Chapter 5 Supply Splash Screen

Click the Speaker button to listen to Economics and You. About how many hours do you spend studying every night? How many hours would you study if you were paid $1 an hour? $10 an hour? If you will study more for a higher price, you are following the Law of Supply. Click the Speaker button to listen to Economics and You. Chapter Introduction 1

Chapter Objectives Section 1: What Is Supply? Understand the difference between the supply schedule and the supply curve.  Explain how market supply curves are derived.  Specify the reasons for a change in supply. Click the mouse button or press the Space Bar to display the information. Chapter Introduction 2

Chapter Objectives Section 2: The Theory of Production Explain the theory of production.  Describe the three stages of production. Click the mouse button or press the Space Bar to display the information. Chapter Introduction 3

Chapter Objectives Section 3: Cost, Revenue, and Profit Maximization Define four key measures of cost.  Identify two key measures of revenue.  Apply incremental analysis to business decisions. Click the mouse button or press the Space Bar to display the information. Chapter Introduction 4

Introduction The concept of supply is based on voluntary decisions made by producers, whether they are proprietorships working out of home offices or large corporations operating out of downtown corporate headquarters.  For example, a producer might decide to offer one amount for sale at one price and a different quantity at another price. Click the mouse button or press the Space Bar to display the information. Section 1-4

Introduction (cont.) Supply, then, is defined as the amount of a product that would be offered for sale at all possible prices that could prevail in the market.  Because the producer is receiving payment for his or her products, it should come as no surprise that more will be offered at higher prices.  This forms the basis for the Law of Supply, the principle that suppliers will normally offer more for sale at high prices and less at lower prices. Click the mouse button or press the Space Bar to display the information. Section 1-5

An Introduction to Supply Supply is the amount of a product that would be offered for sale at all possible prices in the market.  The Law of Supply states that suppliers will normally offer more for sale at high prices and less at lower prices. Click the mouse button or press the Space Bar to display the information. Section 1-6

An Introduction to Supply An individual supply curve illustrates how the quantity that a producer will make varies depending on the price that will prevail in the market. A market supply curve illustrates the quantities and prices that all producers will offer in the market for any given product or service.  Economists analyze supply by listing quantities and prices in a supply schedule (table). When the supply data is graphed, it forms a supply curve with an upward slope. Click the mouse button or press the Space Bar to display the information. Section 1-6

The Supply Schedule Section 1-7

The Market Supply Curve Section 1-11

Click the mouse button or press the Space Bar to display the answer. Discussion Question How do you explain that prices and quantities move in the same direction in a supply schedule? Producers will produce high quantities at the highest prices and low quantities at the lowest prices. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Change in Quantity Supplied A change in quantity supplied is the change in amount offered for sale in response to a change in price.  Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. If the price rises, the producer can step up production levels. Click the mouse button or press the Space Bar to display the information. Section 1-12

Click the mouse button or press the Space Bar to display the answer. Discussion Question What steps do you suppose a producer must go through in setting an introductory price for a product it brings to the market for the first time? Answers will vary but students may indicate that the producer must study the pricing system for similar products and risk that competing producers, in short order, will offer a like product at a lower price. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Change in Supply A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.  Factors that can cause a change in supply include: the cost of inputs; productivity levels; technology; taxes or the level of subsidies; expectations; and government regulations. Section 1-14

Change in Supply (cont.) A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.  Factors that can cause a change in supply include: the cost of inputs; productivity levels; technology; taxes or the level of subsidies; expectations; and government regulations. Section 1-15

Click the mouse button or press the Space Bar to display the answer. Discussion Question Why does using new technology almost always increase supply? It generally leads to greater efficiency, which lowers production costs, even though producers must initially train workers and adapt or create new production processes that accommodate the new technology. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Elasticity of Supply Supply is elastic when a small increase in price leads to a larger increase in output—and supply.  Supply is inelastic when a small increase in price cause little change in supply.  Supply is unit elastic when in price causes a proportional change in supply. Click the mouse button or press the Space Bar to display the information. Section 1-27

Elasticity of Supply (cont.) Determinants of supply elasticity are related to how quickly a producer can act when the change in price occurs. If adjusting production can be done quickly, the supply is elastic. If production is complex and requires much advance planning, the supply is inelastic. Another factor is substitution: if substituting for a given product is easy, the supply is elastic; if it is difficult to substitute, the supply is inelastic. Click the mouse button or press the Space Bar to display the information. Section 1-27

Elasticity of Supply (cont.) Section 1-28

Elasticity of Supply (cont.) Section 1-29

Elasticity of Supply (cont.) Section 1-30

Elasticity of Supply (cont.) Section 1-31

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