Theory of Supply
- What changes supply?
- Own Price ("Quantity Supplied")
- Something else ("Supply shifts")
- Supply Elasticities
- = % change in quantity supplied / % change in price
- < 1 = "inelastic"
- > 1 = "elastic"
- Supply cost is the opportunity cost of not using the materials for a different good
- Leads to differences in prices
- Low Wages may be caused by a lack of other potential or real employers
- Lack of competition among employers
- Lack of demand for workers
- Lack of choice among employees to find other work
- Supply and demand are very similar in their trends and analysis
- "Law" of Supply, NOT "Law of Supply" -> first is indefinite, second is definite; supply is not truly a law
- As the price a consumer is willing to pay increases, supply increases
- If a future price increase is expected, short-term supply will decrease since suppliers will pull back in expectation of greater future profits
- The opposite occurs if price in the future is expected to drop
- Each point on a supply curve represents the marginal opportunity cost of making the product
- Other things to learn from a supply curve
- Total Revenues = Price sold x Quantity (P x Q)
- Consumer surplus / producer surplus
- If there is a supply curve in any factor market, attached goods will have a supply curve, even when they are otherwise "perfectly inelastic", though this is impossible
- Change in input (factor) price will change supply
- When input prices fall, supply increases
- When input prices rise, supply decreases
- Technology can shift supply curves out (increase supply)
- Substitutes can shift supply curves in (decrease supply)
- Expectations matter a great deal in shifting supply curves
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