UNIT 3: THE MODEL OF PERFECT COMPETITION: THE SUPPLY

THE SUPPLY

QUANTITY SUPPLIED: The quantity (of a good) that sellers are wiling (and can) sell
under any possible circumstances
SUPPLY CURVE: Is a function (or a graph) that shows us the supply as a function of the
price.

The supply curve is constructed under the ceteris paribus condition

The supply function satisfies the law of supply: greater prices imply greater quantities

THE UNI-DEMAND CASE

A seller can supply no more than one unit.
EXAMPLE: If price >6, sell.
If price <6, do not sell.
SELLER’S RESERVATION PRICE: It is equal to the seller’s opportunity cost.

THE COSTS:
-Costs for economists always means opportunity costs.
-They differ from normal life concepts of costs.

MARGINAL COST: Increase in cost when production increases one unit

VARIABLE COSTS: Costs that vary with the quantity produced
FIXED COSTS: Costs that are independent of the quantity produced
SUNK COSTS: Costs that are unavoidable

Total revenue = 6000+20000+30000 = 56000

Total cost=40000 (rent)+3000 (waiter)+3000 (supplies)=46000
It is profitable to start the business.

VARIABLE COST: waiter + supplies

FIXED COST: renting

THE GENERAL CASE

3 elements for our general analysis
-Individual supply
-Marginal costs
-Market supply
INDIVIDUAL SUPPLY

MARGINAL COSTS
The marginal cost is how much costs increase as production (or sales) increase in one
unit.

The marginal cost increases with quantity once production increases sufficiently

ECONOMIES OF SCALE
The economies of scale measure how cost vary when we change all the productive
factors.
We say that there are economies or diseconomies of scale depending on whether
average cost go down or up, respectively, as we increase the production scale.

MARKET SUPPLY
The market supply is the total supply of all the sellers in a market
This can be computed by summing all the individual supplies at each price level. This
operation is called horizontal summation.

The law of supply

-The market supply satisfies the law of supply:
The individual supply curves have positive slope
As price increases, more firms enter the market

MOVEMENTS AND SHIFTS

There is a change in the quantity supplied or movement along the supply if:
The price of the good changes, ceteris paribus

DETERMINANTS OF SUPPLY (beyond the price)

-Input prices
-Technology
-Number of producers
-Expectations

SHIFTS IN SUPPLY
Some other factor that affect the supply other than the price of the good changes:
There is a shift in supply or a change in the supply

ELASTICITIES: DEFINITIONS
PRICE ELASTICITY OF DEMAND (AND SUPPLY)
-Elasticity measures how sensitive is a variable to changes in another one.
-The price elasticity of demand (supply) measures how sensitive is the quantity
demanded (supplied) to changes in the price of the good.

Percentual change in quantity demanded

Price elasticity of demand=
Percentual change in price

The (price) elasticity of supply is calculated analogously.

VALUES FOR ELASTICITIES

• Perfectly elastic
• ε=∞
• Elastic
• ε>1
• Unit elastic
• ε=1
• Inelastic
• ε<1
• Perfectly inelastic
ε=0

DETERMINANTS OF THE ELASTICITY OF DEMAND

• -Properties of the good.
• Luxury goods.
• Water.
• Time horizon:
• The demand is in general more elastic in the long run (oil, etc.).

ELASTICITY OF SUPPLY
-Computation
-Cases
-Examples