Learning Objectives LO1Explain the law of supply. LO2Describe the elasticity of supply, and explain how it is measured. 5.1THE SUPPLY CURVE 3 CHAPTER 5
Key Terms supply law of supply supply curve elasticity of supply 4 CHAPTER 5
Review: Demand Demand indicates how much of a product consumers are both willing and able to buy at each price during a given period, other things constant. 5 With demand, the assumption is that consumers try to maximize utility, a goal that motivates their behavior.
Determinants of Demand What factors determine how much you will buy? What factors determine how much you will really purchase? 1) Product’s Own Price 2) Consumer Income 3) Prices of Related Goods 4) Consumer Tastes 5) Consumer Expectations 6) Number of Consumers 6
Law of Demand The law of demand says that quantity demanded varies inversely with price, other things constant. The higher the price, the smaller the quantity demanded. 7
Supply Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant. The supply curve is a curve or line showing the quantities of a particular good supplied at various prices during a given time period, other things constant. 8
Law of Supply The law of supply says that the quantity supplied is usually directly related to its price, other things constant. With supply, the assumption is that producers try to maximize profit. Profit is the goal that motivates the behavior of suppliers. 9
Role of Profit Profit equals total revenue minus total cost. Profit = Total revenue – Total cost Total revenue is the total sales (dollars) received from consumers for a certain time period. Total cost includes the cost of all resources used by a firm in producing goods or services. Over time, total revenue must cover total cost for the firm to survive. 10
Starts and Closures of Employer Firms, 2005–2009* 11 Source: U.S. Dept. of Commerce, Census Bureau, Administrative Office of the U.S. Courts, U.S. Dept. of Labor, Business Employment Dynamics (BED). *Estimates based on Census data and BED trends The number of firms which start, close, or go bankrupt in a year.
More Willing to Supply As a price increases, a producer becomes more willing to supply the good. Prices act as signals to existing and potential suppliers about the rewards for producing various goods. A higher price makes production more profitable and attracts resources from lower-valued uses. 13
More Able to Supply Higher prices also increase the producer’s ability to supply the good. The marginal cost of production increases as output increases. A higher price makes producers more able to increase quantity supplied. 14
Supply Versus Quantity Supplied Supply is the entire relation between the price and quantity supplied, as reflected by the supply schedule or supply curve. Quantity supplied refers to a particular amount offered for sale at a particular price, as reflected by a point on a given supply curve. 15
Individual Supply and Market Supply Individual supply—the supply of an individual producer Market supply—the supply of all producers in the market 16
Elasticity of Supply The elasticity of supply measures how responsive producers are to a price change. 17 Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. Percentage change in quantity supplied Percentage change in price Elasticity of supply = Supply is elastic if supply elasticity exceeds 1.0. Supply is unit elastic if supply elasticity equals 1.0. Supply is inelastic if supply elasticity is less than 1.0.
Determinants of Supply Elasticity One important determinant of supply elasticity is the length of the adjustment period under consideration. The elasticity of supply is typically greater the longer the period of adjustment. 18
Learning Objectives LO1Identify the determinants of supply, and explain how a change in each affects the supply curve. LO2Contrast a movement along the supply curve with a shift of the supply curve. 19 5.2SHIFTS OF THE SUPPLY CURVE
Key Terms movement along a supply curve shift of a supply curve 20
Determinants of Supply Anything that affects production costs and profit opportunities helps shape the supply curve. 1) Price of the good 2) Cost of resources used to make the good 3) Price of other goods these resources could make 4) Technology used to make the good 5) Producer expectations 6) Number of sellers in the market 21
Changes in the Cost of Resources Any change in the costs of resources used to make a good will affect the supply of the good. An increase in supply means that producers are more willing and able to supply more goods at each price. An increase in the price of a resource will reduce supply, meaning a leftward shift of the supply curve. 22
Changes in the Prices of Other Goods A change in the price of another good certain resources could make affects the opportunity cost of making a particular good. 23
Changes in Technology Discoveries in chemistry, biology, electronics, and many other fields have created new products, improved existing products, and lowered the cost of production. 24
Changes in Producer Expectations Any change that affects producer expectations about profitability can affect market supply. An expectation of higher prices in the future could either increase or decrease current supply, depending on the good. 25
Changes in the Number of Suppliers Government regulations may influence market supply. Any government action that affects a market’s profitability, such as a change in business taxes, could shift the supply curve. 26
Movements Along a Supply Curve Versus Shifts of a Supply Curve A change in one of the determinants of supply other than the price causes a shift of a supply curve, changing supply. 29 A change in price, other things constant, causes a movement along a supply curve from one price- quantity combination to another.