SupplySupply

I.I. BasicsBasicsA.A. Definition: the Definition: the

amount of a product amount of a product that is offered for that is offered for sale at all possible sale at all possible prices that exist in prices that exist in the marketthe market

B.B. Law of Supply:Law of Supply:Price and supply Price and supply have a direct have a direct relationship so that relationship so that when price when price increases, more of a increases, more of a product is offered product is offered for sale. for sale.

C.C. When price drops, When price drops, less is offered at the less is offered at the lower prices lower prices

D.D. This creates an upward sloping This creates an upward sloping supply curvesupply curve

P

Q0

$5

15

$10

What’s the Law of Supply say?

25

S

Which causes movementALONG the supply curve

This is referred to as a change in the quantity supplied

The changein price

Causes the change in the quantities supplied

E.E. Creating a supply curve from a supply Creating a supply curve from a supply scheduleschedule

P QS

$10

7

3

10

20

2 3

7

$10

P

2 10 20

S

TaskTask

Using the supply schedule below, Using the supply schedule below, construct a supply curveconstruct a supply curve

P Q

$45

32

20

150

75

62

P

Q

S

20

32

$45

62 75 150

II.II. Why producers supply more product at higher Why producers supply more product at higher prices:prices:

A.A. Businesses want to take advantage of higher Businesses want to take advantage of higher prices, so they increase supply prices, so they increase supply

B.B. As prices rise, more firms enter the market to take As prices rise, more firms enter the market to take advantage of the higher profits than in other advantage of the higher profits than in other industriesindustries

C.C. Increases in demand cause prices to rise, which Increases in demand cause prices to rise, which signals an increase in supply to meet the signals an increase in supply to meet the increased demand increased demand

D.D. To supply more, more must be produced. To To supply more, more must be produced. To produce more, the supplier must buy more produce more, the supplier must buy more resources to increase production. His costs of resources to increase production. His costs of production therefore increase. Businesses can production therefore increase. Businesses can sometimes ONLY increase production when sometimes ONLY increase production when product prices increase to offset their increased product prices increase to offset their increased cost cost (deeper oil reserves under harder rock)(deeper oil reserves under harder rock)

III.III. Changes/shifts in SupplyChanges/shifts in SupplyA.A. Reasons other than price for changes in Reasons other than price for changes in

the amount producers supply (most having the amount producers supply (most having to do with changes in production costs)to do with changes in production costs)

P

Q

S1

Price doesn’t change

$5

New position

S2

What factors causethe shift?

B.B. Almost all the factors have to do with Almost all the factors have to do with costs of productioncosts of production

1.1. If production costs are low, profits are If production costs are low, profits are higher, so more product will be suppliedhigher, so more product will be supplied

2.2. If costs are higher, profits are lower, and If costs are higher, profits are lower, and less will be suppliedless will be supplied

Example:

Widgets

Widget price: $3

Per widget cost: $2

Per widget profit: $1

Two ways to increase profits

Increase price

$3.50

$2.00

$1.50

Or, decrease costs

$3.00

$1.50

$1.50

Either way,

the higher profits will motivate producers to supply more to the market

C.C. Reasons for changes in supply (or shifts Reasons for changes in supply (or shifts in the supply curve)in the supply curve)

Changes in:Changes in:1.1. the cost of inputsthe cost of inputs

2.2. productivityproductivity

3.3. technologytechnology

4.4. taxestaxes

5.5. subsidiessubsidies i.i. government government

payments for which payments for which it receives nothing – it receives nothing – welfare payments, welfare payments, social securitysocial security etc. etc.

