Supply & Elasticity of Supply
AG BM 102
Introduction
• Supply is the counterpart of demand
• It also is a schedule of prices and quantities
• Supply is driven by different factors
• Together Supply & Demand determine the market prices and quantities
Supply - A schedule of the quantities of product that
producers will sell at various prices
An Example – Beef Supply
Price Quantity Price Quantity
3.00 60 4.25 72.5
3.25 62.5 4.50 75
3.50 65 4.75 77.5
3.75 67.5 5.00 80
4.00 70 5.25 82.5
Some Ideas
• Time period important
• Short time – little adjustment possible
• Long time – lots of adjustment possible
• Medium – moderate adjustment possible
• Orchard
Upward sloping
• Higher prices induce more production
• Higher prices induce entry
• Higher prices mean more profit
Calculate Equation
Q a bP
b Q Q P P ( ) / ( )1 2 1 2
a Q bP 1 1
Values
Q lbs and P2 280 00 . $5.
a 70 10 4 30( )
b ( ) / ( )70 80 4 5 10
Q P 30 10
Q lbs P1 170 00 . , $4 . ,
Check to see if points are on line
• P = 4, Q = 30 + 10 (4) = 70
• P = 5, Q = 30 + 10 (5) = 80
Elasticity of Supply-The percentage change in quantity supplied in response to a one percent change in price
Calculate Elasticity of Supply
( ) / ( ) * ( ) / ( ) ( / )Q Q P P P Q b P Q2 2 1 11 1 1 1
b P Q( / ) ( )( / ) ( / ) .1 1 10 4 70 4 7 0 57
Interpretation
• Inelastic supply – between zero and 1
• Elastic supply – greater than 1
• Unitary elasticity - equal to 1
Discussion of Supply Elasticity
• Short run vs. long run
• Plant products vs. animal products
• Ag vs. non- ag (e.g., clothing)
• Perishable vs. storable
Change in Supply or Quantity Supplied
• Effect on beef market if feed price rises
• Effect on beef market if chicken price falls
• Effect on beef market if consumer income rises
• Effect on beef market if hard winter kills a lot of cattle
Concluding Comments
• Understanding supply goes a long way toward understanding markets
• Two parts- mechanical part & intuitive part
• Second is more important– Think about what will suppliers do?– How fast can they adjust?– What holds them back?
Same lists for demand
• Intuition important
• Comes from thinking systematically – What will demander do?– How fast will demander change?– Is habit an issue here?
• Lots of variables, but most not important– Key is to know which is which