supply chapter 4 price effect market supply price elasticity change in supply
TRANSCRIPT
SupplyChapter 4
Price Effect
Market Supply
Price Elasticity
Change in Supply
Supply• The various amounts of something
a producer is willing and able to sell at different prices at a given time–General rule:
•Sell a lot at a high price
•Sell a little at low price
Price
Quantity
S
Price Effect• As price changes, quantity supplied
changes– As each new quantity supplied is added,
the marginal cost of production increases
– Thus, as quantity goes up, so does the price and vice versa
• Price Effect: price changes effect quantity changes
Price
Quantity
S
Market Supply
The sum of all individual supplies in a given market at a particular time
All suppliers of a given product included in the figures given
Price Elasticity• The degree in which price changes
effect quantity supplied–Small price changes that effect
quantity supplied A LOT is elastic
–Small price changes that have little to no effect on quantity supplied is inelastic
• Two Reasons for Elasticity:1. Availability of Inputs
2. Adjust for time
• Examples:– Pizza: Elastic (availability of
Subs)
– Flu Vaccine: Inelastic (adjust for time)
Price
Quantity
S
P1
P2
Q1 Q2
Big Change
Small Change
Inelastic
Price
Quantity
S
P1
P2
Q1 Q2
Similar
Change
Similar Change
Elastic
Change in Supply
• Change is supply results in quantity changes at all prices (a new line is drawn on the graph)
Price
Quantity
S2
S1
S1 to S2 = Increase in Supply
Price
Quantity
S2
S1
S1 to S2 = Decrease in Supply
Change in supply occurs when:
1. Change in marginal cost of production (improving production methods, new and cheaper materials & equipment)
2.Change in number of sellers/producers (new competition)3.Change in expectations (expecting future
changes – politics, new laws and tax regulations, war, etc)
4. Substitutes: if price of a good goes up, the supply of its substitute goes down
[QS of the 1st good goes up due to the price increase – LAW OF SUPPLY – thus the 2nd good must cut
back on production so additional quantities of the 1st good can be produced]
5. Compliments: if price of a good goes up, the supply of its compliment also goes up
[QS of the 1st good goes up due to price increase – LAW OF SUPPLY – thus when more of the 1st good
is made, more of the 2nd good is automatically produced]