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Law of Supply and Elasticity of Supply
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Transcript of Law of Supply and Elasticity of Supply
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Supply
Quantity supplied rises asprice rises and falls as
price falls, other thingsconstant.
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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.
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Supply Schedule
Price Per Slice of Pizza (Rs)
Slices Supplied Per Day
50 100
100 150
150 200
200 250
250 300
300 350
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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.
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Supply function
Qxs = f (P x, F1, F2…Fm, T,Pr, Fe)
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SupplyPrice
Price of inputs
Prices of related products
Number of producers
Future price expectation
Taxes and subsidies
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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???
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Shift in Supply Curve
VsMovement along Supply
Curve
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• 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..
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• When supply shifts to theright, supply increases. Thiscauses quantity supplied tobe greater than it was prior tothe shift, for each and every
price level.
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Price
Quantity
S1
P1
Q1 Q2
S2
S3
Q3
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Factors that Shift Supply
Prices of RelatedGoods and Services
Number
Of
Producers
Expectations
Of
Producers
TechnologyAnd
Productivity
Resource
Prices
Supply
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Price of Inputs
(Resource Prices)
When costs go up, profitsgo down, so that the
incentive to supply alsogoes down.
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Technology
Advances in technology
reduce the number of inputs needed to produce
a given supply of goods.
Costs o down rofits o
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Expectations
If suppliers expect pricesto rise in the future, they
may store today's supplyto reap higher profits
later.
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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
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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.
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Subsidies
When taxes go up, costs
go up, and profits godown, leading suppliers to
reduce output.When government
subsidies go up, costs go
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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
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Individual and Market
Supply Curves
The market supply curve isderived by horizontally adding theindividual supply curves of each
supplier.
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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
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Market SupplyAs with market demand, market supply is the horizontal summationof individual firms’ supply curves.
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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
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Market
Equilibrium Only inequilibrium,
quantity suppliedis equal toquantity
demanded.
At any price levelother than P0,the wishes of
buyers and
M k t
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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
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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.
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Elasticity
of
Supply
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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
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Formula for calculating PriceElasticity of Supply
Es = % Change in Qs
% Change in Price
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ES > 1 elastic supply
ES = 1 unit-elastic supply
ES < 1 inelastic supply
Es = 0 perfectly inelastic supply
Es = infinity perfectly elastic supply
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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.
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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.
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U it El ti S l
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Unitary Elastic Supply
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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
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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
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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
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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.
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Whenever a transaction occurs
in the marketplace, bothconsumers and producers
benefit.
But howmuch do
they benefit?
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Consumer Surplus
The difference
between the pricethat a consumer is
prepared to payand the actual price
aid is known as
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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.
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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
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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
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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
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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
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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
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