Supply Defined

• Supply: The Different Qualities Of A Good That Sellers Are willing And able To Sell (produce) At Different Prices

• Law Of Supply: There Is A Direct (aka Positive) Relationship Between Price And Quantity Supplied

  • As Price Increases, The Quantity Producers Make Increases +v/v

  • Because At Higher Prices, Profit-seeking Firms Have An Incentive To Produce More

Five Shifters (determinants) Of Supply

1. Prices/availability Of Inputs (resources)

2. Number Of Sellers

3. Technology

4. Government Action: Taxes & Subsidies

   • Subsidy: A Government Payment To A Business Or Market, Generally Intended To Cause The Supply Of A Good To Increase

5. Expectations Of Future Profit

Elasticity Of Supply

• Price Elasticity Of Supply (SED): Measurement Of How Sensitive Quantity Supplied Is To A Change In Price

  • Based On Time Limitations; Producers Need Time To Produce More

• Inelastic — Insensitive To A Change In Price

  • Most Goods Have Inelastic Supply In The Short Run

    • Short Run — Where We Currently Are

• Elastic — Sensitive To A Change In Price

  • Most Goods Have Elastic Supply In The Long Run

    • Long Run — Can Do Anything

• Perfectly Inelastic Supply — Qs Doesn’t Change

  • Set Quantity Supplied (vertical Line)

Inelastic Supply

• Hard To Produce

• High Barriers To Entry (few Firms)

• High Cost Or Specialized Inputs

• Hard To Switch From Producing Alternative Goods

• Elasticity Coefficient Less Than One

Elastic Supply

• Easier To Produce

• Low Barriers To Entry (many Firms)

• Low Cost Or Generic Inputs

• Easy To Switch From Producing Alternative Goods

• Elasticity Coefficient Greater Than One

other elasticities

• Cross-price elasticity of demand (XED): measurement of how sensitive quantity demanded of one product is to a change in price of a different product

  • Shows if two goods are substitutes or complements

  • Formula: [% change in quantity of product b/%change in price of product a]

• Income elasticity of demand (YED): measurement of how sensitive quantity demanded is to a change in income

  • Shows which goods are normal v inferior

  • Formula: [% change in quantity/% change in income]

  • If the coefficient is positive (shows a direct relationship), then the good is normal

  • If the coefficient is negative (shows an inverse relationship), then the good is inferior