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SUPPLY. The quantity a producer is able and willing to produce at given prices. The law of supply states that, if the price increases the quantity supplied will increase all other factors remaining constant. DERIVING THE CURVE. - PowerPoint PPT Presentation
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SUPPLY The quantity a producer is able
and willing to produce at given prices.
The law of supply states that, if the price increases the quantity supplied will increase all other factors remaining constant.
DERIVING THE CURVE
P
C
$
Q
AC
AVC
MC
S
The supply curve can be derived from the firms marginal cost curve. It is the MC curve above AVC.
Movement along the curve An increase in
price causes an increase in quantity supplied.
A decrease in price causes a decrease in quantity supplied.
S
P
$
Q
P2
P1
Q1 Q2
SHIFTS OF THE CURVEC
P
$
AVC’
AVC
MC
MC’
S’
S
Q
An decrease in costs (or an improvement in technology) will cause the supply curve to shift to the right (increase in supply). An increase in costs will cause an decrease in supply.
RELATED GOODS Related goods are goods that the
producer also produces. If the price of a related good
increases the producer will devote more resources to its production.
This will cause a decrease in supply for the other good that is produced.
ELASTICITY OF SUPPLY
Measures the responsiveness
of quantity supplied
to changes in
price
ELASTICITY COEFFICIENTEsupply = %Q / %P
Esupply = Q / (Q1+Q2) /2
P/ (P1+P2) /2
ELASTICITY OF SUPPLY
SP
Q
Es = 0
Perfectly inelastic
Momentary Term
ELASTICITY OF SUPPLY
Q
PS
Es<1
RELATIVELY INELASTIC
SHORT TERM SUPPLY
ELASTICITY OF SUPPLY
P
Q
SEsupply = 1
UNITARY ELASTICITY
ELASTICITY OF SUPPLY
Q
PS Es > 1
RELATIVELY ELASTIC
LONG TERM SUPPLY
The Long Run In the long run there are no fixed
inputs Price elasticity of supply is elastic
in the long run. This is because firms can vary all of their inputs to respond to changes in price and also, firms can enter and exit the industry.
The Long Run In the long run a firm can expand
and achieve “Economies of Scale” Economies of scale means the long
run average cost curve falls due to the firm achieving technical, marketing, financial or managerial economies because of their larger scale.
Economies of Scale Long run economies of scale should not
be confused with short run economies. Short run economies = Diminishing
returns. Short run diseconomies = Increasing
returns. Short run economies and diseconomies
occur for technical, marketing, financial and managerial reasons.
Long run economies of scale.
C $
Q
SRAC1 SRAC2 SRAC
3 SRAC4 SRAC5
LRAC
Long run diseconomies of scale
C $
Q
srac1
srac2
srac3
srac4
LRAC
