Chapter 2 Demand Supply The Business Side Supply

Chapter 2: Demand & Supply: The Business Side

Supply is the relationship between the various possible prices of a product and the quantities of the product businesses are willing to supply

Quantity Supplied n The amount of product businesses are willing to supply at each price

Law of Supply n n n There is a direct relationship between a product’s quantity supplied and its price If price increases, quantity supplied increases (ceteris paribus) If price decreases, quantity supplied decreases (ceteris paribus)

Market Supply The sum of all producers quantity supplied at each price

The Supply Schedule for Strawberries

The Market Supply Curve for Strawberries P$ Price $2. 50 $2. 00 . . $1. 50 $1. 00 $0. 50 0 . . . S Q Quantity Supplied (000’s of baskets) 5 10 15 20 25

In Supply vs. in Quantity Supplied n n A change in supply is represented by a shift of the supply curve A change in quantity supplied (represented by a movement along a supply curve) is caused by a change in price

Changes In Supply n While price changes will cause quantity supplied to change, other factors can cause supply to increase or decrease

Supply Determinants 1. 2. 3. 4. 5. Number of Producers Resource Prices State of Technology Changes in Weather Prices of Related Goods

1. Number of Producers n n n Increase in # of producers causes an increase in supply (shifts supply curve to the right) Decrease in # of producers causes an Decrease in supply (shifts supply curve to the left) Direct relationship

2. Resource Prices n n n Businesses buy resources (factors of production) to produce goods and services Increase in resource prices increase costs An increase in resource prices causes supply to decrease (shift to the left) An decrease in resource prices causes supply to increase (shift to the right) Indirect relationship

3. State of Technology n n Increased efficiency allows businesses to produce more goods and service at every price Improvement in technology will increase supply (shift to the right)

4. Changes in Nature n n n Earthquakes, early frost, high temperatures, floods, etc. can affect the supply of many products Poor weather conditions can decrease supply (shift to the left) Like wise, a good season can increase the supply of products, such as fruit, vegetables, flowers, etc. (shift to the right)

5. Prices of Related Goods n n Supply of a product can be influenced by changes in the prices of other products. Ex: Decline in price of tobacco causes farmers to switch to ginseng (a rise in supply, shifting S out and right)

An Increase In the Supply of Strawberries n n An increase in supply is represented by a shift in the supply curve to the right (S 1). At each price point, producers are willing to supply more goods. For example, at $1. 00, producers were supplying 10, 000 baskets. Now producers are willing to supply 15, 000 (an increase of 5, 000 baskets)

An Increase In the Supply of Strawberries P$ S Price $2. 50 S 1 $2. 00 $1. 50 $1. 00 $0. 50 0 Q Quantity Supplied (000’s of baskets) 5 10 15 20 25

A Decrease in the Supply of Strawberries n n n A decrease in supply is represented by a shift to the left of the supply curve (S 0) At all prices, producers are willing to supply less strawberries Example: At $1. 50, producers were willing to supply 15, 000 baskets. Given the decrease in supply, producers are now only willing to supply 10, 000 baskets (a decrease in supply of 5, 000 baskets)

A Decrease in the Supply of Strawberries P$ S 0 S Price $2. 50 $2. 00 $1. 50 $1. 00 $0. 50 0 Q Quantity Supplied (000’s of baskets) 5 10 15 20 25

Supply Elasticity Also known as Price Elasticity of Supply n Measures producers response to the quantity supplied of a product to a change in price

Elastic Supply n n More responsive to price changes A given percentage change in a products price results in a larger percentage change in its quantity supplied.

Inelastic Supply n n Less responsive to price changes A given percentage change in price results in a smaller percentage change in quantity supplied.

Factors That Affect Supply Elasticity n n n The Immediate Run The Short Run The Long Run

The Immediate Run n Period where businesses in an industry can make no changes in the resources they use (labour, capital, natural) In the immediate run, supply is perfectly inelastic Fig. 2. 15 p. 63

The Short Run n n Period where at least one of the resources can be changed Ex. Increasing labour Supply curve can be elastic or inelastic Depends on % change in P compared to % change in Qs

The Long Run n In the long run, all the resources used by a business can be changed. Human, capital & natural resources can be altered Supply is elastic