Supply

1. Basics Definition: the amount of a product that is offered for sale at all possible prices that exist in the market Supply

2. Law of Supply: Price and supply have a direct relationship so that when price increases, more of a product is offered for sale. • When price drops, less is offered at the lower prices

3. This creates an upward sloping supply curve This is referred to as a change in the quantity supplied What’s the Law of Supply say? P S $10 The change in price Which causes movement ALONG the supply curve $5 0 Q 15 25 Causes the change in the quantities supplied

4. Creating a supply curve from a supply schedule P P QS S $10 $10 20 7 7 10 3 3 2 2 10 20

5. Task • Using the supply schedule below, construct a supply curve P P Q S $45 $45 150 32 32 75 20 20 62 Q 62 75 150

6. Why producers supply more product at higher prices: • Businesses want to take advantage of higher prices, so they increase supply • As prices rise, more firms enter the market to take advantage of the higher profits than in other industries • Increases in demand cause prices to rise, which signals an increase in supply to meet the increased demand • To supply more, more must be produced. To produce more, the supplier must buy more resources to increase production. His costs of production therefore increase. Businesses can sometimes ONLY increase production when product prices increase to offset their increased cost (deeper oil reserves under harder rock)

7. Changes/shifts in Supply • Reasons other than price for changes in the amount producers supply (most having to do with changes in production costs) New position S1 S2 P Price doesn’t change $5 What factors cause the shift? Q

8. Almost all the factors have to do with costs of production • If production costs are low, profits are higher, so more product will be supplied • If costs are higher, profits are lower, and less will be supplied Either way, the higher profits will motivate producers to supply more to the market Example: Two ways to increase profits Widgets Increase price Or, decrease costs $3.00 $3.50 Widget price: $3 $1.50 $2 $2.00 Per widget cost: $1.50 $1.50 $1 Per widget profit:

9. Reasons for changes in supply (or shifts in the supply curve)

10. Changes in: the cost of inputs productivity technology taxes subsidies government payments for which it receives nothing – welfare payments, social security etc. expectations of future prices government regulations number of sellers

11. Create supply curves showing the change in supply for the following: • Supply of furniture when lumber becomes more expensive • Supply of corn when the govt reduces farm subsidies • Supply of TVs when it’s expected that TV prices will decrease starting next month • Supply of peanut butter when peanut harvesters go on strike • Supply of a product after manufacturing is computerized

12. Elasticity of Supply • The more time it takes to respond to the higher prices and increase supply, the more inelastic the supply will be • The quicker a company can respond to the price signal to increase supply, the more elastic • Determinants of supply elasticity have to do with time • Large amount of capital • Use of technology • Skilled labor required • Simply takes a while (time) If the increased production requires the use of any of these, supply will be inelastic If none of these is required, supply will be elastic

13. Huge amounts of land to locate and purchase Some coal mines can simply work a few hours longer or dig weekends too. So some increase will occur. But beyond that, new heavy industrial machinery must be purchased and shipped, new workers trained, and mining operations expanded or new locations found, purchased, and cleared just to begin mining. Thus, a relatively smaller increase in QS in the short run will occur but the long run increase in quantities supplied will be extremely inelastic Increased supply  large amount of time in the short run. Supply elasticity = highly inelastic • Large amounts of capital • e.g.: coal mining The relatively smaller change in quantities supplied is due to the amount of time needed to increase supplies. Capital intensive

14. a. Purchase, shipment, setup and integration into current manufacturing system, hiring and training on the new machinery will take time • Use of technology

15. Skilled labor • Time needed for the training

16. Other products are just so massive in scale, to increase quantities supplied takes years … or more • Other time issues S So why is there any increased quantities supplied?

17. Determinants of Supply Elastic City ChartTo increase supply requires …

18. Elastic Supply Inelastic Supply Unit elastic Supply P S Q P S Q P S Q

19. How can you know for certain the elasticity of supply? • Nope!

20. Questions • Define the Law of Supply. • Create a supply curve reflecting the Law of Supply. • Why do producers supply products at greater quantities when prices increase? • What are the factors that cause an increase in supply (not in quantities supplied)? • Create a supply curve showing a change in supply for shirts when the cost of cotton increases. • Create a supply curve for vacuums when 20% of vacuum plant workers are replaced with automated machinery. • List the determinants of supply elasticity. • What’s the supply elasticity for airplanes? Why? • What’s the supply elasticity for orange juice? Why? • What’s the supply elasticity for socks? Why?