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© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.11
Chapter 5
Supply
5.1 The Supply Curve
5.2 Shifts of the Supply Curve
5.3 Production and Cost
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.12
Chapter 5
Supply
Why might a firm decide to store its products in a
warehouse rather than offer them for sale?
What’s the meaning of the old expression “Too
many cooks spoil the broth”?
Can a firm shut down without going out of
business?
Why do movie theaters have so many screens?
Consider
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.13
LESSON 5.1
The Supply Curve
Understand the law of supply.
Describe the elasticity of supply, and
explain how it is measured.
Objectives
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.14
LESSON 5.1
The Supply Curve
supply
law of supply
supply curve
elasticity of supply
Key Terms
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.15
Law of Supply
Role of profit
Supply
More willing to supply
More able to supply
Supply versus quantity supplied
Individual supply and market supply
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.16
Role of Profit
Profit equals total revenue minus 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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.17
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 law of supply says that the quantity supplied
is usually directly related to its 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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.18
Price Quantity Supplied
per Pizza per Week (millions)
$15 28
12 24
9 20
6 16
3 12
Supply Schedule
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.19
Supply Curve
12 16 20 24 28Millions of pizzas per week
$15
12
9
6
3
0
Price p
er
piz
za
S
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.110
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.111
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.112
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.113
Individual Supply
and Market Supply
Individual supply—the supply of an
individual producer
Market supply—the supply of all
producers in the market
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.114
Summing Individual Supply
Curves to Find the Market
Supply Curve
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.115
Elasticity of Supply
The elasticity of supply measures how
responsive producers are to a price
change.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.116
Measurement
Elasticity of supply equals percentage
change in quantity supplied divided by
percentage change in price.
Elasticity
of supply=
Percentage change in
quantity supplied
Percentage
change in price
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.117
Categories of
Supply Elasticity
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.118
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.119
Market Supply Becomes
More Elastic Over Time
100 200
Millions of gallons per day
0
$1.25
1.00
Pric
e pe
r ga
llon
300
S w S m
S y
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.220
LESSON 5.2
Shifts of the Supply Curve
Identify the determinants of supply, and
explain how a change in each will affect
the supply curve.
Contrast a movement along the supply
curve with a shift of the supply curve.
Objectives
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.221
LESSON 5.2
Shifts of the Supply Curve
movement along a supply curve
shift of a supply curve
Key Terms
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.222
Determinants of Supply
Five determinants of market supply
(other than the price of the good)
Cost of resources used to make the good
Price of other goods these resources could
make
Technology used to make the good
Producer expectations
Number of sellers in the market
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.223
Changes in the Price
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.224
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.225
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.226
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.227
Changes in the Number of
Sellers in the Market
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.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.228
An Increase in the
Market Supply for Pizza
12 16 20 24 28Millions of pizzas per week
$15
12
9
6
3
0
Price
pe
r p
izza
S S'
gh
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.229
An Decrease in the
Market Supply for Pizza
12 16 20 24 28Millions of pizzas per week
$15
12
9
6
3
0
Price
pe
r p
izza
SS''
gi
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.230
Movements Along a Supply Curve
Versus Shifts of a Supply Curve
A change in price, other things constant,
causes a movement along a supply
curve from one price-quantity
combination to another.
A change in one of the determinants of
supply other than the price causes a
shift of a supply curve, changing
supply.
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.331
LESSON 5.3
Production and Cost
Understand how marginal product varies as a
firm employs more labor in the short run.
Explain the shape of the firm’s marginal cost
curve and identify what part of that is the firm’s
supply curve.
Distinguish between economies of scale and
diseconomies of scale in the long run.
Objectives
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.332
LESSON 5.3
Production and Cost
short run
long run
total product
marginal product
law of diminishing
returns
fixed cost
variable cost
Key Terms
total cost
marginal cost
marginal revenue
competitive firm’s supply
curve
economies of scale
long-run average curve
cost
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.333
Production in the Short Run
Fixed and variable resources
Increasing returns
Law of diminishing returns
Marginal product curve
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.334
Marginal Product of Labor
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.335
Costs in the Short Run
Fixed and variable costs
Total cost
Marginal cost
Marginal cost curve
Marginal revenue
Short-run losses and shutting down
The firm’s supply curve
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.336
Marginal Cost Curve for
Hercules At Your Service
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.337
Supply Curve for
Hercules At Your Service
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.338
Production and
Costs in the Long Run
Economies of scale
Diseconomies of scale
Long-run average cost curve
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.339
Economies of Scale
Economies of scale—forces that reduce
a firm’s average cost as the firm’s size, or
scale, increases in the long run
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.340
Diseconomies of Scale
If the firm’s long-run average cost
increases as production increases, this
reflects diseconomies of scale
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.341
Long-Run Average
Cost Curve
Long-run average cost curve shows
the lowest average cost of producing
each level of output
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.342
A Firm’s Long-Run
Average Cost Curve
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