Supply and Elasticity of Supply - Intro to Economics...

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Supply and Elasticity of SupplyIntro to Economics Lecture 6

Petar Stankov

petar.stankov@gmail.com

Nov. 2014

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 1 / 11

SupplyDefinition, intuition, modelling and graphing

SupplyA rational decision on howmuch quantity to supply, ifany

General setting: Sx =f (px ,E{px t+1}, pi ,T ,N, πalt , ...)

Supply w.r.t the price px and shift in supply

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 2 / 11

SupplyDefinition, intuition, modelling and graphing

SupplyA rational decision on howmuch quantity to supply, ifany

General setting: Sx =f (px ,E{px t+1}, pi ,T ,N, πalt , ...)

Supply w.r.t the price px and shift in supply

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 2 / 11

Why Does Supply Depend on Price?Total, average and the marginal product

Example: studying for exams; average and marginal class performance; fuelconsumption of a carP.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 3 / 11

Why Does Supply Depend on Price?Average and Marginal Product, Average and MARGINAL COSTS

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 4 / 11

Why Does Supply Depend on Price?Price and marginal costs

How does the Marginal Costs curve shift? How does that affect quantitysupplied?

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 5 / 11

Own-Price Elasticity of SupplyDefining supply elasticity

The general model: Sx = f (px ,E{px t+1}, pi ,T ,N, πalt , ...)

Supply elasticity (Еластичност на предлагането)A measure of how much supply reacts to changes in its factors

Price elasticity of supply (Еластичност на предлагането от цената)By how much (in % points) does supply change if price changes by 1%

εSxpx = ∆Sx=?%∆px=1%

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 6 / 11

Own-Price Elasticity of SupplyDefining supply elasticity

The general model: Sx = f (px ,E{px t+1}, pi ,T ,N, πalt , ...)

Supply elasticity (Еластичност на предлагането)A measure of how much supply reacts to changes in its factors

Price elasticity of supply (Еластичност на предлагането от цената)By how much (in % points) does supply change if price changes by 1%

εSxpx = ∆Sx=?%∆px=1%

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 6 / 11

Supply elasticityA graphical representation

Elastic supply

Inelastic supplyP.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 7 / 11

Further info

Reading:Sloman, Ch. 2: 39-42; 119-131Икономикс, глава 5-6

Do not miss:economist.com; wsj.com; cnbc.com; the economic news

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 8 / 11

AppendinxReal-Life Average and Marginal Product and Costs

An example of declining marginalcosts: facebook

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 9 / 11

AppendixHow does Facebook help understand micro?

An example of a total product:facebook delivers people

An example of declining marginalcosts: facebook

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 10 / 11

AppendixWhy Firms Exist: The Profit

ProfitThe difference between total revenues and total costs

π = TR − TC = p.Q(L,K )− w .L− r .K

Can we find the optimal point for the firm: how much capital and laborshould the firm hire in order to maximize its profit?

P.Stankov (UNWE, CERGE-EI) Lecture 06 Nov. 2014 11 / 11