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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