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THE SUPPLY THEORY

Objectives
  

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

 

how different factors influence the sellers behaviour understand elasticity of supply

The supply and the quantity supplied




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?

Market supply versus individual supply




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

Market supply versus individual supply

3.5 3 2.5 2 1.5 1 0.5 0

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
 

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)

the number of sellers of chocolate bars increases?

Factors influencing supply and quantity supplied

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




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

When the supply of good is elastic?

The price elasticity of supply


Who influences the price elasticity of supply?


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?

The variety of supply curves (1)




Elastic supply: Elasticity is


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

Inelastic supply: Elasticity is


less than 1
p
S Ip

(%p < (%Q


p2 (%p p1 S

(%p > (%Q

Q Q1 Q2

(%Q

The variety of supply curves (2)




Unit elastic supply: Elasticity equals 1


p
S Ip !1

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

The variety of supply curves (3)




Perfectly inelastic supply:


Elasticity equals 0
p S S Ip !0

Perfectly elastic supply:


Elasticity equals infinity
p

p2

(%p >0, (%Q=0


p1 S S

p1

S Q Q

S Ip !g

(%p =0, (%Q>0

Conclusions
    

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