Supply & Elasticity of Supply

AG BM 102

Introduction

• Supply is the counterpart of demand

• It also is a schedule of prices and quantities

• Supply is driven by different factors

• Together Supply & Demand determine the market prices and quantities

Supply - A schedule of the quantities of product that

producers will sell at various prices

An Example – Beef Supply

Price Quantity Price Quantity

3.00 60 4.25 72.5

3.25 62.5 4.50 75

3.50 65 4.75 77.5

3.75 67.5 5.00 80

4.00 70 5.25 82.5

Some Ideas

• Time period important

• Short time – little adjustment possible

• Long time – lots of adjustment possible

• Medium – moderate adjustment possible

• Orchard

Upward sloping

• Higher prices induce more production

• Higher prices induce entry

• Higher prices mean more profit

Calculate Equation

Q a bP

b Q Q P P ( ) / ( )1 2 1 2

a Q bP 1 1

Values

Q lbs and P2 280 00 . $5.

a 70 10 4 30( )

b ( ) / ( )70 80 4 5 10

Q P 30 10

Q lbs P1 170 00 . , $4 . ,

Check to see if points are on line

• P = 4, Q = 30 + 10 (4) = 70

• P = 5, Q = 30 + 10 (5) = 80

Elasticity of Supply-The percentage change in quantity supplied in response to a one percent change in price

Calculate Elasticity of Supply

( ) / ( ) * ( ) / ( ) ( / )Q Q P P P Q b P Q2 2 1 11 1 1 1

b P Q( / ) ( )( / ) ( / ) .1 1 10 4 70 4 7 0 57

Interpretation

• Inelastic supply – between zero and 1

• Elastic supply – greater than 1

• Unitary elasticity - equal to 1

Discussion of Supply Elasticity

• Short run vs. long run

• Plant products vs. animal products

• Ag vs. non- ag (e.g., clothing)

• Perishable vs. storable

Change in Supply or Quantity Supplied

• Effect on beef market if feed price rises

• Effect on beef market if chicken price falls

• Effect on beef market if consumer income rises

• Effect on beef market if hard winter kills a lot of cattle

Concluding Comments

• Understanding supply goes a long way toward understanding markets

• Two parts- mechanical part & intuitive part

• Second is more important– Think about what will suppliers do?– How fast can they adjust?– What holds them back?

Same lists for demand

• Intuition important

• Comes from thinking systematically – What will demander do?– How fast will demander change?– Is habit an issue here?

• Lots of variables, but most not important– Key is to know which is which