Market Supply and Elasticity

Report
AAEC 3315
Agricultural Price Theory
Chapter 9
Market Supply and Elasticity
Objectives

To learn:


How Market Supply is determined.
Elasticity of Supply
Price Elasticity of Supply
 Cross-Price Elasticity of Supply

Market Supply

Earlier, we discussed
that the individual
firm’s supply curve was
the firm’s MC curve
above AVC

The total offered by all
firms in the market can
then be derived by
aggregating each firm’s
supply curve.
Market Supply


As with demand, the supply
curve for a good in the
market is the horizontal sum
of all individual firm’s
supply curves.
Market Supply - is the
various amounts of a good
that producers are willing &
able to produce and supply
at different price levels
during a specified period of
time.
P
S1
S2
Market Supply
P2
P1
Q11 Q21 Q12 Q22
Q1M Q2M
Q
Elasticity of Supply (Es)

Managers are interested in two types of supply
elasticity measures:

Own-price elasticity of supply - measures the responsiveness
of quantity supplied of a good to a change in the price of that
good.

Cross-price elasticity of supply - measures the responsiveness
of quantity supplied of a good to a change in the price of a
related good.
Elasticity of Supply (Es)

Price Elasticity of Supply is defined as the
percentage change in the quantity supplied
relative to the percentage change in price.
 It is a measure of responsiveness of quantity
supplied to changes in price.
 Calculating Own Price Elasticity of Supply from a
Supply Function:

Using calculus: Esy 
Qsy
Py

Py Qsy
Elasticity of Supply (ES)

Given a supply function:
Qsy = -900 + 150 P, where, Qsy = Quantity supplied of
product Y and Py = Price of product Y ($30 per unit).

Qsy = -900 + 150*(30) = 3600 units

Taking partial derivative of the supply function with
respect to price and substituting values for P and Qs:
Qsy
Py
30
Esy 

 (150) 
 1.25
Py Qsy
3600
Elasticity of Supply (Es)

Interpretation
 Es = 3: If the price of the product changes by 1%
then the quantity supplied of the product changes by
3%
 Es = 1: If the price of the product changes by 1%
then the quantity supplied of the product changes by
1%
 Es = 0.37: If the price of the product changes by 1%
then the quantity supplied of the product changes by
0.37%
Elasticity of Supply (Es)

Classifications:
 Inelastic supply (Es < 1): a change in price brings
about a smaller change in quantity (we are less
responsive to price)

Unitary Elastic supply (Es = 1): a change in price
brings about an equivalent change in quantity.

Elastic supply (Es >1): a change in price brings
about a relatively larger change in quantity.
Cross-price Elasticity of Supply

Measures the effect of a change in the price of good X
on the quantity supplied of Y.

Using Calculus from a Supply function:
Esyx

Qsy
Px


Px Qsy
Read this as the cross-price of elasticity of supply for
product Y with respect to price of product X.
Interpretation & Classification of
Cross-price elasticity of Supply

Interpretation:


ESYX=1.5 implies that as price of X changes by 1%, the
quantity supplied of Y changes by 1.5%.
Classification:

Complements in production (ESYX>0): implies that as the
price of X increases, the quantity of Y supplied by the firm
will increase.

Substitutes in production (ESYX <0): implies that as the
price of X increases, the quantity of Y supplied by the firm
will decrease.

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