Introduction to Supply

Supply: The Basics Obviously prices effect how much we faceless business men supply to consumers. Producers often offer a certain amount of a product at one price and a different amount at another (self- interest) I. Supply A. Supply: the amount of goods that are available B. Quantity supplied: how much of a good is offered at a specific price

II Law of Supply States that the quantity supplied (Q) of a good/service and the price (P) of the good have a direct relationship A. Price goes up, quantity supplied goes up; price goes down, quantity supplied goes down P: Q: P: Q:

Supply Curve Quantity Supplied Price

III. What drives supply? A. Possibility of making a profit! B. More Producers will enter the market if there is a greater chance of making profit (if prices are higher) + current producers will offer more product Is this greed? Do our laws of economics function off of the idea that greed is natural?

Definitions 4. Supply Schedule: a table that lists the quantity of a good or service that producers are willing and able to offer at particular prices

Supply Schedule Price per pair of Shoes Quantity Supplied $60.00 4,750 $50.00 3,750 B $40.00 3,000 C $30.00 2,250 D $20.00 1,500 E

Definitions 5. Supply Curve: a graphic illustration of a supply schedule

Pairs of Shoes (Thousands) Supply Curve P 70 60 50 40 30 20 10 S1 ● A ● B ● C $ ● D ● E 1 2 3 4 5 Pairs of Shoes (Thousands) Q

Supply vs. Demand Schedule Supply Schedule for T-Shirts Demand Schedule for T-Shirts Price Quantity Supplied $30 8 $25 7 $20 6 $15 4 Price Quantity Demanded $30 4 $25 6 $20 7 $15 8

Change in Quantity Supplied IV. Change in Quantity Supplied: change in the amount offered for sale in response to a change in price. Quantity supplied can increase or decrease depending on the price change. ex. When the economy collapsed in late summer of ’08, price of oil dropped from close to $4 a gallon to around $1.85. OPEC responded to this by producing less oil. OPEC-Organization of Petroleum Exporting Countires

Shifts of Supply V. Shifts of Supply Curve A. A change in the OVERALL supply results in a shift of the supply curve B. Increase in supply = shift to right C. Decrease in supply = shift to left

Difference Between Shifting Supply and Quantity Supplied 1. Shifting supply means that at every price point the supply has changed (moves the demand graph to the left or to the right) 2. Quantity supplied is a change in the quantity based on a change in PRICE of that item (movement along the demand graph)

VI. What Causes Shifts (determinants) A. Production Costs i. Resource prices: major components of production costs -increase in resource prices, decrease in supply (shift left) ii. Technology: new technology can lower production costs and increase supply (shift right) iii. Taxes: add to production costs, reduces supply (shift left) iv. Subsidies (incentives given by the gov): lower costs and increase supply (shift right)

Dang, everyone is selling bootlegged Bieber CDs More Determinants B. Changes in prices of related goods E.g. lower price of wheat may cause farmers to produce more corn (shift right for corn) C. Supplier Expectations E.g. if price expected to rise in the future, decrease supply now and wait for higher prices (shift left) D. Number of suppliers: more producers means more goods and services (shift right) Dang, everyone is selling bootlegged Bieber CDs

Even more Determinants E. Nature/Random Shocks: weather, earthquakes, wars, labor disputes

Rule of Thumb… Change in Price = change in Quantity Supplied = movement ALONG the curve Change in something else = change in Supply = movement of ENTIRE curve

VI. Supply Elasticity A. Elastic supply = changes in price have large effect on quantity supplied Math: % change in quantity supplied is greater than % change in price Elastic Supply Items: products that can be quickly produced/offered without much additional cost (e.g. gasoline, jolly ranchers, etc)

What ifs? B. Perfect Elastic Supply – if price drops quantity supplied will drop to 0. Only feasible circumstance is if product has thousands of substitutes, so any price change would ultimately result in all consumers going somewhere else.

VI. Supply Elasticity C. Inelastic supply = changes in price have less effect on quantity supplied Math: % change in price is greater than % change in quantity supplied i. Inelastic Supply Items – items that are not easily produced/offered e.g. Houses, artwork, antiques, supercomputers

What ifs? D. Perfect Inelastic Supply – quantity supplied will remain constant regardless of price Think items that are nearly impossible to replicate (e.g. Mona Lisa)

E. Unitary Elastic Supply = increase in price and quantity supplied are proportional Math = % change in price = % change in quantity supplied

Grow!!! You little jerk, prices are sky high VII. Factors Affecting Elasticity A. Availability of Resources B. Time and complexity of production C. Supplier Inventory Eg. Orange prices go up, how quickly can the producer respond to that and provide more oranges? Plant more trees, use new fertilizer (takes time) How about haircuts? Hire more workers immediately Grow!!! You little jerk, prices are sky high Perfect, we had all these hats left over from last Halloween and they are so HOT right now for Cinco de Mayo