SUPPLY DETERMINANTS: Five ceteris paribus factors that affect supply, but which are assumed constant when

a supply curve is constructed. They are resource prices, production technology, other prices, sellers' expectations, and number of sellers. Changes in the supply determinants cause shifts of the supply curve and disruptions of the market. Supply determinants are five ceteris paribus factors that are held constant when a supply curve is constructed. They are held constant to isolate the law of supply relation between supply price and quantity supplied. When the determinants change they cause a change in the location of the supply curve. In effect, supply determinants can be said to "determine" the position of the supply curve.

What They Are
The five ceteris paribus supply determinants are resource prices, production technology, other prices, sellers' expectations, and number of sellers.

Resource Prices: The prices paid for the use of labor, capital, land, and entrepreneurship affect production cost and the ability to supply a good. If resource prices increase, then production cost is higher and the sellers are inclined to offer less of the good for sale. If resource prices decrease, then production cost is lower and the sellers are inclined to offer more of the good for sale.

Production Technology: The information available concerning production techniques affects the ability to supply a good. Technology is what producers know about the ways to combine inputs into the production of outputs. An advance in technology makes it possible to sell more of a good. A decline in technology means producers can sell less of a good.

Other Prices: The supply for one good is based on the prices paid for other goods that use the same resources for production. A change in the price of a substitute good (or substitute-in-production) induces sellers to alter the mix of goods purchased. An increase in the price of a substitute motivates sellers to sell more of this good and less of the substitute good. A change in the price of a complement good (or complement-in-production) induces sellers to supply more or less of both goods. An increase in the price of a complement motivates sellers to sell more of this good as they sell more of the complement good.

Sellers' Expectations: The decision to sell a good today depends on expectations of future prices. Sellers seek to sell the good at the highest possible price. If

sellers expect the price to decline in the future, they are inclined to sell more now. If they expect the price to rise in the future, they are inclined to sell less now.

Number of Sellers: The number of sellers willing and able to sell a good affects the overall supply. With more sellers, there is more supply. With fewer sellers, there is less supply.

How They Work
These five supply determinants cause the supply curve to shift. This can be illustrated using the positively-sloped supply curve for Wacky Willy Stuffed Amigos presented in this exhibit. This supply curve captures the specific one-to-one, law of supply relation between supply price and quantity supplied. The supply determinants are assumed to remain constant with the construction of this supply curve. The supply determinants are assumed constant for two reasons:

One: To isolate the law of supply relation between supply price and quantity supplied

Two: To systematically analyze what happens to supply when each determinant changes.

Reason number two provides a powerful analytical tool. By turning supply determinants off and on, allowing each to change one at a time, a more thorough understanding of the supply side of the market can be had. Now, consider how changes in the supply determinants shift the supply curve. A change in any of the five determinants can cause either an increase in supply or a decrease in supply.
• Supply Determinants

Increase in Supply: An increase in supply is a rightward shift of the supply curve. An increase in supply means that for any price, for every price, sellers are willing and able to sell more of the good. Click the [Increase] button to demonstrate.

Decrease in Supply: A decrease in supply is a leftward shift of the supply curve. A decrease in supply means that for any price, for every price, sellers are willing and able to sell less of the good. Click the [Decrease] button to demonstrate.

Two Changes

supply will also increase. due to the law of supply. ceteris paribus. PES is the percentage change in supply one would expect after a 1% change in price. In economics. • A Change in Supply: This a change in the overall supply relation.[2] For example. there is an expectation that. It is caused by a change in the supply price and is indicated by a movement along the supply curve from one point to another. [5] Interpretation PES values are almost universally positive. a change in all price-quantity pairs. Price elasticity of supply From Wikipedia. when price increases. It is caused by a change in one of the five supply determinants and is indicated by a shift of the supply curve.Shifts of the supply curve caused by changes in the supply determinants suggest two related notions--a change in supply and a change in quantity supplied. the exact value can yield more inferences about the good in question.[2] Per the law of supply. in a given market. in response to a 10% rise in the price of a good. price elasticity of supply (PES) is an elasticity defined as a numerical measure of the responsiveness of the supply of a given good to a change in the price of that good. search Not to be confused with price elasticity of demand.[1] Mathematically:[2][4] In other words. and the upwardssloping supply curve that results from this. • A Change in Quantity Supplied: This is a change in the specific amount of the good that sellers are willing and able to purchase.[2] However.[6] They are not tied to any specific units. if. the quantity supplied increases by 20%. the free encyclopedia Jump to: navigation.[1] Calculation Price elasticity of supply is a measure of the sensitivity of the quantity of a good supplied in a market to changes in the market price for that good.[2][3] PES is a numerical measure (coefficient) of by how much that supply is affected. . the price elasticity of supply would be 20%/10% = 2.

