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THE SUPPLY THEORY

Objectives
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define supply and quantity supplied draw the supply curve highlight the difference between market supply and individual supply

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how different factors influence the sellers behaviour understand elasticity of supply

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The quantity supplied:

the amount of a good that sellers are willing and able to sell. exercise: how many chocolate bars do you sell?

The law of supply:

when the price of a good rises, the quantity supplied of the good rises and when the price falls, the quantity supplied falls, all other thinks being equal.

quantity supplied is positively related to the price Video: The Supply Curve.wmv

Describing SUPPLY
supply schedule sUPply curve

Why the seller does not supply any products at 0.5 lei?

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What is market supply? Individual supplies

p 0 0,5 1 1,5 2 2,5 3 QI 0 0 1 2 3 4 5 p Q II 0 0 0,5 0 1 0 1,5 2 2 4 2,5 6 3 8

Market supply
p QT 0 0 0,5 0 1 1 1,5 4 2 7 2,5 10 3 13

5 6 7 QI Q II

8 9 QT

10

11

12

13

Q 14

Factors influencing sellers behavior

Who is affected, the supply or the supply curve, when
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the price of chocolate bar changes? the cost of cocoa falls? the wages of employees increase? (Input prices)

the firm bought a new machine which increase the number of chocolate bars per hour? (Technology)

the firm is expecting the price of chocolate bars to increase 10% in the next month? (Expectations)

Factors influencing supply and quantity supplied

Variable Price Input prices Technology Expectations Number of sellers A change in this variable Represents a movement along the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve

The price elasticity of supply

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The price elasticity of supply measures how much the quantity supplied responds to a change in price.
Percentage change in quantity supplied Price elasticity of supply = Percentage change in price
p ( % Q S (Q S S Ip ! ! v S (% p (p Q

The price elasticity of supply

Who influences the price elasticity of supply?
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Production capacity
who is more elastic, the supply of beds in a hotel or the supply of touristic maps?

Time horizon
when is more elastic the supply of beds in a hotel, in the short run or in the long run?

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Elastic supply: Elasticity is

greater than 1
p S p2 (%p p1 S Q1 (%Q Q Q2
S Ip "1

less than 1
p
S Ip

p2 (%p p1 S

Q Q1 Q2

(%Q

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Unit elastic supply: Elasticity equals 1

p
S Ip !1

(%p = (%Q
p2 (%p p1 S Q1 (%Q Q Q2

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Perfectly inelastic supply:

Elasticity equals 0
p S S Ip !0

Perfectly elastic supply:

Elasticity equals infinity
p

p2

p1 S S

p1

S Q Q

S Ip !g

(%p =0, (%Q>0

Conclusions
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Low of supply: when the price of a good rises, the quantity supplied of the good rises A change in the goods price will determine a movement along the supply curve. A change in one of the other variables will shift the supply curve. The price elasticity of supply measures how much the quantity supplied responds to a change in price Production capacity and time horizon influence the price elasticity of supply