Chapter 2: Demand & Chapter 2: Demand & SupplySupply

Supply: The Business SideSupply: The Business Side

SupplySupply

Supply is the relationshipSupply is the relationshipbetween the various possible between the various possible prices of a product and the prices of a product and the

quantities of the productquantities of the productbusinesses are willing tobusinesses are willing to

supplysupply

Quantity SuppliedQuantity Supplied

The amount of product businesses The amount of product businesses are willing to supply at each priceare willing to supply at each price

Law of SupplyLaw of Supply

There is a direct relationship There is a direct relationship between a product’s quantity between a product’s quantity supplied and its pricesupplied and its price

If price increases, quantity supplied If price increases, quantity supplied increases (ceteris paribus)increases (ceteris paribus)

If price decreases, quantity supplied If price decreases, quantity supplied decreases (ceteris paribus)decreases (ceteris paribus)

Market SupplyMarket Supply

The sum of all producers quantity The sum of all producers quantity supplied at each pricesupplied at each price

The Supply Schedule for StrawberriesThe Supply Schedule for Strawberries

Price Quantity Supplied(QS)

$0.50 5

$1.00 10

$1.50 15

$2.00 20

$2.50 25

The Market Supply Curve for The Market Supply Curve for StrawberriesStrawberries

Pri

ce

Quantity Supplied (000’s of baskets)

S

0

$1.00

$0.50

15

$1.50

$2.00

$2.50

20 25105

P $

Q

. . . . .

In Supply vs. In Supply vs. in Quantity Suppliedin Quantity Supplied

A change in supply is A change in supply is represented by a shift of the represented by a shift of the supply curvesupply curve

A change in quantity supplied A change in quantity supplied (represented by a movement (represented by a movement along a supply curve) is caused along a supply curve) is caused by a change in priceby a change in price

Changes In SupplyChanges In Supply

While price changes will cause While price changes will cause quantity supplied to change, quantity supplied to change, other factors can cause supply to other factors can cause supply to increase or decreaseincrease or decrease

Supply DeterminantsSupply Determinants

1.1. Number of ProducersNumber of Producers

2.2. Resource PricesResource Prices

3.3. State of TechnologyState of Technology

4.4. Changes in WeatherChanges in Weather

5.5. Prices of Related GoodsPrices of Related Goods

1. Number of Producers1. Number of Producers

Increase in # of producers causes Increase in # of producers causes an increase in supply (shifts supply an increase in supply (shifts supply curve to the right)curve to the right)

Decrease in # of producers causes Decrease in # of producers causes an Decrease in supply (shifts an Decrease in supply (shifts supply curve to the left)supply curve to the left)

Direct relationshipDirect relationship

2. Resource Prices2. Resource Prices

Businesses buy resources (factors of Businesses buy resources (factors of production) to produce goods and production) to produce goods and servicesservices

Increase in resource prices increase costsIncrease in resource prices increase costs An increase in resource prices causes An increase in resource prices causes

supply to decrease (shift to the left)supply to decrease (shift to the left) An decrease in resource prices causes An decrease in resource prices causes

supply to increase (shift to the right)supply to increase (shift to the right) Indirect relationshipIndirect relationship

3. State of Technology3. State of Technology

Increased efficiency allows Increased efficiency allows businesses to produce more goods businesses to produce more goods and service at every priceand service at every price

Improvement in technology will Improvement in technology will increase supply (shift to the right)increase supply (shift to the right)

4. Changes in Nature4. Changes in Nature

Earthquakes, early frost, high Earthquakes, early frost, high temperatures, floods, etc. can affect temperatures, floods, etc. can affect the supply of many productsthe supply of many products

Poor weather conditions can Poor weather conditions can decrease supply (shift to the left)decrease supply (shift to the left)

Like wise, a good season can Like wise, a good season can increase the supply of products, such increase the supply of products, such as fruit, vegetables, flowers, etc. as fruit, vegetables, flowers, etc. (shift to the right)(shift to the right)

5. 5. Prices of Related GoodsPrices of Related Goods

Supply of a product can be Supply of a product can be influenced by changes in the prices influenced by changes in the prices of other products.of other products.