Thus the PES for textiles is elastic. since it is generally assumed that in the long run all factors of production can be utilised to increase supply. The quantity of goods supplied can. when the coefficient is great (greater than one). conjoint analysis (a ranking of users' preferences which can then be statistically analysed) may be used. the supply of that good is described as inelastic. Textile production is relatively simple. Determinants Availability of raw materials: for example. and use of present-day surveys of customers' preferences to build up test markets capable of modelling such changes.[8] Time to respond: The more time a producer has to respond to price changes the more elastic the supply. availability may cap the amount of gold that can be produced in a country regardless of price. be different from the amount produced. skilled labor. The labor is largely unskilled and production facilities are little more than buildings . Auto manufacture is a multi-stage process that requires specialized equipment.e. and even then.[2] For example.[2] Inventories: A producer who has a supply of goods or available storage capacity can quickly increase supply to market.[2] Coefficients of zero indicated goods the supplies of which do not respond to price changes: they are "fixed" in supply. Alternatively.When the coefficient is small (less than one). If the coefficient is exactly one. in the short term. the PES for specific types of motor vehicles is relatively inelastic. a cotton farmer cannot immediately (i.[7][8] Supply is normally more elastic in the long run than in the short run for produced goods. a large suppliers network and large R&D costs.[9] . limiting the short run prospects of expansion. Such goods often have no labor component or are not produced. Likewise. On the other hand. in the short run) respond to an increase in the price of soybeans because of the time it would take to procure the necessary land. the supply is described as elastic. changes may be prohibitively costly. Various research methods are used to calculate price elasticities in real life.[7] Length and complexity of production: Much depends on the complexity of the production process. the price of Van Gogh paintings is unlikely to affect their supply. the good is said to be unitary elastic. including analysis of historic sales data. both public and private.no special structures are needed. as manufacturers will have stocks which they can build up or run down. Excess capacity: A producer who has unused capacity can (and will) quickly respond to price changes in his market assuming that variable factors are readily available. whereas in the short run only labor can be increased.

Usually. for any given supply curve.57 (Short Run) [11] Gasoline o 1. when supply is represented linearly. it is likely that PES will vary along the curve. technology and expectations of sellers.Graphical representation It is important to note that elasticity and slope are.0 (Long Run) [12] Steel o 1.7 (Long Run) [11] Cotton o 0. supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell. Thus. Factors affecting supply . supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. production costs.2 (Long Run. and the coefficient of elasticity of any linear supply curve that cuts the x-axis is less than 1 (inelastic). the free encyclopedia Jump to: navigation.[10] the coefficient of elasticity of any linear supply curve that cuts the y-axis is greater than 1 (elastic).[citation needed] Likewise.61 (Short Run) [11] Tobacco o 7. in the most part. the price of related goods. Supply schedule A supply schedule is a table which shows how much one or more firms will be willing to supply at particular prices.[2] Selected Supply Elasticities • • • • • • Heating Oil o 1.0 (Long Run) [11] Housing o 1.[1] The supply schedule shows the quantity of goods that a supplier would be willing and able to sell at specific prices under the existing circumstances. regardless of the slope of the supply line.6-3.3 (Short Run) [12] o 1. unrelated. the coefficient of elasticity of any linear supply curve that passes through the origin is 1 (unit elastic). from Minimills) [13] Supply (economics) From Wikipedia. Some of the more important factors affecting supply are the goods own price. search In economics.

a firm produces leather belts. the relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied. The firm's managers learn that leather pouches for smartphones are more profitable than belts. [4] A technological advance would cause the average cost of production to fall which would be reflected in an outward shift of the supply curve. If a company runs both a beef processing operation and a tannery an increase in the price of steaks would mean that more cattle are processed which would increase the supply of leather. Technology is the way inputs are combined to produce a final good. The supply curve would shift out. All facts and circumstances that are relevant to a seller's willingness or ability to produce and sell goods can affect supply. In this case the relationship would be negative or inverse. a change in the price of a joint product will affect supply.[9] • It should be emphasized that this list is not exhaustive.• Innumerable factors and circumstances could affect a sellers willingness or ability to produce and sell a good. if the price of electricity increased a seller may reduce his supply because of the increased costs of production. If the price of pigs goes up the supply of Spam would decrease (supply curve shifts up or in) because the cost of production would have increased. Note that the outward shift of the supply curve may create the exact condition the seller anticipated.[2] Expectations: Sellers expectations concerning future market condition can directly affect supply.[8] Government intervention can take many forms including environmental and health regulations. Finally.[6] Price of inputs: Inputs include land. Therefore pigs would be considered a related good to Spam. For example beef products and leather are joint products. generally.[10] For example. hour and wage laws. excess demand. Some of the more common factors are: Goods own price: The basic supply relationship is between the price of a good and the quantity supplied. Although there is no "Law of Supply". For example.[2] Price of related goods:[2] For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good. The seller is likely to raise the price the seller charges for each unit of output. For example. electrical and natural gas rates and zoning and land use regulations. A related good may also be a good that can be produced with the firm's existing factors of production. The firm might reduce its production of belts and begin production of cell phone pouches based on this information. taxes. Spam is made from pork shoulders and ham. energy and raw materials. labor.[3] Technology. if the forecast is for snow retail .[6] Government policies and regulations:Government intervention can have a significant effect on supply.[5] If the seller believes that the demand for his product will sharply increase in the foreseeable future the firm owner may immediately increase production in anticipation of future price increases. [7]If the price of inputs increases the supply curve will shift in as sellers are less willing or able to sell goods at existing prices. Both are derived from Pigs. For example.

