1.3.3 - Supply
- Syllabus
- 2018
- Topic
- 1.3.3
- Level
- AS
Learning objectives
1.3.31a - concept of 'supply'The concept of 'supply'.1.3.31b - distinction between movements along a supply curve and shifts of a supply curveThe distinction between movements along a supply curve and shifts of a supply curve.1.3.31c - Factors that may cause a shift in the supply curve: • changes in the costs ofFactors that may cause a shift in the supply curve:; changes in the costs of production; the introduction of new technology; indirect taxes (specific and ad valorem); government subsidies; natural disasters.1.3.32a - concept of 'price elasticity of supply'. supplyThe concept of 'price elasticity of supply'. supply1.3.32b - Calculation and interpretation of numerical values of price elasticity of supply: •Calculation and interpretation of numerical values of price elasticity of supply:; perfectly elastic supply; elastic supply; unitary elastic supply; inelastic supply; perfectly inelastic supply.1.3.32c - Factors that influence price elasticity of supply: • the time period • availability ofFactors that influence price elasticity of supply:; the time period; availability of stock/perishability; mobility of factors of production; legal constraints; capacity.1.3.32d - distinction between the short run and long run in economics and its significance forThe distinction between the short run and long run in economics and its significance for price elasticity of supply.
What supply means
Supply is the quantity of a good or service that producers are willing and able to offer for sale at each possible price during a stated period, ceteris paribus.
A supply schedule records price–quantity pairs; a supply curve plots them with price on the vertical axis and quantity supplied on the horizontal axis. Market supply adds the quantities offered by all producers at each price.
A higher price can make extra production worthwhile because it may cover the rising marginal cost of expanding output, so a conventional supply curve slopes upward.
Supply is the entire relationship between price and quantity supplied. Stock is an amount held at a moment; some stock may be withheld rather than offered for sale, so stock and supply are not identical.
Movement along or shift of supply
| Event | Diagram change | Language |
|---|---|---|
| the good's own price changes, other supply conditions fixed | move to another point on the same supply curve | extension when price rises; contraction when price falls |
| a non-price determinant changes | the whole curve shifts right or left | increase or decrease in supply at every given price |
A rise in the market price of wheat causes an extension in quantity supplied along the existing wheat supply curve. A fall in fertiliser costs can shift wheat supply right because farmers can profitably offer more at each price.
Ask whether the good's own price changed. If it did, show a movement along the same curve. If costs, technology, policy or another supply condition changed, hold own price constant and show a shift.
An extension of supply is not an increase in supply. The former is an own-price movement; the latter is a rightward shift of the whole relationship.
What shifts a supply curve
| Change | Usual shift, other things equal | Mechanism |
|---|---|---|
| production costs rise / fall | left / right | fewer / more units are profitable at each price |
| productive technology improves | right | productivity rises or unit cost falls |
| specific indirect tax | left | a fixed tax per unit raises marginal cost by the same amount per unit |
| ad valorem indirect tax | left | a percentage tax creates a larger tax amount at higher prices |
| government subsidy | right | payment lowers producers' effective cost |
| natural disaster | left | capital, crops, transport or other productive capacity is damaged |
Name the determinant, trace its effect on cost or productive capacity, and state why producers offer more or less at every given market price. The shift's size depends on the magnitude and importance of the change.
A cost rise may be partly absorbed or offset by another cost fall. Technology needs adoption, and a disaster may affect only a region or industry, so direction can be clear while magnitude and duration remain uncertain.
Do not shift supply because the good's own market price changes. Own price causes movement along supply; a tax or subsidy shifts supply because it changes producers' cost at a given price.
The concept of price elasticity of supply
Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in the good's own price, ceteris paribus.
PES=\frac{%\text{ change in quantity supplied}}{%\text{ change in price}}
PES is a unit-free ratio. Supply normally responds in the same direction as price, so PES is usually positive. A larger value means producers can adjust quantity supplied more strongly over the stated time period.
PES measures a movement along a supply curve after an own-price change; it does not measure a shift caused by costs, taxes or technology. Always state the time period because responsiveness can change over time.
Calculate and interpret PES
%\Delta Z=\frac{Z_{new}-Z_{original}}{Z_{original}}\times100,\qquad PES=\frac{%\Delta Q_s}{%\Delta P}
Calculate both percentage changes from their original values, divide the percentage change in quantity supplied by the percentage change in price, retain the sign, and round only at the end. If PES and a price change are known, use %ΔQs=PESimes%ΔP.
| PES | Interpretation | Benchmark curve |
|---|---|---|
| tends to infinity | perfectly elastic supply | horizontal |
| greater than 1 | elastic: quantity changes more than proportionately | relatively responsive |
| 1 | unitary elastic | equal proportionate change |
| between 0 and 1 | inelastic: quantity changes less than proportionately | relatively unresponsive |
| 0 | perfectly inelastic supply | vertical |
If price rises by 10% and quantity supplied rises by 4%, PES = 4% ÷ 10% = 0.4, so supply is price inelastic.
PES is not a percentage and should not normally be negative. A negative result often signals reversed dates, a simultaneous supply shift, or data that do not satisfy ceteris paribus.
What influences PES
| Factor | Supply is more elastic when... |
|---|---|
| time period | producers have longer to alter inputs, plant or capacity |
| stocks / perishability | saleable stocks exist and can be released; goods are not rapidly perishable |
| mobility of factors | labour, capital and land can move into production readily |
| legal constraints | licences, planning rules and quotas are limited or quick to satisfy |
| capacity | spare capacity exists rather than factories operating at full capacity |
Hotels and houses can be inelastic when construction and permissions take years. Agricultural supply can be inelastic when crops need long maturation or suitable climates, but stored stocks can increase the immediate response. Full-capacity semiconductor plants cannot expand quickly after a price rise.
Factors interact. Spare capacity is useful only if inputs are available; stocks help only until exhausted; and technology or investment can relax a constraint after a lag. Define the market and period before judging PES.
Scarcity alone does not determine PES. The question is how much quantity supplied can change after price changes within the specified period.
Short run, long run and PES
| Period | Production constraint | Typical PES implication |
|---|---|---|
| short run | at least one factor of production is fixed | output can change only through variable inputs, stocks or spare capacity; supply is often less elastic |
| long run | all factors can be varied | firms can expand capacity, enter or leave, retrain labour and adopt technology; supply is often more elastic |
The short run and long run are defined by adjustability, not by a fixed number of months. A farm crop, hotel and digital service can each have a different adjustment horizon.
After a crop price rises, farmers may release stocks in the short run but cannot instantly grow another harvest. Over the long run they may change acreage, equipment and crop choice, increasing the quantity response.
Long-run supply is not automatically elastic. Finite deposits, climate, land, law or persistent skills constraints may keep PES below 1 even after more adjustment time.