Elasticity of Supply

1. Elasticity of Supply

2. Changes in the price offered by the market will affect the amount of goods produced by businesses • The degree to which a product’s supply is impacted by price is called the elasticity of supply

3. If the price that consumers are offering for a product goes up- the producers would be foolish not to make more • Big question is Can They Make More? Ease of Production

4. A factory makes tie dyed T shirts • They respond to higher prices by a massive increase in production • The shirts are cheap and easy to make • They have an elastic supply

5. On the other hand- let’s look at the Boeing 777 • A third world dictator wishes to pay double the sticker price to build an airline for his country

6. He is angered to learn that Boeing turns down his offer to buy twenty planes at $300 million each- especially since they only cost $150 million to begin with

7. Remember ease of production? Jets are not something you whip up during an all nighter • They are massive pieces of intricate machinery and technology

8. No matter what you offer- Boeing simply cannot make an abundance of the planes • Quantity cannot stretch much- economists refer to a product like jets as having an inelastic supply

9. What are some other products that are inelastic in supply?

10. Inelastic • Powerplant/lines • House • Shopping malls

11. Supply Curves Move When Supply Increases or Decreases • Even if price remains constant- other factors many force supply to increase or decrease • Businesses are often faced with many obstacles in getting products to the marketplace

12. The factors are called determinants of supply • Technological improvement • Resource prices • Taxes and subsidies • Competition

13. Technological Improvement • If Ford buys new robots to work in its factories, productivity will increase • More Fords will hit the marketplace even if prices have remained constant

14. Resource Prices • The price of resources or factors usually refers to anything needed to make a product or provide a service • If a steel shortage causes production problems at Caterpillar- the amount of tractors the company will be able to make may decrease

15. Taxes and subsidies • Subsidy: monetary grant to a business to help ease production or develop a new product • Taxes add to production costs and will result in lower supplies at a given price • If more money is coming in the form of subsidy, costs will decrease and result in higher supplies

16. Competition • When in-line skates started to become popular, there were only a few companies in the field • As the popularity became evident to business people, more producers entered the market • Prices remained competitive, but the supplies and choices of in line skates swelled

17. The product is Boeing 777s. For each of the four determinants of supply, think of a situation that would increase the supply of planes

18. Supply and Demand Meet!! • The price system is the means by which the price of a good or service is determined in a pure market economy • When a business produces something, it hopes to find a customer, retrieve the money spent in productions, and make a profit

19. When a business approaches the marketplace- it posts a price that says to customers “If you want my product you will have to give me this much”

20. Customers also approach the market with something to say • If they choose to buy, they confirm to the business that they consider the price fair • If they pass, the producer is being told that the price is not acceptable

21. The business will respond by lowering prices until people start to buy • Price is determined graphically where the supply and demand curves meet

22. This point is often called equilibrium • It occurs when the supply for a product matches the demand for a product

23. What is the current equilibrium price of gasoline?