referred to as a change in supply. the supply curve would shift in.30 Prg + 20S. The coefficient is positive following the general rule that price and quantity supplied are directly related.[14] Inverse Supply Equation By convention economist graph the dependent variable on the y axis and the independent variable on the x axis. P is the price of the own good. The curve is generally positively sloped. these factors are part of the supply curve and are present in the intercept or constant term.[11] Movements versus shifts Movements along the curve occur only if there is a change in quantity supplied caused by a change in the goods own price. occurs only if a non price determinant of supply changes. For example. Supply function/equation The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale. if the price of an ingredient used to produce the good.sellers will respond by increasing their stocks of snow sleds or skis or winter clothing or bread and milk.[13] For example. The portion of the SRMC below . 325 is y-intercept it is the repository of all nonspecified factors that affect demand for the product. Qs = 325 + P . The form of the inverse supply equation is Ps = f(Q). Qs = f( P. However. a related good. The vertical bar means that the variables to the right are bring held constant. An example of an inverse supply equation would be Ps = Q/2 + Y/40. price and quantity supplied. For example. This means that the equation depicted is the inverse equation. Typically the relationship is negative because the good is an input or a source of inputs. The supply equation is the explicit mathematical expression of the functional relationship.⎮ Prg S ) is a supply function where P equals price of the good Prg equals the price of related goods and S equals the number of producers. Supply curve The relationship of price and quantity supplied can be exhibited graphically as the supply curve. All other factors affecting supply are held constant. The curve depicts the relationship between two variables only. were to increase.[15] Marginal costs and short-run supply curve A firm's short-run firm supply curve is the marginal cost curve above the shutdown point (the SRMC above the minimum average variable costs).[12] A shift in the supply curve. Prgis the price of a related good.

It is calculated for discrete changes as (∆Q/∆P) x P/Q and for smooth changes of differentiable supply functions as (∂Q∕∂P) x P/Q. the price elasticity of supply is usually positive. a large suppliers network and large R&D costs.[18] Elasticity Price elasticity of supply measures the responsiveness of quantity supplied to changes in price. The LDMR states that as production increases eventually a point (the point of diminishing marginal returns) will be reached after which additional units of output will be successively smaller. Thus the PES for textiles is elastic.the shutdown point is not part of the supply curve because the firm is not producing any output. Beyond the point of diminishing marginal returns the marginal product of labor will continually decrease. Time to respond: The more time a producer has to respond to price changes the more elastic the supply.no special structures are needed. Textile production is relatively simple. Since supply is usually increasing in price. a cotton farmer cannot immediately respond to an increase in the price of soybeans. For example. . as the percentage change in quantity supplied induced by a one percent change in price. Auto manufacture is a multi-stage process that requires specialized equipment. the curve may slope down or up or be horizontal or vertical. For example if the PES for a good is 0.[16] Shape of the short-run supply curve The law of diminishing marginal returns (LDMR) shapes the SRMC curve. The mathematical relationship is MR = MC = w/MPL where w is the wage rate and MPL. skilled labor. Excess capacity: A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available. the PES for specific types of motor vehicles is relatively inelastic. From firm to market supply curve The market supply curve is the horizontal summation of firm supply curves.[17] The shape of the market supply curve There is no law of supply that “requires” that the market supply curve have a positive slope.67 a 1% rise in price will induce a two-thirds increase in quantity supplied. On the other hand. As MPL decreases with a constant wage rate MC will increase. Complexity of Production: Much depends on the complexity of the production process. Significant determinants include: Reaction time: The PES coeffiecient will largely be determined by how quickly producers react to price changes by increasing (decreasing) production and delivering (cutting deliveries of) goods to the market. The labor is largely unskilled and production facilities are little more than buildings .

