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Supply & Elasticity of Supply

Supply & Elasticity of Supply. AG BM 102. Introduction. Supply is the counterpart of demand It also is a schedule of prices and quantities Supply is driven by different factors Together Supply & Demand determine the market prices and quantities.

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Supply & Elasticity of Supply

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  1. Supply & Elasticity of Supply AG BM 102

  2. Introduction • Supply is the counterpart of demand • It also is a schedule of prices and quantities • Supply is driven by different factors • Together Supply & Demand determine the market prices and quantities

  3. Supply - A schedule of the quantities of product that producers will sell at various prices

  4. An Example – Beef Supply

  5. Some Ideas • Time period important • Short time – little adjustment possible • Long time – lots of adjustment possible • Medium – moderate adjustment possible • Orchard

  6. Upward sloping • Higher prices induce more production • Higher prices induce entry • Higher prices mean more profit

  7. Calculate Equation

  8. Values

  9. Check to see if points are on line • P = 4, Q = 30 + 10 (4) = 70 • P = 5, Q = 30 + 10 (5) = 80

  10. Elasticity of Supply-The percentage change in quantity supplied in response to a one percent change in price

  11. Calculate Elasticity of Supply

  12. Interpretation • Inelastic supply – between zero and 1 • Elastic supply – greater than 1 • Unitary elasticity - equal to 1

  13. Discussion of Supply Elasticity • Short run vs. long run • Plant products vs. animal products • Ag vs. non- ag (e.g., clothing) • Perishable vs. storable

  14. Change in Supply or Quantity Supplied • Effect on beef market if feed price rises • Effect on beef market if chicken price falls • Effect on beef market if consumer income rises • Effect on beef market if hard winter kills a lot of cattle

  15. Concluding Comments • Understanding supply goes a long way toward understanding markets • Two parts- mechanical part & intuitive part • Second is more important • Think about what will suppliers do? • How fast can they adjust? • What holds them back?

  16. Same lists for demand • Intuition important • Comes from thinking systematically • What will demander do? • How fast will demander change? • Is habit an issue here? • Lots of variables, but most not important • Key is to know which is which

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