1. Slide 1 Copyright © Pearson Education, Inc.Chapter 5, Opener Essential Question: How does the law of supply affect the quantity supplied?? Chapter 5.1 Law of Supply

2. Slide 2 Copyright © Pearson Education, Inc.Chapter 5, Opener What is Supply? What is supply? –Supply is the amount of goods available to meet customers’ demand What are the goals of a firm? –ALL FIRMS/SUPPLIERS ALWAYS SEEK TO MAXIMIZE PROFITS

3. Slide 3 Copyright © Pearson Education, Inc.Chapter 5, Opener The Law of Supply The law of supply states that as prices rise, quantity supplied will rise as well. –This is opposite of the law of demand The law of supply includes two effects of a price change: –Individual firms changing their level of production –Firms entering or exiting the market

4. Slide 4 Copyright © Pearson Education, Inc.Chapter 5, Opener The Law of Supply

5. Slide 5 Copyright © Pearson Education, Inc.Chapter 5, Opener Maximizing profit drives the choices made by the producer. An increase in the price will increase the firm’s profits. So, firms will increase the amount of goods they sell, which increases quantity supplied The Law of Supply – Increased Production

6. Slide 6 Copyright © Pearson Education, Inc.Chapter 5, Opener Rising prices and profits make other people “jealous” – they want to make profits too New firms are motivated to join the market and make profits and will add to the quantity supplied of the good. Example: High prices and profits for Apple because of the iPhone made Samsung and others jealous. They entered the market by selling new smartphones. The Law of Supply – Market Entry

7. Slide 7 Copyright © Pearson Education, Inc.Chapter 5, Opener The Law of Supply - Summary Price Change Effect on Production Effect on Market Entry Law of Supply Effect Price risesHigher production Firms enter; more sellers Quantity supplied increases Price fallsLower production Firms leave; less sellers Quantity supplied decreases

8. Slide 8 Copyright © Pearson Education, Inc.Chapter 5, Opener 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. Individual supply schedule = single supplier market supply schedule = all firms in a market Supply Schedule

9. Slide 9 Copyright © Pearson Education, Inc.Chapter 5, Opener Supply Schedule Compare and contrast the individual and market supply schedules for pizza

10. Slide 10 Copyright © Pearson Education, Inc.Chapter 5, Opener 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.

11. Slide 11 Copyright © Pearson Education, Inc.Chapter 5, Opener 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 Supply is very sensitive to price changes –Inelastic Supply is not very responsive to price changes.

12. Slide 12 Copyright © Pearson Education, Inc.Chapter 5, Opener Elasticity in the Short Run In the short run, it is difficult for a firm to change its output level, so supply is inelastic. Many agricultural businesses, such as harvesting cranberries, have a hard time adjusting to price changes in the short term.

13. Slide 13 Copyright © Pearson Education, Inc.Chapter 5, Opener Elasticity in the Long Run In the long run, supply can become more elastic as firms can adjust to price changes –If prices are rising, firms can invest in planting more fields, building more factories, so they can produce more goods –If prices are falling, firms can close down factories, so they can produce less goods Supply becomes more elastic if the supplier has a longer time to respond to a price change.

14. Slide 14 Copyright © Pearson Education, Inc.Chapter 5, Opener Objectives 1.Explain the law of supply. 2.Interpret a supply schedule and a supply graph. 3.Examine the relationship between elasticity of supply and time. As price rises; quantity supplied increases (and vice versa) Two effects of a price rise: higher production and more entry Represents two variables: price and quantity supplied. Always slopes up and to the right (opposite of demand) With more time comes greater ability to respond to price changes. Inelastic supply in the short-term Elastic supply in the long-term

15. Slide 15 Copyright © Pearson Education, Inc.Chapter 5, Opener 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

16. Slide 16 Copyright © Pearson Education, Inc.Chapter 5, Opener Key Terms, cont. 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