law of supply and elasticity of supply

8/3/2019 Law of Supply and Elasticity of Supply

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Supply

Quantity supplied rises asprice rises and falls as

price falls, other thingsconstant.



Continued…Law of Supply: the higher the price, thelarger the quantity supplied.

P QS

P QS

Quantity Supplied is the amount of gooda supplier is willing and able to supply ata certain price.



Supply Schedule

Price Per Slice of Pizza (Rs)

Slices Supplied Per Day

50 100

100 150

150 200

200 250

250 300

300 350



Price

Quantity

Supply

P1

Q1

P2

Q2Q3

P3

An increasein price willcause an

EXPANSIONin Supply.

A fall in pricewill cause a

CONTRACTION in Supply.

The supply curve is

the graphicrepresentation of the

law of supply.



Supply function

Qxs = f (P x, F1, F2…Fm, T,Pr, Fe)



SupplyPrice

Price of inputs

Prices of related products

Number of producers

Future price expectation

Taxes and subsidies



The “quantity supplied” is the amount sellers arewilling and able to offer for sale at a single price

Supply curves normally slope upward as

Rising prices act as an incentive for producers toexpand output – potential for higher profits

Increased output may lead to higher costs of production

Why Supply curve movesupward???



Shift in Supply Curve

VsMovement along Supply

Curve



• A change in A change in supply supply is not theis not the

same as a change insame as a change in quantity quantity

supplied supplied ..

• In this example, a higher priceIn this example, a higher price

causescauses higher quantity higher quantity

supplied supplied , and a, and a move along move along the demand curve.the demand curve.

• In this example, changes in determinants of supply, other than price, cause anIn this example, changes in determinants of supply, other than price, cause an

increase in supply increase in supply , or a, or a shift shift of the entire supply curve, fromof the entire supply curve, from SS A A toto SSBB..



• When supply shifts to theright, supply increases. Thiscauses quantity supplied tobe greater than it was prior tothe shift, for each and every

price level.



Price

Quantity

S1

P1

Q1 Q2

S2

S3

Q3



Factors that Shift Supply

Prices of RelatedGoods and Services

Number

Of

Producers

Expectations

Of

Producers

TechnologyAnd

Productivity

Resource

Prices

Supply



Price of Inputs

(Resource Prices)

When costs go up, profitsgo down, so that the

incentive to supply alsogoes down.



Technology

Advances in technology

reduce the number of inputs needed to produce

a given supply of goods.

Costs o down rofits o



Expectations

If suppliers expect pricesto rise in the future, they

may store today's supplyto reap higher profits

later.



Number of

Suppliers

As more people decide tosupply a good the market

supply increases(Rightward Shift).

r ce o e a e oo s or



r ce o e a e oo s orServices

Eg: if price of wheat risessharply, it becomes more

profitable and thus thefarmers would produce lessof other crops like rice,

pulses etc and increase theproduction of wheat.



Subsidies

When taxes go up, costs

go up, and profits godown, leading suppliers to

reduce output.When government

subsidies go up, costs go



Change in quantitysupplied (a movementalong the curve)

P r i c e

( p e r

u n i t )

Quantity supplied (per unit of time)

S0

$15 A

1,250 1,500

B



Individual and Market

Supply Curves

The market supply curve isderived by horizontally adding theindividual supply curves of each

supplier.



QuantitiesSupplied

AB

C

D

E

F

G

H

I

(1)

Price(per DVD)

(2)

Ann'sSupply

(5)

MarketSupply

(4)

Charlie'sSupply

Rs. 0.000.501.001.502.00

2.503.003.504.00

0 1

2

3

4

5

6

7

8

0 0

1

2

3

4

5

5

5

0 0

0

0

0

0

0

2

2

0 1

3

5

7

9

11

14

15

(3)

Barry's

Supply



Market SupplyAs with market demand, market supply is the horizontal summationof individual firms’ supply curves.



Equilibrium The operation of the market depends

on the interaction between buyers and

sellers.

An equilibrium is the condition that

exists when quantity supplied andquantity demanded are equal.

At equilibrium, there is no tendency for

M k t



Market

Equilibrium Only inequilibrium,

quantity suppliedis equal toquantity

demanded.

At any price levelother than P0,the wishes of

buyers and

M k t



Market

DisequilibriumExcess demand , orshortage, is thecondition that exists

when quantitydemanded exceedsquantity supplied atthe current price.

When quantityWhen quantity

demanded exceedsdemanded exceeds

quantity supplied,quantity supplied,

price tends to riseprice tends to rise

until e uilibrium isuntil e uilibrium is



Disequilibrium

Excess supply , orsurplus, is the conditionthat exists whenquantity supplied

exceeds quantitydemanded at thecurrent price.

When quantity suppliedWhen quantity suppliedexceeds quantityexceeds quantitydemanded, price tendsdemanded, price tendsto fall until equilibriumto fall until equilibriumis restored.is restored.



Elasticity

of

Supply



Price elasticity of supply measures therelationship between change in quantity

supplied and a change in price. In otherwords, it measures the amount supplychanges when price changes.

