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THE SUPPLY THEORY

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Objectives

define supply and quantity supplied

draw the supply curve

highlightthedifference between market supply and

individual supply

how differentfactors influencethe sellers behaviour

understandelasticity ofsupply

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The supply and the quantity supplied

The quantity supplied:

the amountofa goodthat sellers arewilling andable to sell.

exercise:how many chocolate bars do you sell?

The law of supply:

whenthe priceofa goodrises, the quantity suppliedofthe

goodrises and whenthe pricefalls, the quantity supplied

falls, all otherthinks beingequal.

quantity suppliedispositively relatedtothe price

Video: The Supply Curve.wmv

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Describing SUPPLY

supply schedule sUPply curve

Why the sellerdoes not supply

any products at 0.5 lei?

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Market supply versus individual supply

Whatis market supply?

p Q I

0 0

0,5 0

1 1

1,5 22 3

2,5 4

3 5

p Q II

0 0

0,5 0

1 0

1,5 22 4

2,5 6

3 8

Individual supplies Market supply

p Q T

0

0,5

1

1,52

2,5

3

p Q T

0 0

0,5 0

1 1

1,5 42 7

2,5 10

3 13

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Market supply versus individual supply

0

0.5

1

1.5

2

2.5

3

3.5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

P

Q

Q I Q II Q T

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Factors influencing sellers behavior

Who is affected, the supply or the supply curve, when

theprice ofchocolate barchanges?

the costofcocoa falls?the wages ofemployees increase?

(Input prices)

thefirm bought a new machine whichincreasethenumber

ofchocolate bars perhour? (Technology)

thefirm is expectingthe priceofchocolate bars toincrease

10% inthenext month? (Expectations)

thenumber of sellers ofchocolate bars increases?

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Factors influencing supply and quantity supplied

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Variable A change in this variable

Price

Input prices

Technology

Expectations

Numberofsellers

Represents a movement alongthe supply curve

Shifts the supply curve

Shifts the supply curve

Shifts the supply curve

Shifts the supply curve

Factors influencing supply and quantity supplied

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The price elasticity of supply

Theprice elasticity of supply measures how muchthe

quantity suppliedresponds to a changein price.

Whenthe supply ofgoodis elastic?

Priceelasticity ofsupply = Percentage changein quantity suppliedPercentage changein price

IpS

S S

S

Q

p

Q

p

p

Q

! ! v(

(

(

(

%

%

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The price elasticity of supply

Whoinfluences the priceelasticity ofsupply?

Production capacity whois moreelastic, the supply ofbeds in a hotel orthe

supply oftouristic maps?

Timehorizon whenis moreelastic the supply ofbeds in a hotel, inthe

shortrunorinthe longrun?

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The variety of supply curves (1)

Inelastic supply: Elasticity isless than 1

Elastic supply: Elasticity isgreaterthan 1

S

S

p1

p2(%p > (%Q

p

QQ2Q1

(%p

(%Q

1SpIS

S

p1

p2(%p < (%Q

p

QQ2Q1

(%p

(%Q

1"SpI

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The variety of supply curves (2)

Unit elastic supply: Elasticity equals 1

S

S

p1

p2

(%p = (%Q

p

Q

Q2Q1

(%p

(%Q

1!SpI

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The variety of supply curves (3)

Perfectly elastic supply:Elasticity equals infinity

Perfectly inelastic supply:Elasticity equals 0

SSp1

p

Q

g!S

pI

(%p =0, (%Q>0

S

S

p1

p2(%p >0, (%Q=0

p

Q

Q

0!SpI

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Conclusions

Low of supply: whenthe priceofa goodrises, the

quantity suppliedofthegoodrises

A changeinthegoods price will determine a movement

alongthe supply curve. A changeinoneoftheothervariables will shiftthe

supply curve.

Theprice elasticity of supply measures how muchthe

quantity suppliedresponds to a changein price Production capacity andtimehorizoninfluencethe price

elasticity ofsupply