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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:
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 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
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
Even if the customer wants to Now if the customer wants to Now when the customer wants
offer PA = 4 instead of PA = 1 to offer PA = 4 instead of PA = 1 to to offer PA = 4 instead of PA = 1
get additional airplanes get additional airplanes to get additional airplanes (but
immediatelythe producer soonthe producer can supply can wait awhile)the producer
cannot supply themthere is a second onethere is some can supply them with 5there is
no time. time to respond to the change enough time more completely
in price. respond to the change in price.
Supply:
S2
S2 S
Q Q Q
0
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
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 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:
Some people prefer a less formal end to a proof, w5, which stands for:
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).