CONTEMPORARY ECONOMICS: LESSON 5.1 Learning Objective: Today I will be able to explain the Law of Supply and Supply Elasticity in a brief summary. Agenda Learning Objective Vocabulary: Ch. 4 & 5 Lecture: Ch. 5.1 Law of Supply Exit Slip CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  Role of Profit In trying to earn profit, firms transform productive resources into products. Total revenue is the total sales (dollars) received from consumers for a certain time period. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  Role of Profit Profit=total revenue-total cost. Total cost includes the cost of all resources used by a firm in producing goods or services. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  Role of Profit Over time, total revenue must cover total cost for the firm to survive. When firms break even, total revenue just covers total cost. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  Role of Profit entrepreneurs are always eager to pursue their dreams b/c of profit. CONTEMPORARY ECONOMICS: LESSON 5.1

Check for Understanding Why are entrepreneurs willing to take risks?? What are the risks??? CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  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. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1 The law of supply says that the quantity supplied is usually directly related to its price, other things constant. If Price then Quantity Supplied 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. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1 Supply Schedule Price Quantity Supplied per Pizza per Week (millions) $15 28 12 24 9 20 6 16 3 12 CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1 Supply Curve 12 16 20 24 28 Millions of pizzas per week $15 9 6 3 Price per pizza S CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1 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. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  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. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  More Able to Supply A higher price makes producers more able to increase quantity supplied. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  More Able to Supply As the price declined, the quantity supplied declined. CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  More Able to Supply In short, a higher price makes producers more willing and better able to increase quantity supplied. CONTEMPORARY ECONOMICS: LESSON 5.1

Check for Understanding What is the Law of Supply??? When are producers more able and willing to supply? CONTEMPORARY ECONOMICS: LESSON 5.1

Supply Vs. Quantity Supplied  Supply Vs. 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. CONTEMPORARY ECONOMICS: LESSON 5.1

Individual Supply and Market Supply  Individual Supply and Market Supply Individual supply —the supply of an individual producer Market supply —the supply of all producers in the market Individual supply curves are summed across to get a market supply CONTEMPORARY ECONOMICS: LESSON 5.1

Summing Individual Supply Curves to Find the Market Supply Curve CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1  Elasticity of Supply The elasticity of supply measures how responsive producers are to a price change. CONTEMPORARY ECONOMICS: LESSON 5.1

 Measurement Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. Elasticity of supply = % change in quantity supplied % change in price CONTEMPORARY ECONOMICS: LESSON 5.1

Categories of Supply Elasticity Supply is elastic if more than 1.0 Supply is unit elastic if = 1.0. Supply is inelastic if less than 1.0. CONTEMPORARY ECONOMICS: LESSON 5.1

Determinants of Supply Elasticity  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. CONTEMPORARY ECONOMICS: LESSON 5.1

Market Supply Becomes More Elastic Over Time w S y $1.25 1.00 Price per gallon 100 200 300 Millions of gallons per day CONTEMPORARY ECONOMICS: LESSON 5.1

Check for Understanding What does the elasticity of Supply measure? What is the formula? So then, what determines Supply Elasticity? CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1

CONTEMPORARY ECONOMICS: LESSON 5.1 Exit Slip What is the Law of Supply? What does Elasticity of Demand measure? CONTEMPORARY ECONOMICS: LESSON 5.1