A monopolist cannot replicate this process. [20]If the linear supply curve intersects the x axis PES will equal zero at the point of intersection and will increase as one moves up the curve. Because marginal costs rise and quantity produced rises. Elasticity along linear supply curves The slope of a linear supply curve is constant.[23] In a perfectly competitive firm the price is given. This ratio defines the firm's marginal cost of production (the additional cost of producing another unit of output). [21]If the linear supply curve intersects the origin PES equals one at the point of origin and along the cuve. For example. A rise in price is associated with a rise in quantity supplied. . the law of supply is the tendency of suppliers to offer more of a good at a higher price. To generate his supply function the seller could simply initially set price equal to zero and then incrementally increase the price at each price level he could calculate the quantity supplied using the supply equation Following this process the manager could trace out the complete supply function.[22] There is simply not a one to one relationship between price and quantity supplied. Other elasticities can be calculated for non-price determinants of supply.Inventories: A producer who has a supply of goods or available storage capacity can quickly respond to price changes. The ratio of the change in total costs to the change in quantity is increasing. the percentage change the amount of the good supplied caused by a one percent increase in the price of a related good is an input elasticity of supply if the related good is an input in the production process.[22] Perfect competition is the only market structure for which a supply function can be derived. As firms produce more output. If the linear supply curve intersects the y-axis PES will be infinitely elastic at the point of intersection. their total costs rise proportionately faster. A manager of a competitive firm can tell you precisely what quantity of goods will be supplied for any price by simply referring to the firm's marginal cost curve. firms need to charge a higher price for each extra unit of output they produce. Market structure and the supply curve There is no such thing as a monopoly supply curve.[19] The coefficient of elasticity decreases as one move "up" the curve. changes in output with no changes in price or both". Law of supply n economics. A function is a rule which assigns to each value of a variable one and only one value of the function.[24]There is no single function that relates price to quantity supplied.[1] The relationship between price and quantity supplied is usually a positive relationship. A change in demand can result in the "changes in price with no changes in output.[citation needed] An example would be the change in the supply for cookies caused by a one percent increase in the price of sugar. The coefficient of elasticity is usually not.

see Supply and demand (disambiguation). Changes in the values of these variables are represented by shifts in the supply and demand curves. the free encyclopedia Jump to: navigation.Supply and demand From Wikipedia. The graphical representation of supply and demand The supply-demand model is a partial equilibrium model representing the determination of the price of a particular good and the quantity of that good which is traded. It concludes that in a competitive market. price will function to equalize the quantity demanded by consumers. Determinants of supply and demand other than the price of the good in question. resulting in an economic equilibrium of price and quantity. the standard graphical representation. Supply and demand is an economic model of price determination in a market. search For other uses. such as consumers' income. and the quantity supplied by producers. input prices and so on. Supply schedule . The diagram shows a positive shift in demand from D1 to D2. The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). responses to changes in the price of the good are represented as movements along unchanged supply and demand curves. By contrast. the opposite of the standard convention for the representation of a mathematical function. Although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the good. resulting in an increase in price (P) and quantity sold (Q) of the product. usually attributed to Alfred Marshall. are not explicitly represented in the supplydemand diagram. has price on the vertical axis and quantity on the horizontal axis.

and the price of complementary goods. the demand curve is almost always represented as downward-sloping. how much output will it be able to sell?" If a firm has market power. depicted graphically as the supply curve. in the long run potential competitors can enter or exit the industry in response to market conditions. so its decision of how much output to provide to the market influences the market price. that is. In the long run.[1] Just as the supply curves reflect marginal cost curves. the price of substitute goods. Following the law of demand. assuming ceteris paribus. represents the amount of some good that producers are willing and able to sell at various prices. Economists also distinguish the short-run market supply curve from the long-run market supply curve. supply is determined by marginal cost. demand curves are determined by marginal utility curves. enabling them to better adjust their quantity supplied at any given price. Thus in the graph of the supply curve. Economists distinguish between the supply curve of an individual firm and the market supply curve. then the firm is not "faced with" any price. For both of these reasons. if the marginal utility of additional consumption is equal to the opportunity cost determined by the price. such as income. the marginal utility of alternative consumption choices. In this context. long-run market supply curves are flatter than their short-run counterparts. assuming all determinants of supply other than the price of the good in question. meaning that as price decreases. remain the same. By its very nature. that is. at a given price.The supply schedule. two things are assumed constant by definition of the short run: the availability of one or more fixed inputs (typically physical capital). Under the assumption of perfect competition. conceptualizing a supply curve requires that the firm be a perfect competitor—that is. depicted graphically as the demand curve. This is because each point on the supply curve is the answer to the question "If this firm is faced with this potential price. The demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time. such as technology and the prices of factors of production. firms have a chance to adjust their holdings of physical capital. Furthermore. assuming all determinants of demand other than the price of the good in question. and the number of firms in the industry. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive. represents the amount of some good that buyers are willing and able to purchase at various prices. . and the question is meaningless. remain the same. Demand schedule The demand schedule. individual firms' supply curves are added horizontally to obtain the market supply curve. personal tastes.[2] Consumers will be willing to buy a given quantity of a good. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. that the firm has no influence over the market price. consumers will buy more of the good.