6.6. expectations of future expectations of future pricesprices

7.7. government government regulationsregulations

8.8. number of sellersnumber of sellers

Create supply curves showing the Create supply curves showing the change in supply for the following:change in supply for the following:

1.1. Supply of furniture when lumber becomes Supply of furniture when lumber becomes more expensivemore expensive

2.2. Supply of corn when the govt reduces farm Supply of corn when the govt reduces farm subsidiessubsidies

3.3. Supply of TVs when it’s expected that TV Supply of TVs when it’s expected that TV prices will decrease starting next monthprices will decrease starting next month

4.4. Supply of peanut butter when peanut Supply of peanut butter when peanut harvesters go on strikeharvesters go on strike

5.5. Supply of a product after manufacturing is Supply of a product after manufacturing is computerizedcomputerized

IV.IV. Elasticity of SupplyElasticity of SupplyA.A. The more time it takes to respond to the The more time it takes to respond to the

higher prices and increase supply, the higher prices and increase supply, the more inelastic the supply will bemore inelastic the supply will be

B.B. The quicker a company can respond to the The quicker a company can respond to the price signal to increase supply, the more price signal to increase supply, the more elasticelastic

C.C. Determinants of supply elasticity have to do Determinants of supply elasticity have to do with timewith time

1.1. Large amount of capitalLarge amount of capital2.2. Use of technologyUse of technology3.3. Skilled labor requiredSkilled labor required4.4. Simply takes a while (time)Simply takes a while (time)

If the increased productionrequires the use of any of these, supply will be inelastic

If none of these is required,supply will be elastic

1.1. Large amounts of capital Large amounts of capital e.g.: coal mininge.g.: coal mining

Huge amounts of landto locate and purchase

Capital intensive

Increased supply large amount of time in the short run. Supply elasticity = highly inelastic

The relatively smaller changein quantities supplied is due to the amount of time needed to increase supplies.

Some coal mines can simply work a fewhours longer or dig weekends too. So some increase will occur. But beyond that,new heavy industrial machinery must be purchased and shipped, new workers trained,and mining operations expanded or new locations found, purchased, and clearedjust to begin mining. Thus, a relativelysmaller increase in QS in the short run will occurbut the long run increase in quantities suppliedwill be extremely inelastic

2.2. Use of technologyUse of technologya. Purchase, shipment, setup and integration into current manufacturing system, hiring and training on the new machinery will take time

3.3. Skilled laborSkilled labor1.1. Time needed for the trainingTime needed for the training

4.4. Other time issuesOther time issues

So why is there any increased quantities supplied?

S

Other products are just so massive in scale, to increase quantities supplied takes years … or more

Large amountsLarge amountsof capitalof capital

YesYes

NoNo

InelasticInelastic

ElasticElastic

The use of The use of technologytechnology

YesYes

NoNo

InelasticInelastic

ElasticElastic

Skilled laborSkilled laborYesYes

NoNo

InelasticInelastic

ElasticElastic

Significant Significant amount of timeamount of time

YesYes

NoNo

InelasticInelastic

ElasticElastic

Determinants of Supply Elastic City ChartDeterminants of Supply Elastic City ChartTo increase supply requires …To increase supply requires …

Elastic SupplyElastic Supply

Inelastic SupplyInelastic Supply

Unit elastic SupplyUnit elastic Supply

P

Q

S

P

Q

S

P

Q

S

V.V. How can you know for certain the How can you know for certain the elasticity of supply?elasticity of supply?

A.A. Nope! Nope!

QuestionsQuestions1.1. Define the Law of Supply.Define the Law of Supply.2.2. Create a supply curve reflecting the Law of Supply.Create a supply curve reflecting the Law of Supply.3.3. Why do producers supply products at greater Why do producers supply products at greater

quantities when prices increase?quantities when prices increase?4.4. What are the factors that cause an What are the factors that cause an increaseincrease in supply in supply

((notnot in in quantitiesquantities supplied)? supplied)?5.5. Create a supply curve showing a change in supply for Create a supply curve showing a change in supply for

shirts when the cost of cotton increases.shirts when the cost of cotton increases.6.6. Create a supply curve for vacuums when 20% of Create a supply curve for vacuums when 20% of

vacuum plant workers are replaced with automated vacuum plant workers are replaced with automated machinery.machinery.

7.7. List the determinants of supply elasticity.List the determinants of supply elasticity.8.8. What’s the supply elasticity for airplanes? Why?What’s the supply elasticity for airplanes? Why?9.9. What’s the supply elasticity for orange juice? Why?What’s the supply elasticity for orange juice? Why?10.10. What’s the supply elasticity for socks? Why?What’s the supply elasticity for socks? Why?