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]