SUPPLYSUPPLYWhen we talk about supply we are referring

to the activities of the producer!

Supply: amount producers are willing and able to produce at each and every price (the entire curve)

Quantity supplied: amount producers are willing and able to produce at a certain price (a point on the curve)

THE LAW OF SUPPLYTHE LAW OF SUPPLY• The higher the price of a good, the

more producers will supply (the higher the quantity supplied) and vice versa

* Thus we knowthat a supply curvewill slope upward(opposite a demandcurve)

SUPPLY GRAPHS SUPPLY GRAPHS (AND SCHEDULES)(AND SCHEDULES)

• Like demand graphs, supply graphs show the relationship between two variables: price and quantity (supplied)

• All other factors that could change production are assumed to remain same

• A rise or fall in price will cause quantity supplied to change…not supply!

SUPPLY GRAPHS SUPPLY GRAPHS (AND SCHEDULES)(AND SCHEDULES)

• If price changes, quantity supplied changes and we move along the curve

• If a factor other than price changes, supply changes and we move the entire curve

CHANGES IN SUPPLYCHANGES IN SUPPLY#1 Cost of resources• A rise in the cost of resources (land,

labor, capital) to make a good or service will cause a decrease in supply and shift the curve to the left

• A decrease in the cost of resources will cause an increase in supply and shift the curve to the right

CHANGES IN SUPPLYCHANGES IN SUPPLY#2 Technology• New technology can lower production

costs and cause an increase in supply; shift of the curve to the right

CHANGES IN SUPPLYCHANGES IN SUPPLY#3 Government Action: Subsidies,

Taxes, and RegulationsSubsidies: government payment that

supports a business• If the government provides a

subsidy, it usually causes an increase in supply

CHANGES IN SUPPLYCHANGES IN SUPPLY#3 Government Action: Subsidies,

Taxes, and Regulations• Increased (* excise)taxes can cause

a decrease in supply* Tax on the production/sale of a good

(cigarettes, gasoline, etc.)• Increased regulation can cause a

decrease in supply

CHANGES IN SUPPLYCHANGES IN SUPPLY#4 Natural Disaster/Other Event• A hurricane, crop freeze, labor strike

or some other type of event can cause a decrease in supply

CHANGES IN SUPPLYCHANGES IN SUPPLY

* Since the U.S. relies heavily on imports, our supply is often affected by events in other countries

ACTIVITY 6: SHIFTS IN ACTIVITY 6: SHIFTS IN SUPPLYSUPPLY

Supply of Foreign and Domestic Cars in U.S. (start at curve C) * one no change and factors can be used twice1. Ford and GM Announce Wage DecreasesFactor ________ Supply _______Curve _____2. New Robot Increases Efficiency3. Japanese Auto Strike Began at Midnight (Tokyo time)4. Auto Prices Rise Due To Inflation5. U.S. Increases Auto Efficiency Requirements to 35/mpg For All New Models6. Glitch in Software Forces Robot Recall7. Young Design Engineers Commanding Ever-Increasing Salaries

ACTIVITY 6: SHIFTS IN ACTIVITY 6: SHIFTS IN SUPPLY SUPPLY (start at C again)(start at C again)

* There are two ‘no supply factors, no changes in supply’, but not because of a change in price…see if you can figure them out!8. Government Decreases Taxes on Factories 9. Government Reduces Individual Income Taxes to Spur Economy10. Government Subsidizes Car Industry To Stimulate Economy11. Cost of Steel Rises12. Commie’s Take Over Factories In Mexico; Transfer Resources to Military Production13. Buyers Reject New Models14. Flood Cleanup Finished; Factories Up and Running Again

ELASTICITY AND SUPPLYELASTICITY AND SUPPLY• Elasticity of supply: measurement of how

producers respond to a price change• If price changes and quantity supplied

changes dramatically supply is elastic• If price changes and quantity supplied

changes only a small amount supply is inelastic

• The main factor is time: initially supply will be inelastic, but eventually becomes elastic