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SUPPLYChapter 5
SUPPLY
Producers people who provide goods or services
Manufactures provide goods and services
From nutrition bars, automobiles, to even farmers
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,
HOW DOES THE LAW OF SUPPLY WORK? .
More profit
The promise of increased revenues when prices are high encourages firms to produce more.
Rising prices
SUPPLY SCHEDULE
Supply schedule lists
A market supply schedule is a
$.50 1,000
Price per slice of pizza Slices supplied per day
Market Supply Schedule
$1.00 1,500
$1.50 2,000
$2.00 2,500
$2.50 3,000
$3.00 3,500
SUPPLY SCHEDULES
SUPPLY CURVES Supply curve shows the data from a
supply schedule in graph form
Market supply curve shows the data from a market supply schedule in graph form
Output refers to…
Market Supply CurveP
ric
e (
in d
oll
ars
)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
0
0 500 1000 1500 2000 2500 3000 3500
Supply
SUPPLY CURVES A market supply curve is a graph of the quantity
supplied of a good by all suppliers at different prices.
UNDERSTANDING SUPPLY What is the law of supply?
What are supply schedules and supply curves?
LABOR AFFECTS PRODUCTION
3 workers, make jeansHire 1 more worker Page 141
Specialization isAutomobiles
Increasing returns-
Diminishing returns- Difference?
FOUR PRODUCTION COSTS
1. Fixed costs-2. Variable costs-3. Total cost -4. Marginal cost-
# of Workers
Total Product
Fixed Cost
Variable Cost
Total Cost(FC +VC)
Marginal Cost
0 0 40 0 40 --
1 3 40 30 70 10
2 7 40 62 102 8
3 12 40 97 137
4 19 40 132 172
5 29 40 172 212
EARNING THE HIGHEST PROFIT
Marginal revenue- Total Revenue- Profit maximizing output-
# of workers
Total Product
Total Cost
(FC+VC)$
Marginal Cost
$
Marginal
Revenue(price)
$
Total Revenue
$(TPxMR)
Profit$
(TR-TC)
0 0 40 -- -- 0 -40
1 3 70 10 20
2 7 102 8 20 140 38
3 12 137 7 20
4 19 172 6 20 380 208
5 29 212 4 20
6 42 251 4 20 840 589
WHAT FACTORS AFFECT SUPPLY Change in quantity supplied –
Change in supply-
6 FACTORS AFFECTS CHANGE IN SUPPLY
1. Input costs
2. Labor Productivity
3. Technology
4. Government Action
5. Product Expectations
6. Number of Producers
INPUT COSTS
LABOR PRODUCTIVITY
TECHNOLOGY
GOVERNMENT ACTION
PRODUCER EXPECTATIONS
NUMBER OF PRODUCERS
Elasticity of supply
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.
Elasticity of supply is also a measure of how responsive producers are to price changes
If a change of price leads to a relatively larger change in price leads to a relatively larger change in quantity supplied, supply is elasticSupply is very sensitive to changes in price
If a change of price leads to a relatively smaller change in quantity supplied, supply is inelasticSupply is not very responsive or sensitive to
changes in price
ELASTIC SUPPLY
Ex. You are a leather boot producer. As your boots gain popularity, a shortage develops
Price of the boots rises from $60 to $150
Supply went from 10,000 to 50,000
Elastic Supply Curve
Pri
ce
(in
do
lla
rs)
Quantity supplied of boots (in thousands)
180
150
120
90
60
30
0 0 10 20 30 40 50 60 70
INELASTIC SUPPLY Ex. Gasoline is inelastic based off
of demand No matter the price people will pay
for it
Supply of gas is also inelastic, when prices rose from 20 to 30 percent between 2004 to 2005
Suppliers were not able to increase supply by the same amount because the refineries of crude oil was limited
INELASTIC SUPPLY Ex. Olive Oil
As the price of olive oil rose by a factor of four, supply could not keep up
They use previous season’s olives to make the oil
Page 155
WHAT AFFECTS ELASTICITY OF SUPPLY? There are (fewer than demand) factors
that affect the elasticity of supply Time- more time the more elastic
Year or years lean towards elasticDays, weeks, months leans towards
inelastic Response to change in price
Faster=elasticSlower=inelastic
WHAT AFFECTS ELASTICITY OF SUPPLY?
Time
In the long run, firms are more flexible, so supply can become more elastic.
• In the short run, a firm cannot easily change its output level, so supply is inelastic.
