3 SUPPLY

Supply:

Market Supply and Related Concepts:

Definition: Quantity supplied is the total amount of a commodity that all

producers as a whole wish to produce and sell.

Determinants of Quantity Supplied for Good X (QX):

Price of Good X (PX)
For example, PX QX and PX QX
Supply:

Similarly to demand, this leads us to a supply schedule which allows us to map Market
Supply.
Ps Qs PX
1 4
4 S
2 5
3
3 6
2

QX
1 2 3 4 5 6 7

The intuition is that if PX (ceteris paribus) then it becomes more profitable to produce
good X, so production of good X will increase.
Supply:

Potential Shift Variables:

the price of other goods change
i.e. Splenda is a substitute for sugar: PSplenda QSugar
Molasses is a complement to sugar: PMolasses QSugar
(a by-product in production)

costs of production increase (or decrease)

i.e. costs Qx ceteris paribus (can make more X with the same
production budget).
costs QX ceteris paribus (cannot make as much X for the same
production budget).
Supply:

Potential Shift Variables:

technology advancement in the industry reduction in cost / unit (this returns us to the
argument above) QX
number of sellers
government policies (i.e. taxes and subsidies, quotas, etc.)
future expectations regarding price in the industry
Supply:

Movements along Market Supply and Shifts in the Supply Curve:

Movements along the supply curve happen when only the price of good X has changed.
i.e. PX QX
PX QX

PX
S

QX
Supply:
Shifts in the supply curve happen when something other than PX has changed.

PSugar S PSugar
PX
S S S S
S

QX QSugar QSugar

Costs PSplenda PMolasses

(substitute in production) (complement in production)
Elasticity of Supply:
Definition:
es = % in Q
% in P
the percentage change in quantity supplied as a result of a percentage
change in the price of the same good.
This is the price elasticity of supply. Note that when we have upward sloping
supply curves this price elasticity is positive since there is a direct relationship
between price and quantity supplied.

We can write es as es = Q/Q = Q . P

P/P P Q
Elasticity of Supply:
The main determinant of the price elasticity of supply is the amount of time
available to respond to a change in pricethe more time available, the more
elastic is the supply.
Suppose that the commodity in question is aircraft and that price goes up

PA S PA S PA
S
4 4 4

1 1 1
QA QA QA
NO TIME !!!! SOME TIME LOTS OF TIME !!!!
PA quantity supplied PA quantity supplied PA quantity supplied can
stays the same. goes up a bit. more fully adjust.
Perfectly Inelastic Supply Supply is Inelastic Supply is Elastic
es = 0 0 < es < 1 1 < es <
Elasticity of Supply:
PA S PA S PA
S
4 4 4

1 1 1
QA QA QA

NO TIME !!!! SOME TIME LOTS OF TIME !!!!

PA quantity supplied PA quantity supplied PA quantity supplied can
stays the same. goes up a bit. more fully adjust.
Perfectly Inelastic Supply Supply is Inelastic Supply is Elastic
es = 0 0 < es < 1 1 < es <

Even if the customer wants to
offer PA = 4 instead of PA = 1 to
get additional airplanes
immediatelythe producer
cannot supply themthere is
no time.
Now if the customer wants to
offer PA = 4 instead of PA = 1 to
get additional airplanes
soonthe producer can supply
a second onethere is some
time to respond to the change
in price.
Now when the customer wants
to offer PA = 4 instead of PA = 1
to get additional airplanes (but
can wait awhile)the producer
can supply them with 5there is
enough time more completely
respond to the change in price.
Supply:
Some Other Interesting Supply Curve Results
P S1
S2
Q Q
0
Any straight-line supply
curve that goes through
the origin is UNIT ELASTIC
!!!!
That means that both of
the supply curves shown
(and any others that go
through the origin) are
unit elastic (i.e. es = 1).
Can you prove this result?
S1
P P
S2
S
Q
Perfectly Elastic Any straight-line supply curve
Supply (es = ) that crosses the horizontal
axis at a positive (negative) Q
More on this later
is inelastic (elastic).
This result also only applies
to straight-line supply curves
and can be proven in a similar
fashion to the case that goes
through the origin. Can you
prove these results?
Supply:
Proof: any straight line supply curve that goes through the origin is unit elastic, s = 1.

P
We will prove this assertion for the general case, by construction.
S1
We know that the equation for the general form of a supply
curve takes the form:
S2
Qs = + P

where,
= intercept -<<
= slope >0
Q
0

Recall that the elasticity of supply is given by:

s = Q . P
P Q

Using these two bits of information, we can construct the asserted result
Supply:

We know from the general equation of the supply curve that the slope, Q is simply .
P
So s = . P
Q

and we know Q from the supply equation is...

Qs = + P
so...
s = . __P__
+P

And since the supply curve goes through the origin, = 0 so...

s = P = 1
P

Q.E.D.
Supply:

For those who are a little rusty in Latin, Q.E.D. is the abbreviation of the Latin
phrase:

Quod erat demonstrandum

which literally translated means which was to be demonstrated. These

three letters go at the end of a proof to signify its correct (?) completion.

Some people prefer a less formal end to a proof, w5, which stands for:

Which was what we wanted

Supply:

Why am I telling you this? Because for homework Im asking you to prove
that:

a) A supply curve that crosses the horizontal axis when Q > 0 is inelastic (this
only applies to straight line supply curves).

b) A supply curve that crosses the horizontal axis when Q < 0 is elastic (this
only applies to straight line supply curves).
Lecture #3: Homework Questions

1. Prove that:

a) A supply curve that crosses the horizontal axis when Q > 0 is inelastic (this only applies to
straight line supply curves).
b) A supply curve that crosses the horizontal axis when Q < 0 is elastic (this only applies to straight
line supply curves).