Supply

1

Supply DefinedWhat is supply?Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices.

What is the Law of Supply?There is a DIRECT (or positive) relationship between price and quantity supplied.• As price increases, the quantity producers make

increases• As price falls, the quantity producers make falls.

Why? Because, at higher prices profit seeking firms have an incentive to produce more.

EXAMPLE: Mowing Lawns2

Example of SupplyYou own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these

prices?Price per

lawn mowedQuantity SuppliedSupply

Schedule

3

$1$5

$20$50

$100$100

0

An Introduction to Supply

Economists analyze supply by listing quantities and prices in a supply schedule.

Figure 5.1Figure 5.1

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

Draw this large in your notes

5

PriceQuantitySupplied

$5 50

$4 40

$3 30

$2 20

$1 10

An Introduction to Supply

An individual supply curve illustrates the various amounts supplied at each price that would prevail in the market.

An Introduction to Supply

When the supply data is graphed, it forms a supply curve with an upward slope.

Figure 5.1Figure 5.1

An Introduction to Supply

A market supply curve illustrates the amounts offered at various prices by all firms in the market.

An Introduction to SupplyFigure 5.2Figure 5.2

Supply vs. Quantity Supplied• Supply is the amount of a

product that would be offered for sale at all possible prices that could prevail in the market. It’s the big picture. It’s the curve.

• Quantity supplied is the amount that producers bring to the market at any given price. It’s a specific point in time at a specific price. It’s a point on the curve.

Change in Quantity Supplied

• If prices fall too low, producers have the freedom to slow (or stop) production or leave the market completely.

• If the price rises, the producer can step up production levels if they choose.

• A change in quantity supplied is the change in amount offered for sale in response to a change in price.

Change in Quantity Supplied

Change in Supply

New topic…

Change in Supply

A change in supply is when a situation occurs which causes a change in the number of products for sale at all possible prices in the market.

Change in Supply

There are many different situations (factors) that can cause a change in supply.

Factors such as cost of labor, technology, taxes, etc. can cause an increase or decrease in supply.

Change in Supply

• the cost of inputs • (labor, packaging, etc.)• inverse relationship

• productivity levels • (motivation, training, efficiency)

• positive or negative effects

• technology • (new software, machines, etc.)

• improvements or failures

7 Factors that can

cause a

change in

supply:

Change in Supply

• taxes and subsidies • change in taxes• support of farmers• positive and negative effects

• expectations • future increase in prices

• might withhold production

7 Factors that can

cause a

change in

supply:

Change in Supply

• government regulations • safety regulations• positive and negative effects

• number of sellers• Businesses entering and exiting the market

• can move the curve left or right

7 Factors that can

cause a

change in

supply:

Change in Supply

Negative

Factor

Decrease in

Supply

Shift to the Left

Positive

Factor

Increase in

Supply

Shift to the

Right

Change in Supply

Figure 5.3Figure 5.3

Supply PracticeFirst, identify the determinant (shifter) then

decide if supply will increase or decrease

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ShifterIncrease or Decrease Left or Right

1

2

3

4

5

6

Supply Practice

Hamburgers1. Mad cow disease kills 20% of cows 2. Price of hamburgers increase 30%3. Government taxes burger

producers4. Restaurants can produce burgers

and/or tacos. A demand increase causes the price for tacos to increase 500%

5. New bun baking technology cuts production time in half

6. Minimum wage increases to $20

1. Which determinant (SHIFTER)?2. Increase or decrease?3. Which direction will curve shift?

22

Time Out!

To Be Continued…

Quick Review

1. Define supply2. Define the Law of Supply3. How can you best explain the reason for the

Law of Supply?4. Describe the difference between a change in

supply and a change in the quantity supplied5. Name four of the seven determinants of a

change in supply6. Name the other three determinants of a

change in supply7. Name 10 candy bars

Elasticity of Supply

Remember: elasticity is

a measureme

nt….

Determinants of Supply ElasticitySupply elasticity is related to how quickly a producer can act when a change in price occurs. • If adjusting production can be

done quickly, the supply is elastic.

• If adjusting production is complex and requires much advance planning, the supply is inelastic.

Elasticity of Supply

• Can the purchase be delayed?

• Are there adequate substitutes?

• Does the purchase require a large portion of income?

Supply elasticity

is not concerned

with:

Supply elasticity is only concerned with how quickly a producer can act when a

change in price occurs.

Elasticity of Supply

Supply is elastic when an increase in price leads to a larger increase in output (supply).

Figure 5.4aFigure 5.4a

Here, when price doubles, quantity supplied triples. Thus, this product is elastic.

Elasticity of Supply

Figure 5.4bFigure 5.4bHere, when price doubles, quantity supplied only increases 50%. Thus, this product is inelastic.

Supply is inelastic when an increase in price causes a smaller increase in supply.

Elasticity of Supply

Supply is unit elastic when a change in price causes a proportional (same) change in supply.

Figure 5.4cFigure 5.4c

As you can see, when price doubles, so does the quantity supplied. This product is unit elastic.

Elasticity of SupplyFigure 5.4dFigure 5.4d

Elasticity of Supply

Quantity (Q)