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SUPPLY

SUPPLY. The quantity a producer is able and willing to produce at given prices. The law of supply states that, if the price increases the quantity supplied will increase all other factors remaining constant. DERIVING THE CURVE.

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SUPPLY

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  1. SUPPLY • The quantity a producer is able and willing to produce at given prices. • The law of supply states that, if the price increases the quantity supplied will increase all other factors remaining constant.

  2. DERIVING THE CURVE The supply curve can be derived from the firms marginal cost curve. It is the MC curve above AVC. MC P C $ S AC AVC Q

  3. Movement along the curve An increase in price causes an increase in quantity supplied. A decrease in price causes a decrease in quantity supplied. P $ S P2 P1 Q Q1 Q2

  4. SHIFTS OF THE CURVE S An decrease in costs (or an improvement in technology) will cause the supply curve to shift to the right (increase in supply). An increase in costs will cause an decrease in supply. MC C S’ P $ MC’ AVC AVC’ Q

  5. RELATED GOODS • Related goods are goods that the producer also produces. • If the price of a related good increases the producer will devote more resources to its production. • This will cause a decrease in supply for the other good that is produced.

  6. ELASTICITY OF SUPPLY Measures the responsiveness of quantity supplied to changes in price

  7. ELASTICITY COEFFICIENT Esupply = %Q / %P Esupply = Q / (Q1+Q2) /2 P/ (P1+P2) /2

  8. ELASTICITY OF SUPPLY P S Es = 0 Perfectly inelastic Q Momentary Term

  9. ELASTICITY OF SUPPLY S P Es<1 RELATIVELY INELASTIC Q SHORT TERM SUPPLY

  10. ELASTICITY OF SUPPLY Esupply = 1 UNITARY ELASTICITY P S Q

  11. ELASTICITY OF SUPPLY P Es > 1 RELATIVELY ELASTIC S LONG TERM SUPPLY Q

  12. The Long Run • In the long run there are no fixed inputs • Price elasticity of supply is elastic in the long run. This is because firms can vary all of their inputs to respond to changes in price and also, firms can enter and exit the industry.

  13. The Long Run • In the long run a firm can expand and achieve “Economies of Scale” • Economies of scale means the long run average cost curve falls due to the firm achieving technical, marketing, financial or managerial economies because of their larger scale.

  14. Economies of Scale • Long run economies of scale should not be confused with short run economies. • Short run economies = Diminishing returns. • Short run diseconomies = Increasing returns. • Short run economies and diseconomies occur for technical, marketing, financial and managerial reasons.

  15. Long run economies of scale. C $ SRAC1 SRAC2 SRAC3 SRAC4 SRAC5 LRAC Q

  16. Long run diseconomies of scale C $ srac4 srac2 srac3 srac1 LRAC Q

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