EconS 451: Lecture #7
Supply Review
•
Understand the relationship between average and marginal cost curves
and supply (both long-run and short-run).
•
Be able to calculate the elasticity of supply and understand what values
indicate Inelastic and Elastic supply.
•
Understand the relationship between product price and factor price and
the quantity produced of a given product.
•
Be able to understand those factors which shift (or influence)
supply……and how.
•
Describe the concept of “Supply Response”.
•
Describe…..in detail how changes in marketing margins impact producers
relative to consumers.
Producer’s Goal
Max π s.t. Production Technology
Profit Maximization Occurs:
MR = MC
Cost of
Revenue / Unit
Cost Curves and Supply
Marginal Cost Curve
P2
Average Total Cost
P1
Average Variable Cost
Q1
Q2
Quantity / Unit Time
Cost Curves and Supply
$ Price
Short Run
Long Run
Quantity / Unit Time
Price Elasticity of Supply
Percentage change in Quantity Supplied in
response to a 1 percent change in price, all other
factors held constant.
Q P
Es 
P Q
Es = 0
0 < Es < 1
Es > 1
Perfectly Inelastic
Inelastic Supply
Elastic Supply
$ Price
Changes in Supply Elasticity
Quantity / Unit Time
Factors influencing Supply
•
Input prices
•
Technology
•
Change in returns from products that compete for
productive resources.
•
Joint products
•
•
Soybean / Soybean Meal
Lambs / Wool
•
Price and Yield Risk
•
Government Intervention
Cost Curves and Supply
$ Price
S 1 Original Input Price
S2
Lower Input Price
P1
P2
Q1
Quantity / Unit Time
Product – Factor Price Relationship
•
Producer Optimizes Factor Use:
M Px 
•
Pfactor
Pproduct
Optimum factor use (of input x) will change when
relative factor input / product prices change.
Factor Price
Input Prices and Supply
Sx
P1
P2
D2
D1
X1 X2
Quantity Input X
Factor Price
Input Prices and Supply
Sx
P1
P2
D2
D1
X1
X2
Quantity Input X
Supply Changes
• Shift
• Parallel shifts from
changes such as input
costs.
Q    P  X
• Structural Change
• Changes in the
parameters or
functional form
(technology,
government programs).
Q    P  X
2
Supply Response Path
$ Price
S2
Price Increase
Response
S1
P2
Price Decrease
Response
P3
P1
Q1
Q3 Q2
Quantity / Unit Time
Historical Supply Shifts
S1
$ Price
S2
P1
P2
Historically, changes in
aggregate output have
been associated with
supply shifts rather than
movements along the
supply curve.
D1
Q1
Q2
Quantity
Marketing Margin Changes
$ Price
Derived Supply 2 (Retail)
RP2
Derived Supply 1 (Retail)
M2
Primary Supply (Farm)
RP1
M1
FP1
FP2
Primary Demand (Retail)
Derived Demand 1 (Farm)
Derived Demand 2 (Farm)
Q2 Q 1
Quantity / Unit Time
Methods for Reducing MM
• Operational Changes
• Reduce # of middlemen.
• Reduce risk.
• Modify marketing structure / organization.
• Change laws for unfair trading practices.
• Improve Efficiency
• Technological advancements.
• # and location of firms.
• Economies of size.
Short Run Supply Elasticities
Crops
Elasticity
Livestock
Elasticity
Potatoes
.8
Eggs
1.2
Soybeans
.5
Poultry Meat
.9
Feed Grains
.4
Hogs
.6
Cotton
.4
Beef
.5
Tobacco
.4
Milk
.3
Wheat
.3
Fruits
.2
Summary Questions
•
Are agricultural products such as wheat and feed grains
generally have inelastic or elastic supply elasticities?
•
In describing the “supply response”, are the elasticities
of supply equal for price increases and decreases?
Why?
•
If output prices drop by 20% and input prices drop by
20%, how much will output change?
•
At low levels of output, is aggregate (or individual)
supply more elastic or inelastic? Why?