CONTEMPORARY ECONOMICS 5.1 The Supply Curve CONTEMPORARY ECONOMICS 4/19/2017 5 Supply 5.1 The Supply Curve 5.2 Shifts of the Supply Curve 5.3 Production and Cost LESSON 5.1

5.1 The Supply Curve CONSIDER Why would a firm decide to store its products in a warehouse rather than offer them for sale? What’s the meaning of the old expression “Too many cooks spoil the broth”? Can a firm shut down without going out of business? Why is bigger not always better when it comes to the size of a firm?

5.1 The Supply Curve Objectives Understand the law of supply. Describe the elasticity of supply, and explain how it is measured.

CONTEMPORARY ECONOMICS 4/19/2017 5.1 The Supply Curve Key Terms Key Terms supply law of supply supply curve elasticity of supply LESSON 5.1

5.1 The Supply Curve Law of Supply With demand, the assumption is that consumers try to maximize utility, a goal that motivates their behavior. With supply, the assumption is that producers try to maximize profit. Profit is the goal that motivates the behavior of suppliers.

Profit = Total revenue – Total cost 5.1 The Supply Curve Role of Profit Profit equals total revenue minus total cost. Profit = Total revenue – Total cost Total revenue is the total sales (dollars) received from consumers for a certain time period. Total cost includes the cost of all resources used by a firm in producing goods or services. Over time, total revenue must cover total cost for the firm to survive.

5.1 The Supply Curve 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. The law of supply says that the quantity supplied is usually directly related to its price, other things constant. 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.

Supply Schedule and Supply Curve for Pizza 5.1 The Supply Curve Supply Schedule and Supply Curve for Pizza Price per Pizza Quantity Supplied per Week (millions) a $15 28 b 12 24 c 9 20 d 6 16 e 3 Figure 5.1

5.1 The Supply Curve 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.

5.1 The Supply Curve 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. A higher price makes producers more able to increase quantity supplied.

Supply Versus Quantity Supplied 5.1 The Supply Curve Supply Versus 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.

Individual Supply and Market Supply 5.1 The Supply Curve Individual Supply and Market Supply Individual supply—the supply of an individual producer Market supply—the supply of all producers in the market

Summing Individual Supply Curves to Find the Market Supply Curve 5.1 The Supply Curve Summing Individual Supply Curves to Find the Market Supply Curve Figure 5.2

5.1 The Supply Curve Elasticity of Supply The elasticity of supply measures how responsive producers are to a price change.

5.1 The Supply Curve Measurement Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. Elasticity of supply = Percentage change in quantity supplied Percentage change in price

Categories of Supply Elasticity 5.1 The Supply Curve Categories of Supply Elasticity Supply is elastic if supply elasticity exceeds 1.0. Supply is unit elastic if supply elasticity equals 1.0. Supply is inelastic if supply elasticity is less than 1.0.

Determinants of Supply Elasticity 5.1 The Supply Curve 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.

Market Supply Becomes More Elastic Over Time 5.1 The Supply Curve Market Supply Becomes More Elastic Over Time S m S w S y $3.50 3.00 Price per gallon 100 200 300 Millions of gallons per day Figure 5.4