Now that we have introduced the demand schedule and taken a look at the factors that influence demand, we turn our attention briefly to supply.
It is sufficient to understand that, providing one accepts the profit maximising assumption, firms/suppliers will, ceteris paribus
- raise output if prices rise or costs fall
- reduce output if prices fall or costs increase
Movements along the supply curve result from a change in the price of the good being supplied (ceteris paribus).
A shift in the supply curve is caused by factors that affect the cost of production, or any other factor affecting the volume of production other than the price of the good itself. Examples are the impact on harvests of the weather or outbreaks of pests and diseases. Changes in technology may also shift the supply curve by changing the cost of production per unit of output.
Elasticity of supply
The elasticity of supply is a measure of the responsiveness of supply to some influence. Here, we are only concerned with the elasticity of supply with respect to price, that is, the responsiveness of supply to variations in the price of the good being supplied. The own price elasticity of supply is defined by the following formula
price elasticity of supply =
|percentage change in supply|
percentage change in price
The same general principles apply as in the case of demand elasticities. Perfectly inelastic supply curves are straight vertical lines with an elasticity of zero. Elasticities between 0 and 1 represent inelastic supply response, whilst those greater than 1 signify an elastic supply response. It is also important to note that there can be differences in the position of supply curves in short and long run. Long-term supply curves tend to be much more elastic than short-term supply curves. This is because, in many contexts, supply cannot be adjusted in the short run because of physical as well as financial constraints on the firm. Given a long enough period, almost any adjustments to the production process can be made.