individuals' demand curves are added horizontally to obtain the market demand curve. economists distinguish between the demand curve of an individual and the market demand curve. There may be rare examples of goods that have upward-sloping demand curves. Comparative statics of such a shift traces the effects from the initial equilibrium to the new equilibrium. that the purchaser has no influence over the market price. Micro Economics Equilibrium Equilibrium is defined to the price-quantity pair where the quantity demanded is equal to the quantity supplied. then the buyer is not "faced with" any price.As described above. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price. This is because each point on the demand curve is the answer to the question "If this buyer is faced with this potential price. represented by the intersection of the demand and supply curves. conceptualizing a demand curve requires that the purchaser be a perfect competitor—that is. Thus in the graph of the demand curve. By its very nature. and the question is meaningless. how much of the product will it purchase?" If a buyer has market power. so its decision of how much to buy influences the market price. Demand curve shifts Main article: Demand curve . represented as shifts in the respective curves. As with supply curves. Changes in market equilibrium Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price). the demand curve is generally downward-sloping.

as from the initial curve D1 to the new curve D2. In the diagram. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand. If the demand decreases. this raises the equilibrium price from P1 to the higher P2. and number of buyers. If the demand starts at D2. the supply curve shifts. or when technological progress occurs. Note in the diagram that the shift of the demand curve. Increased demand can be represented on the graph as the curve being shifted to the right. market expectations. The quantity supplied at each price is the same as before the demand shift. The increase in demand could also come from changing tastes and fashions. assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases." that is. incomes. resulted in movement along the supply curve from the point (Q1. then the opposite happens: a shift of the curve to the left. This would cause the entire demand curve to shift changing the equilibrium price and quantity. a greater quantity is demanded. there has been an increase in demand which has caused an increase in (equilibrium) quantity. and decreases to D1. At each price point. P1) to the point Q2. a shift of the curve. and the equilibrium quantity will also decrease. Otherwise stated. the equilibrium price will decrease. In the example above. by causing a new equilibrium price to emerge. This raises the equilibrium quantity from Q1 to the higher Q2. reflecting the fact that the supply curve has not shifted. Supply curve shifts Main article: Supply (economics) An outward (rightward) shift in supply reduces the equilibrium price but increases the equilibrium quantity When the suppliers' unit input costs change. price changes in complementary and substitute goods.An outward (rightward) shift in demand increases both equilibrium price and quantity When consumers increase the quantity demanded at a given price. but the equilibrium quantity and price are different as a result of the change (shift) in demand. For example. . it is referred to as an increase in demand. P2).

If supply is perfectly inelastic. The quantity demanded at each price is the same as before the supply shift. demand or supply is said to be inelastic. knowledge of the price elasticity will help us to predict the size of the resulting effect on the quantity demanded. changing the unit of measurement or the currency will not affect the elasticity.00 to $1. if a government imposes a tax on a good. has zero elasticity. and as a result the quantity supplied goes from 100 pens to 102 pens.producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward. the quantity of pens increased by 2%. thereby increasing the effective price. Likewise. point elasticity uses differential calculus to determine the elasticity at a specific point. In contrast. If the quantity supplied decreases. In this context. it is useful to know how strongly the quantity demanded or supplied will change when the price changes. which calculates the elasticity over a range of values. the price and the quantity move in opposite directions. Elasticity Elasticity is a central concept in the theory of supply and demand. the equilibrium quantity and price have changed.that is. For example. and the price increased by 5%. For discrete changes this is known as arc elasticity.05. One way to define elasticity is the percentage change in one variable (the quantity supplied or demanded) divided by the percentage change in the causative variable. then there is a vertical supply curve. reflecting the fact that the demand curve has not shifted.4. If the quantity demanded or supplied changes by a greater percentage than the price did. Since the changes are in percentages. If the quantity changes by a lesser percentage than the price did. Elasticity is a measure of relative changes. This increase in supply causes the equilibrium price to decrease from P1 to P2. including price and other determinants. The equilibrium quantity increases from Q1 to Q2 as consumers move along the demand curve to the new lower price. Often. how will this affect the amount of their good that customers purchase? This knowledge helps the firm determine whether the increased unit price will offset the decrease in sales volume. If a monopolist decides to increase the price of its product. elasticity refers to how strongly the quantities supplied and demanded respond to various factors. This is known as the price elasticity of demand or the price elasticity of supply. . But due to the change (shift) in supply. the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. then demand or supply is said to be elastic. If the supply curve starts at S2. As a result of a supply curve shift. so the price elasticity of supply is 2%/5% or 0. and shifts leftward to S1. the opposite happens. Elasticity is calculated as the percentage change in quantity divided by the associated percentage change in price. to S2—an increase in supply. if the price moves from $1.

