principles of economics-dbm1313 chapter 3: theory of supply & elasticity of supply

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Principles of Economics-DBM1313

Chapter 3:

Theory of Supply & Elasticity of Supply


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Supply represents how much the market can offer. It indicates how many product producers are willing and able to produce and offer for sale over a range of prices and quantity. For example, how many pairs of jeans you would be willing to supply, i.e., offer for sale.

We can define supply more precisely as the amount of the goods or services which is offered for sale at a given price per unit of time. It is always supplied at a certain price.

It is the total amount of a good or services available for purchase by consumers.

Definition of Supply


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The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.Supply is illustrated by the supply curve and the supply schedule.

Supply Curve and Supply ScheduleSupply curve is a graph showing the relationship between the price of a good and the quantity of the good supplied over a specified period of time. The price is measured on the vertical axis; whereas quantity supplied is measured on the horizontal axis.


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Figure 1 Supply Curve


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Figure 1 shows the supply curve usually slopes upwards from left to right - showing the higher the price, the greater the amount offered for sale – reflecting the law of supply.

Supply schedule is a table showing the different pieces of goods that producers are willing and able to supply at various prices over a period of time. It is the list of all possible prices, along with the quantity supplied at each price.A supply schedule can be for an individual producer or group producers, or for all producers (the market supply schedule).

There are two reasons producers offer more for sale when the price rises. First, as the price increases, other things constant, a producer becomes more willing to supply the good. A higher price will makes producers more able to increase Qs.


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Price usually is a major determinant in the Qs. For a particular good with all other factors held constant, a table can be constructed of price and Qs as shown on Figure 3-9 below. The table below demonstrated by the upward slope of the supply curve.

The law of supply states that the higher the price, the larger the Qs, all other things constant.


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Price Qty Supplied

1 12

2 28

3 42

4 52

5 60 1

2

3

4

5

6

10 20 30 40 50 60Qty

Price

Figure 2 Supply Schedule


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Before we proceed with the Law of Supply, I will emphasize on the quantity supplied that is related to supply. Quantity supplied (Qs) refer to the total amount of goods that all firms are willing and able to sell, at a given price, during a given time period. The Qs refers to the amount of certain goods producers are willing to supply when receiving a certain price. And it also refers to the number of units of goods sellers are willing and able to produce and offer to sell at a particular price. Supply and the Qs relationship:·A change in the Qs = a Movement along the supply curve Price.·A change in supply = a Shift in the supply curve This can happen for many reasons.

Quantity Supplied (Qs)


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The Law of Supply

The Qs is usually directly related to its price, other things constant. The higher the price, the greater is the Qs, the lower the price, the smaller are the Qs, other things remain the same. Clearly the law of supply is the opposite of the law of demand. For example, consumers want to pay as little as they can. They will buy more as the price drops. Sellers, on the other hand, want to be able to charge as much as they can. They will be willing to make more and sell more as the price goes up – to maximize profits.

The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope.


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Figure 3 Supply Relationship

A

B

C

P1

P2

P3

Q1 Q2 Q3

Price

Qty.

Supply(s)Figure 3shows that the curve is upward slope, why?

·A, B, and C are points on the supply curve. Each point on the curve reflects a direct correlation between Qs (Q) and price (P).

·So, at point B, the Qs will be Q2 and the price will be P2, and so on.

·This means that the higher the price, the higher the Qs. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.


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Changes in supply versus changes in quantity supplied

Variables That Affect Quantity Supplied•Price

•Input Prices

•Technology

•Expectations

•Number of Sellers

A Change in This Variable…………

•Represents a movement along the supply curve

•Shift the supply curve





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Supply Elasticity

Price elasticity of supply = % change in quantity supplied

% change in price


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Price

Qty

5

4

0 100

Supply

…… leaves the quantity supplied unchanged

a) Perfectly Inelastic Supply: Elasticity = 0

An increase in price …….


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Price

Qty

5

4

0 110

A 22% increase in price …….

…… leads to an 10% increase in quantity supplied

100

Supply

b) Inelastic Supply: Elasticity < 1


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Qty

5

4

0 125


…… leads to an 22% increase in quantity supplied

100

SupplyPrice

c) Unit Elastic Supply: Elasticity = 1


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Qty

54

0 200


…… leads to an 67% decrease in quantity supplied

100

Supply

d) Elastic Supply: Elasticity Is > 1

Price


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Qty

4

0

Price

2. At exactly $4, producers will supply any quantity

1. At any price above $4, quantity supplied is infinite.

3. At any price below $4, quantity supplied is zero

d) Perfectly Elastic Supply: Elasticity = Infinity

principles of economics-dbm1313 chapter 3: theory of supply & elasticity of supply

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