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Understanding Supply

Understanding Supply

Objectives

  • Explain the law of supply.
  • Interpret a supply schedule and a supply graph.
  • Examine the relationship between elasticity of supply and time.

Key Terms

  • Supply: The amount of goods available.
  • Law of Supply: Producers offer more of a good as its price increases and less as its price falls.
  • Quantity Supplied: The amount that a supplier is willing and able to supply at a specific price.
  • Supply Schedule: A chart that lists how much of a good a supplier will offer at various prices.
  • Market Supply Schedule: A chart that lists how much all suppliers will offer at various prices.
  • Supply Curve: A graph of the quantity supplied of a good at various prices.
  • Market Supply Curve: A graph of the quantity supplied of a good by all suppliers at various prices.
  • Elasticity of Supply: A measure of the way quantity supplied reacts to a change in price.

The Law of Supply

  • As price increases, the quantity supplied also increases, while it decreases when prices fall.
  • Producers adjust supply based on price changes in their effort to maximize profit.
  • Example: When the price of pizza rises, the pizzeria will increase the production of pizza to take advantage of higher prices, since each slice sold gives a higher profit.

Supply Schedules

  • Individual Supply Schedule: Shows the quantity supplied by one supplier at various prices.
  • Market Supply Schedule: Aggregates all individual supply schedules to show total quantity supplied by all suppliers at various prices.
  • Example:
    • Individual Supply Schedule for Pizza:
    • At $1.00: 100 slices
    • At $2.00: 150 slices
    • Market Supply Schedule for Pizza:
    • At $1.00: 1,000 slices
    • At $2.00: 1,500 slices

Supply Curves

  • Supply curves are graphical representations of supply schedules, illustrating the relationship between price and quantity supplied.
  • They always rise from left to right, reflecting the law of supply.
  • The individual supply curve corresponds to one supplier, while the market supply curve represents all suppliers in the market.

Elasticity of Supply

  • Elastic Supply: When a small change in price leads to a large change in quantity supplied.
  • Inelastic Supply: When a change in price results in a smaller change in quantity supplied.
  • Unitary Elastic Supply: A percentage change in price is matched by an equal percentage change in quantity supplied.

Elasticity of Supply Over Time

  • Short Run: Supply is typically inelastic; firms cannot easily adjust their output.
    • Example: An orange grove cannot quickly increase supply due to the time required for trees to grow.
  • Long Run: Supply tends to be more elastic as firms have time to adjust production capacities.
    • Example: After years, an orange grower can plant more trees and increase supply.

Factors Affecting Elasticity

  • Type of Product: Services (like haircuts) can adjust supply faster than agricultural products.
  • Time Frame: Longer time allows for greater flexibility and increased elasticity in supply.

Conclusion

  • The law of supply indicates that producers are motivated to respond to price changes by adjusting their output levels to maximize profitability.
  • Understanding how supply schedules and elasticity function can help predict how producers will react to market conditions.