the cross elasticity of demand would be -2. One of the most common to consider is income. because in the long run firms can respond to market conditions by varying their holdings of physical capital. usually the other is also. Another elasticity sometimes considered is the cross elasticity of demand. Elasticity in relation to variables other than price can also be considered. the quantity of new cars demanded decreased by 20%. and markets take some time before they reach a new equilibrium position. where if one is consumed. and because in the long run new firms can enter or old firms can exit the market. Substitute goods are those where one can be substituted for the other. In real economic systems. one may purchase less of it and instead purchase its substitute. This is due to asymmetric. Complements are goods that are typically utilized together.Short-run supply curves are not as elastic as long-run supply curves. or at least imperfect. Cross elasticity of demand is measured as the percentage change in demand for the first good divided by the causative percentage change in the price of the other good. Ultimately both producers and consumers must rely on trial and error as well as prediction and calculation to find the true equilibrium of a market.0. and if the price of one good rises. markets don't always behave in this way. if. without spending any time away from equilibrium. the price and quantity in any market would be able to move to a new equilibrium position instantly. Vertical supply curve (perfectly inelastic supply) . For an example with a complement good. Any change in market conditions would cause a jump from one equilibrium position to another at once. In a frictionless economy. where no one economic agent could ever be expected to know every relevant condition in every market. How strongly would the demand for a good change if income increased or decreased? The relative percentage change is known as the income elasticity of demand. This is often considered when looking at the relative changes in demand when studying complements and substitute goods. which measures the responsiveness of the quantity demanded of a good to a change in the price of another good. information. in response to a 10% increase in the price of fuel.

Other markets The model of supply and demand also applies to various specialty markets. When D2 is occurring. that little of the empirical work done with the textbook model constitutes a potentially falsifying test. The model is commonly applied to wages. . Graham White [8] argues. who try to sell their labor for the highest price. with zero elasticity. Michael Anyadike-Danes and Wyne Godley [7] argue. land has a vertical supply curve. more land cannot be created. there would still be a supply of land. Robert L. and supply is called perfectly inelastic. which try to buy the type of labor they need at the lowest price. As a hypothetical example.[3] A number of economists (for example Pierangelo Garegnani[4]. The typical roles of supplier and demander are reversed. consider the supply curve of land. is logically incoherent. the supply curve is a vertical line. The suppliers are individuals. based on simulation results. Even if no one wanted any of the land. in the market for labor. Therefore. consequently. building on the work of Piero Sraffa. The equilibrium price for a certain type of labor is the wage rate. The demanders of labor are businesses. including the reduction of minimum wages. the price will be P1. that the policy of increased labor market flexibility. the price will be P2. and any shifts in demand will only affect price. No matter how much someone is willing to pay for additional parcels. Vienneau[5]. partially on the basis of Sraffianism. even given all its assumptions. argue that that this model of the labor market. If the quantity supplied is fixed no matter what the price. The equilibrium quantity is always Q. and. does not have an "intellectually coherent" argument in economic theory. and Arrigo Opocher & Ian Steedman[6]).When demand D1 is in effect. empirical evidence hardly exists for that model.

In both classical and Keynesian economics. The money supply may be a vertical supply curve. but other macroeconomic models also use supply and demand. in this case the money supply is totally inelastic. which regresses each of the endogenous variables on the respective exogenous variables. quantity. Compared to microeconomic uses of demand and supply." Typically. Macroeconomic uses of demand and supply Demand and supply have also been generalized to explain macroeconomic variables in a market economy. On the other hand. The demand for money intersects with the money supply to determine the interest rate. particularly to all markets for factors of production.[10] the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply. An alternative to "structural estimation" is reduced-form estimation. its price rises. and to relate labor supply and labor demand to wage rates. including the quantity of total output and the general price level.This criticism of the application of the model of supply and demand generalizes. in this case the money supply curve is perfectly elastic. such as Ibn Taymiyyah who illustrates: "If desire for goods increases while its availability decreases. This can be done with simultaneous-equation methods of estimation in econometrics. data on exogenous variables (that is. On the other hand. Such methods allow solving for the model-relevant "structural coefficients. if availability of the good increases and the desire for it decreases.[11] Empirical estimation Demand and supply relations in a market can be statistically estimated from price. History The power of supply and demand was understood to some extent by several early Muslim economists. It also has implications for monetary theory[9] not drawn out here. and other data with sufficient information in the model. the price comes down. both of which are endogenous variables) are needed to perform such an estimation."[12] . different (and more controversial) theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. if the central bank of a country chooses to use monetary policy to fix its value regardless of the interest rate. The Parameter identification problem is a common issue in "structural estimation. the money market is analyzed as a supplyand-demand system with interest rates being the price. Demand and supply are also used in macroeconomic theory to relate money supply and money demand to interest rates. variables other than price and quantity." the estimated algebraic counterparts of the theory. The Aggregate Demand-Aggregate Supply model may be the most direct application of supply and demand to macroeconomics.

