1. Understanding Supply Chapter 5 Section 1

2. S U P P L Y Objectives: Explain the law of supply.
Interpret a supply graph using a supply schedule.
Explain the relationship between elasticity of supply and time.

3. S U P P L Y
Focus:
As a owner of a business, what would you do if you discovered that your customers were willing to pay twice as much for your product?

4. S U P P L Y
Most entrepreneurs would try to produce more product in order to take advantage of the higher prices.

5. S U P P L Y Supply – the amount of goods available.
Law of Supply – the quantity of a product supplied varies directly with price {the higher the price, the larger the quantity that is produced}.

6. S U P P L Y
The Law of Supply means that a producer will increase their supply as the price goes up, other factors held constant.

7. S U P P L Y
Economists use the term Quantity Supplied to describe how much of a good is offered for sale at a specific price.
Much like Quantity Demanded has to do with the amount consumers would demand, Quantity Supplied has to do with the amount producers will put on the market at that price level.

8. S U P P L Y Supply Schedule Price Quantity Supplied $ .50 100
It shows the relationship between Price and Quantity Supplied
It compares two factors that can change
Price Quantity Supplied $ $ $ $ $ $

9. S U P P L Y
Supply Graph

10. S U P P L Y
Law of Supply develops from the choices of both current producers and new producers. As the price of a good rises, existing firms will produce more in order to earn additional revenue. At the same time, new firms will enter the market to earn a profit for themselves.

11. S U P P L Y IF the price of a good falls….
some firms will produce less.
some firms will drop out or leave the marketplace.
These two movements just described combine to create a new supply curve.

12. S U P P L Y
IF a firm is already earning a profit by selling a good, then an increase in the price – it will increase the firm’s profit.
This promise of higher revenues for each sale encourages the firm to produce more.
Profits also appeal to people who may decide to join the marketplace. These companies will come in and compete with the already existing firms and try to get their share of the profit pie.

13. S U P P L Y Individual Supply Schedule Market Supply Schedule
Reports the amount that would be supplied by each individual producer.
Market Supply Schedule
Reports the amount that would be supplied by all producers in the market.

14. S U P P L Y Coca-Cola Price Quantity Supplied $ 1.00 $ .90 $ .80 $ .70
$ .90
$ .80
$ .70
$ .60
$ .50
$ .40
$ .30
$ .20
$ .10

15. S U P P L Y
Supply Graph
4 Parts – Price on V-axis, QS on H-axis, Title, and Supply Curve labeled with an “S”

16. S U P P L Y
Market Period – a period of time when all production has taken place so the firm has a fixed quantity it is trying to sell. It is right now. Producers cannot change anything.
A set # of goods, all production has taken place.
Supply Curve is a Vertical Line!

17. S U P P L Y
Short Run – a period of time when at least one factor of production is fixed, but the firm can vary output by increasing or decreasing other factors of production.
Short enough period of time that a firm can’t do something like build a factory, train new employees, etc.
It is long enough to change the remaining factors of production (adding new materials or buying more equipment)

18. S U P P L Y
Short Run Supply Curve

19. S U P P L Y Short Run Supply
It is upward sloping because as costs rise as more goods are produced.
The company has to raise the price of the good to cover those increasing costs.

20. S U P P L Y
Long Run – a period of time when no factors of production are fixed.

21. S U P P L Y
Enough time to change all factors of production. {Land, Labor, & Capital}
A period of time that allows a company to change all of its factors of production – they can buy more land, build a new factory, hire & train new employees in that factory, and buy more materials, machines, and tools.

22. S U P P L Y There are two Supply Curves in the Long Run.
2 different outcomes of increasing production

23. S U P P L Y
S1 – represents a company who, as costs rise, must increase price to cover this cost. It looks like the short run supply curve – this company has not figured out a way to decrease its costs as supply increases.

24. S U P P L Y
S1 example would be dwindling oil reserves are causing the long run cost of gasoline to increase because firms are having to drill deeper and in more remote areas to find oil.

25. S U P P L Y
S2 – slopes downward because this company has increasing specialization, which lowers the costs as they produce more.
This happens because as the company makes more of a good they figure out ways to become more efficient and to save costs in the production process.

26. S U P P L Y
S2 example would be the long run supply curve of personal computers. Its supply curve is downward sloping because as the volume of PCs has expanded, computer firms have been able to adopt more specialized equipment and that will lower the cost of production.
Specialization increases the efficiency of the production process.

27. S U P P L Y
For our purposes in this class, we will focus our attention on the short-run supply curve. So we will deal with upward sloping supply curves, that assumes costs increase as output increases.

28. S U P P L Y Elasticity of Supply
This is a measure of the way suppliers respond to a change in price. {much like elasticity of demand}
Elasticity tells how firms will respond to changes in the price of a good.
3 Types:
Elastic Inelastic Unit Elastic

29. S U P P L Y
Elastic Supply – when supply is very sensitive to price change.
Inelastic Supply – when supply is not responsive to price change.
{Much like elasticity of demand}
Unit Elastic – when a percentage change in price is perfectly matched by an equal percentage change in QS

30. S U P P L Y
What determines whether the supply of a good will be elastic or inelastic?
TIME – In the short run, a firm cannot easily change its output level, so supply is inelastic.
In the long run, firms are more flexible, so supply is more elastic.