Supply

What is supply?

Supply is the trusty and almost inseparable companion to demand. Supply is the amount of something that people will be willing and able to supply at any one price or time. Just as with demand you have goods, services, consumers, and producers.

How do you measure supply?

Supply is measured by Price Elasticity of Supply (PES) which is also a value between 0 and infinity (PES is only ever positive). This measures how producers will respond to changes in prices of a good or service and can be: perfectly elastic, relatively elastic, perfectly inelastic, relatively inelastic, and unitary. Elasticity means the same thing as it does for demand, so if you want to recap on the meaning, just check the last post.

Calculation

You take the percentage change in the quantity supplied and then divide it by the percentage change in price that caused it. This is your PES value.

Elastic goods

The more elastic something is, the bigger the change in supply will be in relation to supply. So a producer will always increase the quantity that they supply if the price of it increases (we'll ignore the demand side of this for now). Elastic goods' supply will increase much more with just a small change in price: this is because if you can increase your production of chocolate bars very quickly, because they are selling at double the price, you will! Goods are often elastic if they can be mass produced in factories that are no working at 'full capacity', this means that maybe not all of the workers or machines are being used to their full potential.

If a good is perfectly elastic, producers will only ever produce at a certain price, and only that price. Imagine McDonald's would only ever sell Big Macs at £2.59, and nothing else!

Inelastic goods

These basically means that the increase in supply will be will be relatively smaller to any change in price, this would often be because there is a time lag involved in production (IE you have to wait for a long time to actually make something: crops for example because to increase the number of crops you produce you can sometimes have to wait for a year.

If it is perfectly inelastic this means that suppliers are completely unable to produce anything other than the specific amount that they already produce.

Unitary goods

This is when supply and price are directly proportional (Imagine an x=y curve).

Why do we care?

You can use PES diagrams to figure out how a company will react to changes in price or inflation. What's even more interesting is when you combine PED and PES, but that comes later.

Discussion Point

What do you think would make demand more elastic or inelastic?