2.2: Supply

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