Ricardo. but debate continues between more Keynesian economists and more neoclassical economists – see saltwater and freshwater economics. though different wordings. whom Keynes credits and quotes. whom Keynes does not. including diagrams. Adam Smith used the phrase in his 1776 book The Wealth of Nations. and Léon Walras. The rejection of this doctrine is a central component of The General Theory of Employment. Smith generally assumed that the supply price was fixed but that its "merit" (value) would decrease as its "scarcity" increased.The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy. published in 1767. Say – and the advocacy of the phrase "supply creates its own demand" is today most associated with supply-side economics. The exact phrase "supply creates its own demand" does not appear to be found in the writings of classical economists. in effect what was later called the law of demand. Carl Menger. In his 1870 essay "On the Graphical Representation of Supply and Demand". This field mainly was started by Stanley Jevons. Antoine Augustin Cournot first developed a mathematical model of supply and demand in his 1838 Researches into the Mathematical Principles of Wealth. Keynes's rejection of Say's law is on the whole accepted within mainstream economics since the 1940s and 50s. Interest and Money (1936) and a central tenet of Keynesian economics. Fleeming Jenkin in the course of "introduc[ing] the diagrammatic method into the English economic literature" published the first drawing of supply and demand curves therein. more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. appear in the work of John Stuart Mill (1848). and his father. and is considered by him one of the defining characteristics of classical economics.[1] similar sentiments.[13] Supply creates its own demand "Supply creates its own demand" is the formulation of Say's law by John Maynard Keynes.[14] including comparative statics from a shift of supply or demand and application to the labor market. . in Principles of Political Economy and Taxation.[15] The model was further developed and popularized by Alfred Marshall in the 1890 textbook Principles of Economics. This was a substantial change from Adam Smith's thoughts on determining the supply price. Keynes's interpretation is rejected as a misinterpretation or caricature of Say's law by proponents of same – see Say's law: Keynes vs. and David Ricardo titled one chapter of his 1817 work Principles of Political Economy and Taxation "On the Influence of Demand and Supply on Price". James Mill (1808). the price at the margin. that is. in the neoclassical synthesis.[13] In The Wealth of Nations. During the late 19th century the marginalist school of thought emerged. The key idea was that the price was set by the most expensive price.

Mill's Principles of Political Economy the doctrine is expressly set forth: What constitutes the means of payment for commodities is simply commodities. in Commerce Defended (1808): . is by James Mill.[2] notably John Stuart Mill. Could we suddenly double the productive powers of the country. Chapter 2. John Maynard Keynes. Chapter 2. sense that the whole of the costs of production must necessarily be spent in the aggregate. —The General Theory of Employment. Everybody would bring a double demand as well as supply. but not clearly defined. Keynes states that classical economics. David Ricardo. everybody would be able to buy twice as much. but we should. double the purchasing power.which retorts that "Keynes turned Say on his head and instead stated that 'demand creates its own supply'". but not clearly defined. Interest and Money. John Maynard Keynes. § 2. Each person’s means of paying for the productions of other people consist of what he himself possesses. directly or indirectly. 18 To summarize. xiv. Section VI. believe that "supply creates its own demand". by which he means the economics of Say. S. buyers. meaning in some significant. Chap. (Principles of Political Economy. directly or indirectly. Keynes then restates this in the language of Keynesian economics as: (3) [S]upply creates its own demand in the sense that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment. on purchasing the product. because every one would have twice as much to offer in exchange. on purchasing the product. Interest and Money. All sellers are inevitably.) —The General Theory of Employment. and the original statement of Say's law in English. Section VII Other sources Another source widely cited as a classical expression of the idea. p. In J. Keynes's formulation Keynes coined the phrase thusly (emphasis added): From the time of Say and Ricardo the classical economists have taught that supply creates its own demand. and successors. and by the meaning of the word. —meaning by this in some significant. sense that the whole of the costs of production must necessarily be spent in the aggregate. Book III. we should double the supply of commodities in every market. by the same stroke.

