Chapter 5: Supply Section 1

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1 Chapter 5: Supply Section 1

2 Objectives Explain the law of supply.
Interpret a supply schedule and a supply graph. Examine the relationship between elasticity of supply and time.

3 Key Terms supply: the amount of goods available
law of supply: producers offer more of a good as its price increases and less as its price falls quantity supplied: the amount that a supplier is willing and able to supply at a specific price supply schedule: a chart that lists how much of a good a supplier will offer at various prices variable: a factor that can change market supply schedule: a chart that lists how much of a good all suppliers will offer at various prices supply curve: a graph of the quantity supplied of a good at various prices market supply curve: a graph of the quantity supplied of a good by all suppliers at various prices elasticity of supply: a measure of the way quantity supplied reacts to a change in price

4 Introduction How does the law of supply affect the quantity supplied (QS)? Producers want higher prices because, if consumers agree to pay it, profits can increase As prices rise, producers will offer more of a good, and new suppliers will enter the market, in the hopes of making a profit. The law of supply states that as prices rise, so will the quantity supplied. There is a direct relationship between P and Q

5 The Law of Supply Supply is the amount of goods available at current prices. Law of Supply states: as the price of a good increases, producers will offer more of it As the price decreases, they will offer less. The law of supply causes two reactions: Individual firms changing their level of production Firms entering or exiting the market

6 What is the Law of Supply?

7 Higher Production If a firm is earning a profit from the sale of a good or service, then an increase in the price will, in turn, increase the firm’s profits. In general, the search for profit drives the choices made by the producer.

8 Market Entry Why does production increase when the price of a good increases? Rising prices encourage new firms to join the market and will add to the quantity supplied of the good. Take, for example, the music market: When a particular type of music becomes popular, such as hip hop or country music, more bands will play that type of music in order to profit from such music’s popularity. This action reflects the law of supply. Checkpoint Answer: Because the law of supply states that as prices rise, so does the amount of quantity supplied

9 The Supply Schedule Supply of a good can be measured using a supply schedule. A supply schedule shows the relationship between price and quantity supplied for a particular good. An individual supply schedule shows how much of a good a single supplier will be able to offer at various prices. A market supply schedule shows how much of a good all firms in a particular market can offer at various prices.

10 Supply Schedule The supply schedule lists how many slices of pizza one pizzeria will offer at different prices. The market supply schedule represents all suppliers in a market. What does the individual supply schedule tell you about the pizzeria owner’s decisions? How does the total market supply schedule compare to the individual supply schedule? Answers: 1. That the higher the price of pizza, the more the pizzeria owner will supply. 2. It follows a similar patter as the individual supply schedule with a larger quantity of slices supplied each day, which reflects the entire market.

11 The Supply Graph A supply schedule can be represented graphically by plotting points on a supply curve. A supply curve always rises from left to right because higher prices leads to higher output. (Positive slope) What are the two variables represented in a supply schedule or supply curve? Answer: Checkpoint Answer: price and quantity supplied

12 Elasticity of Supply Elasticity of supply, based on the same concept of elasticity of demand, measures how firms will respond to changes in the price of a good. Elastic When elasticity is greater than one, supply is very sensitive to price changes Inelastic When elasticity is less than one, supply is not very responsive to price changes.

13 Elasticity in the Short Run
In the short run, it is difficult for a firm to change its output level, so supply is generally inelastic. Many businesses, such as harvesting cranberries, have a hard time adjusting to price changes in the short term.

14 Elasticity in the Long Run
In the long run, supply can become more elastic. Just like demand, supply becomes more elastic if the supplier has a longer time to respond to a price change.

15 Review Now that you have learned how the law of supply affects the quantity supplied, go back and answer the Chapter Essential Question. How do suppliers decide what goods and services to offer?

16 QUICK CHECK: Using the total market supply schedule, draw a supply graph in the space below, then answer the following questions: Why would the supplier be willing to supply more product at $8 than $6? Why is quantity supplied, QS, 0 at $2? Show the change on the graph with the following price change: from $8 to $6 Using the formula /\Q / /\P, is the above price change elastic or inelastic? What does this mean? P QS $10 100 $8 75 $6 50 $4 25 $2

17 QUICK CHECK: Using the total market supply schedule, draw a supply graph in the space below, then answer the following questions: Why would the supplier be willing to supply more product at $8 than $6? More profits being made Why is quantity supplied, QS, 0 at $2? No profits are made Show the change on the graph with the following price change: from $8 to $6 Using the formula /\Q / /\P, is the above price change elastic or inelastic? What does this mean? P QS $10 100 $8 75 $6 50 $4 25 $2 $10 $8 $6 $4