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8/6/2019 Supply Module 6
http://slidepdf.com/reader/full/supply-module-6 1/23
8/6/2019 Supply Module 6
http://slidepdf.com/reader/full/supply-module-6 2/23
� In economics, supply during a given period of time
means the quantities of goods which are offered for
sale at particular prices.
� Thus, supply of a commodity may be defined as the
amount of that commodity which the sellers (or
producers) are able and willing to offer for sale at a
particular price during a certain period of time.
8/6/2019 Supply Module 6
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� Individuals control the factors of production ² inputs,
or resources, necessary to produce goods.
� Individuals supply factors of production to
intermediaries or firms
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�The analysis of the supply of produced
goods has two parts:
� An analysis of the supply of the factors of
production to households and firms.
�
An analysis of why firms transform those factorsof production into usable goods and services.
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�The cost factors of production
�The state of technology
�Factors outside the economic sphere
�Tax and subsidy
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� In a supply function, the determinants of supply can
be summarised as under:
� Sx= f(Px, Pf,Py,O,T,t,s)
�Where Sx= the supply of commodity
�Px= price of X
�Pf=set prices of the factor inputs employed for
producing X�O=factors outside the economic sphere
�T= technology, t=tax, s=subsidy
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�There is a direct relationship between price and
quantity supplied.
�Quantity supplied rises as price rises, other things
constant.
� Quantity supplied falls as price falls, other things
constant.
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� Supply is the quantity of a good or service that a
producer is willing and able to supply onto the market
at a given price in a given time period
� The basic law of supply is that as the market price of
a commodity rises, so producers expand their supply
onto the market
� A supply curve shows a relationship between price
and quantity a firm is willing and able to sell
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�The supply curve is the graphic representation of
the law of supply.
�The supply curve slopes upward to the
right.
�
The slope tells us that the quantity suppliedvaries directly ² in the same direction ² with the
price.
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� Assumptions underlying the law of supply
�Cost of production is unchanged
�No changes in technique of production
�Fixed scale of production
�Government policies are unchanged
�No change in transport costs
�
No speculation�The prices of other goods are held constant
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Price
Quantity
Supply
P1
Q1
P2
Q2Q3
P3
An increase inprice will cause
anEXPANSION
in Supply.
A fall in price willcause aCONTRACTION
in Supply.
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� The ´quantity suppliedµ is the amount sellers are willing and able
to offer for sale at a single price
� The change in the price of the good itself causes a movement
ALONG the supply curve
� Supply curves normally slope upward. Why?
� Rising prices act as an incentive for producers to expand
output ² potential for higher profits
� Increased output may lead to higher costs of production
� But not all economists accept this convention (A2 theory)
� Increased output might lead to lower costs per unit (known as
economies of scale)
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Price
Quantity
S1
P1
Q1Q2
S2
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Price
Quantity
S1
P1
Q1Q2
S2
S3
Q3
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� Changes in production costs
� Wages,raw materials and components, energy, rents, interest rates
� Government taxes and subsidies
� Changes in technology
� Climatic conditions (important for agricultural supply)
� Changes in the number of producers in the market
� Changes in the objectives of suppliers in the market
�
Changes in the prices of substitutes in production� The profitability of alternative products (substitutes) or those with
joint supply (crude oil = petrol and paraffin and diesel)
� Expectation of future price changes
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What is it and how is it measured?
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� Elasticity is defined as The relativ e response
of one var iabl e to changes in anot her var iabl e.
� For our purposes, the two variables are:
The quantity supplied
Price
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� Elastic:
When the quantity supplied is very sensitive to
price� Inelastic:
When the quantity supplied is not very sensitive toprice
� Unitary Elastic
When the quantity supplied moves in lock-stepwith price change
8/6/2019 Supply Module 6
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� 1. Calculate the percentage change in Price
((Initial Price New Price) / Initial Price) * 100 = percentage (%)
change of price
� 2. Calculate the percentage change in Quantity Supplied ((Initial Quantity New Quantity) / Initial Quantity) * 100 = %
change of supply
� 3. Calculate the Elasticity
% change of Quantity / % change of Price = Elasticity
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� If the result of the Elasticity calculation is
greater than 1, the relationship is said to be
Elastic.� If the result of the Elasticity calculation is less
than 1, the relationship is said to be Inelastic.� If the result of the Elasticity calculation is
exactly 1, the relationship is said to beUnitaryElastic.
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� When Supply is Elastic, price has a large
impact on the supply for a good.
� Elastic Supply often reflects a longer periodof time as Supply is often difficult to change
in the short term as many production factorsmust be considered.
� Put simply, if a Producer can collect a largeprice for an item, they will supply more of it
as soon as they can.
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� When Supply is Inelastic, price does not have
a large impact on the supply for a good.
� Inelastic Supply generally reflects a shortperiod of time as Supply is often difficult to
change quickly as many production factorsmust be considered.
� Essentials, such as food, are generallyInelastic.
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� When Supply isUnitary Elastic, price and
quantity demanded move in lock step.
� This indicates that the percentage change inthe price of the good will equal the
percentage change in the demand for thegood.
� This is a special case scenario.