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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.