Ex: Decline in price of tobacco Ex: Decline in price of tobacco causes farmers to switch to ginseng causes farmers to switch to ginseng (a rise in supply, shifting S out and (a rise in supply, shifting S out and right) right)

An Increase In the Supply of An Increase In the Supply of StrawberriesStrawberries

An increase in supply is represented An increase in supply is represented by a shift in the supply curve to the by a shift in the supply curve to the right (Sright (S1)1)..

At each price point, producers are At each price point, producers are willing to supply more goods. For willing to supply more goods. For example, at $1.00, producers were example, at $1.00, producers were supplying 10,000 baskets. Now supplying 10,000 baskets. Now producers are willing to supply producers are willing to supply 15,000 (an increase of 5,000 baskets)15,000 (an increase of 5,000 baskets)

An Increase In the Supply of An Increase In the Supply of StrawberriesStrawberries

Pri

ce

Quantity Supplied (000’s of baskets)

S

0

$1.00

$0.50

15

$1.50

$2.00

$2.50

20 25105

P $

Q

S1

A Decrease in the Supply of A Decrease in the Supply of StrawberriesStrawberries

A decrease in supply is represented by a A decrease in supply is represented by a shift to the left of the supply curve (Sshift to the left of the supply curve (S0)0)

At all prices, producers are willing to At all prices, producers are willing to supply less strawberriessupply less strawberries

Example: At $1.50, producers were Example: At $1.50, producers were willing to supply 15,000 baskets. Given willing to supply 15,000 baskets. Given the decrease in supply, producers are the decrease in supply, producers are now only willing to supply 10,000 baskets now only willing to supply 10,000 baskets (a decrease in supply of 5,000 baskets)(a decrease in supply of 5,000 baskets)

A Decrease in the Supply of StrawberriesA Decrease in the Supply of StrawberriesP

rice

Quantity Supplied (000’s of baskets)

S

0

$1.00

$0.50

15

$1.50

$2.00

$2.50

20 25105

P $

Q

S0

Supply ElasticitySupply Elasticity

Also known as Price Elasticity of SupplyAlso known as Price Elasticity of Supply Measures producers response to the Measures producers response to the

quantity supplied of a product to a quantity supplied of a product to a change in pricechange in price

Elastic SupplyElastic Supply

More responsive to price changesMore responsive to price changes A given percentage change in a A given percentage change in a

products price results in a larger products price results in a larger percentage change in its quantity percentage change in its quantity supplied.supplied.

Inelastic SupplyInelastic Supply

Less responsive to price changesLess responsive to price changes A given percentage change in price A given percentage change in price

results in a smaller percentage results in a smaller percentage change in quantity supplied.change in quantity supplied.

Factors That Affect Supply Factors That Affect Supply ElasticityElasticity

The Immediate RunThe Immediate Run The Short RunThe Short Run The Long RunThe Long Run

The Immediate RunThe Immediate Run

Period where businesses in an Period where businesses in an industry can make no changes in the industry can make no changes in the resources they use (labour, capital, resources they use (labour, capital, natural)natural)

In the immediate run, supply is In the immediate run, supply is perfectly inelasticperfectly inelastic

Fig. 2.15 p. 63Fig. 2.15 p. 63

The Short RunThe Short Run

Period where at least one of the Period where at least one of the resources can be changedresources can be changed

Ex. Increasing labourEx. Increasing labour Supply curve can be elastic or Supply curve can be elastic or

inelasticinelastic Depends on % change in P compared Depends on % change in P compared

to % change in Qsto % change in Qs

The Long RunThe Long Run

In the long run, all the resources In the long run, all the resources used by a business can be changed.used by a business can be changed.

Human, capital & natural resources Human, capital & natural resources can be alteredcan be altered

Supply is elasticSupply is elastic