2. Chapter 5SectionMain Menu Understanding Supply What is the law of supply? What are supply schedules and supply curves? What is elasticity of supply? What factors affect elasticity of supply?

3. Chapter 5SectionMain Menu Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply According to the law of supply, suppliers will offer more of a good at a higher price.

4. Chapter 5SectionMain Menu How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. Rising prices draw new firms into a market and add to the quantity supplied of a good. (in other words, healthy profits appeal to producers already in the market and people who may decide to join the market) Great Example: the music business 1970’s: Disco 1980’s: Hair Bands 1990 - today: Gangsta Rap

5. Chapter 5SectionMain Menu $.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500 Supply Schedules A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.

6. Chapter 5SectionMain Menu Remember: total supply moves in the same direction as prices ! Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.

7. Chapter 5SectionMain Menu Elasticity of supply measures the degree to which quantity supplied reacts to a change in price. Elasticity of Supply If supply is not very responsive to changes in price, it is considered inelastic. An elastic supply is very sensitive to changes in price. Remember: total supply moves in the same direction as prices !

8. Chapter 5SectionMain Menu Time ! In the long run, firms are more flexible*, so supply can become more elastic. * They can hire more workers…add more equipment/machines In the short run, a firm cannot easily change its output level, so supply is inelastic. What Affects Elasticity of Supply? Remember: total supply moves in the same direction as prices !

9. Chapter 5SectionMain Menu SEC 2. Production Costs A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs. The total cost = fixed costs plus variable costs. The marginal cost is the cost of producing one more unit of a good.

10. Chapter 5SectionMain Menu SEC. 3 Changes in Supply How do input costs affect supply? How can the government affect the supply of a good? What other factors can influence supply? Remember: total supply moves in the same direction as prices !

11. Chapter 5SectionMain Menu Input Costs and Supply Input: any/every factor used to produce - Raw materials - taxes - machinery / tools / equipmt. - shipping costs - labor - rent / electricity / etc. Any change in the cost of an input will affect supply. As input costs increase, profits AND supply decrease. Input costs can also decrease. New technology can greatly decrease production costs and increase supply. Remember: total supply moves in the same direction as prices !

12. Chapter 5SectionMain Menu Example: You own a lemonade stand. You sell each cup for $0.50 INPUTS (your costs) lemons $0.09 sugar $0.04 cup $0.05 ice $0.02 C ost of Inputs $0.20 Selling Price: $0.50 Minus costs: - $0.20 Profit: $0.30 What happens if one or more of your input costs goes up? Remember: total supply moves in the same direction as prices !

13. Chapter 5SectionMain Menu Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry. Subsidies A subsidy is a gov’t. payment that supports a business or industry… can cause the supply of a good to increase. (examples) Taxes The gov’t.can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. (examples) Regulation Regulation occurs when the gov’t. steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises production costs. (examples) Remember: total supply moves in the same direction as prices !

14. Chapter 5SectionMain Menu Other Factors Influencing Supply The Global Economy –The supply of imported goods and services has an impact on the supply of the same goods and services here. –Government import restrictions will cause a decrease in the supply of restricted goods. Future Expectations of Prices –Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect. Number of Suppliers –If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease. Remember: total supply moves in the same direction as prices !