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.