Supply

Supply

Supply

The quantity of a good/service that producers supply to the market at a given price, at a particular time

Factors causing a shift in the supply curve

• Changes to costs of production

• Improvements in technology

• Changes to the productivity of factors of production

• Indirect taxes and subsidies

• Changes to the price of other goods

• Number of suppliers

Joint supply

Where the production of one good or service involves the production of another - an example of when markets are interrelated.

Price elasticity of supply (PES)

A measure of how the quantity supplied of a good responds to a change in its price.

Formula for PES

% change in quantity supplied/ % change in price

Elastic Supply

PES > 1

A % change in price will cause a larger % change in quantity supplied.

Inelastic supply

0 < PES < 1

A % change in price will cause a smaller % change in quantity supplied.

Unit Elasticity of Supply

PES = 1

The % change in quantity supplied is equal to the % change in price

Short Run Price Elasticity

• In the short run a firm’s capacity is fixed and at least one factor of production is fixed

• This makes it difficult to increase production in the short run, making supply in the short run inelastic

Long Run Price Elasticity

• All the factors of production are variable so in the long run a firm is able to increase its capacity

• Supply is more elastic in the long run because firms have longer to react to changes in price and demand

Factors affecting PES

• Supply tends to be more elastic during periods of unemployment - it’s easy to attract new workers if a firm wishes to expand

• Perishable goods have an inelastic supply because they cannot be stored for long

• Firms with high stock levels often have elastic supply because they’re able to quickly increase supply if they want to

• Industries with more mobile factors of production tend to have more elastic supply