Commerce Defended (1808).[1] some consider its ultimate origin a "mystery". 720/. and that every increase of production. creates.roubini. p. —James Mill. in the circle of Joan Robinson. as it does not appear to be found in the pre-Keynesian literature.Mises. Chapter VI: Consumption. Price Elasticity of Supply A Primer on the Price Elasticity of Supply From Mike Moffatt. —John Stuart Mill.com Guide See More About: • • • price elasticity of supply elasticity formulas elasticity Sponsored Links Introduction to EconomicsLearn Economic Principles online at Mises Academy. "Of the Influence of Consumption On Production". and is the one and universal cause that creates a market for the commodities produced. or rather constitutes.[3] The phrase "supply creates its own demand" appears earlier. if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate. in quotes.Special Online Offer. and.[3] and has been suggested that the phrase was an oral tradition at Cambridge. its own demand.The production of commodities creates. former About. in a 1934 letter of Keynes. Hurry! EconomistSubscriptions.com Economics Ads Equine Supply Teachers Supply Medical Supply Pool Supply Veterinary Supply Sponsored Links .org Roubini Global EconomicsGet The Latest Economic Insights From Nouriel Roubini & RGE Analystswww.[3] and that it may have derived from the following 1844 formulation by John Stuart Mill:[4] Nothing is more true than that it is produce which constitutes the market for produce. Enroll Today!Academy. 81 Keynes does not cite a specific source for the phrase.com The Economist Magazine12 issues now for Rs. Essays On Some Unsettled Questions of Political Economy (1844).

(Your course may use the more complicated Arc Price Elasticity of Supply formula. It's best to calculate these one at a time. not the demand data) when the price is $9 is 150 and when the price is $10 is 110. So we have: Price(OLD)=9 Price(NEW)=10 QSupply(OLD)=150 QSupply(NEW)=210 To calculate the price elasticity. we get: [210 . as the calculations are similar.150] / 150 = (60/150) = 0. calculate the price elasticity of supply when the price changes from $9. you may want to just skim this section. Enrollwww.IIM C6 Months Executive Program for 2+ Yrs Working Professionals. If so you'll need to see the article on Arc Elasticity) We calculate the Price Elasticity of Supply by the formula: PEoS = (% Change in Quantity Supplied)/(% Change in Price) Calculating the Price Elasticity of Supply You may be asked "Given the following data. I'll walk you through answering this question.Supply Chain Mgmt .niitimperia.QSupply(OLD)] / QSupply(OLD) By filling in the values we wrote down.com/SupplyChainMgmt Hambalt Urban EconomicsVisit the experts in Masterplanning / Urban / City Economic Strategywww.00" Using the chart on the bottom of the page. Since we're going from $9 to $10. we need to know what the percentage change in quantity supply is and what the percentage change in price is. we have QSupply(OLD)=150 and QSupply(NEW)=210.hambalt. Calculating the Percentage Change in Quantity Supply The formula used to calculate the percentage change in quantity supplied is: [QSupply(NEW) . First we need to find the data we need.com The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change. so we have Price(OLD)=$9 and Price(NEW)=$10. If you've already read The Price Elasticity of Demand and understand it.4 . We know that the original price is $9 and the new price is $10. From the chart we see that the quantity supplied (make sure to look at the supply data. where "QSupply" is short for "Quantity Supplied".00 to $10.

Price(OLD)] / Price(OLD) By filling in the values we wrote down. A very low price elasticity implies just the opposite. but here that is not an issue since we have a positive value. The higher the price elasticity. sellers will supply a great deal more. Now we need to calculate the percentage change in price.6 When we analyze price elasticities we're concerned with the absolute value. Often you'll have the follow up question "Is the good price elastic or inelastic between $9 and $10". Final Step of Calculating the Price Elasticity of Supply We go back to our formula of: PEoS = (% Change in Quantity Supplied)/(% Change in Price) We now fill in the two percentages in this equation using the figures we calculated. To answer that.4)/(0. Calculating the Percentage Change in Price Similar to before. How Do We Interpret the Price Elasticity of Supply? The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. that changes in price have little influence on supply. the more sensitive producers and sellers are to price changes. so we can calculate the price elasticity of supply. In percentage terms it would be 40%).9] / 9 = (1/9) = 0. sellers will supply a great deal less of the good and when the price of that good goes down. use the following rule of thumb: • • If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes) If PEoS = 1 then Supply is Unit Elastic .6. A very high price elasticity suggests that when the price of a good goes up. we get: [10 .1111 We have both the percentage change in quantity supplied and the percentage change in price.So we note that % Change in Quantity Supplied = 0.1111) = 3. the formula used to calculate the percentage change in price is: [Price(NEW) . PEoD = (0. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.4 (This is in decimal terms.

we calculated the price elasticity of supply to be 3. In our case. so our good is price elastic and thus supply is very sensitive to price changes.• If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price changes) Recall that we always ignore the negative sign when analyzing price elasticity. Next: Income Elasticity of Demand Data Price $7 $8 $9 $10 $11 Quantity Demanded 200 180 150 110 60 Quantity Supplied 50 90 150 210 250 . so PEoS is always positive.6.

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