If it is said to be INELASTIC, there will be asmall change in supply due to a large pricechange. Supply does not change much when

the price changes.

If it is said to be ELASTIC, there will be a

large change in supply due to a small pricechan e. Su l chan es a lot when rice



Formula for calculating PriceElasticity of Supply

Es = % Change in Qs

% Change in Price



ES > 1 elastic supply

ES = 1 unit-elastic supply

ES < 1 inelastic supply

Es = 0 perfectly inelastic supply

Es = infinity perfectly elastic supply



DefinitionsInfinitely Elastic Supply: When the amount

supplied at the ruling price is infinite, we say thesupply is infinitely elastic.

Elastic Supply: When the percentage changein the amount of a good supplied is greater thanthe percentage change in price it then thesupply is said to be elastic supply.

Unitary Elasticity: When the percentagechange in the quantity supplied is exactly equalto percentage change in price the supply is said

to have elasticity equal to unity.



Continued…Inelastic Supply: When the percentage

change in the quantity supplied is less thanthe percentage change in the price the supply is said to be inelastic.

Perfectly Inelastic Supply: In perfectlyinelastic-supply, the quantity supplied doesnot change even if there is a change in price.

The elasticity of supply in other words is zero.



U it El ti S l



Unitary Elastic Supply



do…

1. The price of a product falls from 60p to40p causing supply to contract from120 to 100.

2. The price of a product falls from Rs45to Rs40. As a result supply falls from6000 to 5000.

3. The price of a product rises from Rs50to Rs60 causing supply to extend from100 to 200.

4. A product’s price rises from Rs12 toRs13 but supply remains unchanged at



Answers… The price of a product falls from 60p to 40p causingsupply to contract from 120 to 100.

PeS= 16%/ 33%= 0.48 The price of a product falls from $45 to $40. As a result

supply falls from 6000 to 5000.

PeS= 16% / 11 % = 1.45 The price of a product rises from €50 to €60 causing

supply to extend from 100 to 200.PeS= 100% / 20 % = 5

A product’s price rises from £12 to £13 but supply

remains unchanged at 2000.PeS= 0% / 8.3% = 0

Supply extends from 900 to 1200 because of a rise inprice from £10 to £11.PeS= 33.3% / 10% = 3.3



Inelastic

Petrol (gas) – The amount of petrolsupplied would not change much whenthe price of petrol changes, therefore it

is inelastic.

Tickets (to a concert/sports match) –

Tickets are printed in a fixed amount(there are only so many seats available),

so no matter how much the price

changes, the amount supplied should



Elastic Products

Clothes – If the price of certain clothesdrop, then the production (and

therefore supply) of those clothes willdrop too. Clothes would be elastic.

Electronic goods (games, cameras,

etc.) – If the price of a certainelectronic, say, a games console

were to drop, then production of the

games console would drop too.



Whenever a transaction occurs

in the marketplace, bothconsumers and producers

benefit.

But howmuch do

they benefit?



Consumer Surplus

The difference

between the pricethat a consumer is

prepared to payand the actual price

aid is known as



Willingness to PayWillingness to Pay: the maximum price atwhich he/she would pay for a good.

Individual Consumer SurplusIndividual Consumer Surplus: the netgain in the purchase of a good. It is the

difference between the actual price and aperson’s willingness to pay.

Total Consumer Surplus:Total Consumer Surplus: the sum of allthe consumer surpluses of all the buyers of a good.



Price (Rs)

Quantity Demanded

5

9

15 20

Market Price = Rs5 20 consumers willing to pay Rs5

15 Consumers WILLING to pay Rs9

These 15 consumers get 15 x Rs4of consumer surplus

Total utility = value represented byblue and gold area

Blue area is amount paid toacquire good. Gold area = totalconsumer surplus



Buyer Willingness to pay Price paid Individual Consumer Surplus

David Rs62 Rs28 Rs34

Maggie 55 28 27

Henry 38 28 10

Jamie 18 ---- 0Anna 11 ---- 0

EXAMPLE



Suppose I am willing to pay $4 for 10widgets.

However, the price is $1.50.

6

5

4

3

21

0 1 2 3 4 5 6 7 8 9 10 1112 13 14 15 16

P

Q

This resultsin CONSUMER

SURPLUS, which is thedifference

between D and

P

D

P

$2.5

0

$4.00

- 1.50

$2.50

x 10

$25.00

Price



So, Consumer SurplusConsumer Surplus is the TOTALBENEFIT consumers receive from

having a market in the good.

6

5

4

3

21

0 1 2 3 4 5 6 7 8 9 10 1112 13 14 15 16

P

Q

D

P

$2.5

0

$4.00

- 1.50

$2.50

x 10

$25.0

0Price



The area between the demand ($4.00)and the price ($1.50) is the CONSUMER

SURPLUS.

6

5

4

3

21

0 1 2 3 4 5 6 7 8 9 10 1112 13 14 15 16

P

Q

law of supply and elasticity of supply

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