Unit 2: The Elements of a Market Economy : Understand the relationship of incentives to the law of supply : Discuss the effects of changes of supply on scarcity, price and quantity

Understanding Supply

What Is Supply? Supply is the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period. Quantity supplied is the number of units of a good produced and offered for sale at a specific price.

What Does the Law of Supply Say? The law of supply states that as the price of a good increases, the quantity supplied of the good increases, and as the price of a good decreases, the quantity supplied of the good decreases. Price and quantity supplied move in the same direction, giving them a direct relationship. As one factor rises, the other rises, too. As with the law of demand, we can use a table or a graph to show how the law of supply works.  A supply schedule is a numerical chart that illustrates the law of supply.  A supply curve is a graph that shows the amount of a good that sellers are willing and able to sell at various prices.

 Sometimes the quantity of a good that is available cannot change, regardless of price. When this happens, we get a vertical supply curve. An example is the number of seats for a sporting event taking place this evening. An increase in the price will not increase the amount of seats available, because there is not enough time to construct more seats.

TRANSPARENCY 5-1: Supply in Tables and Graphs Supply schedule Supply curve Supply curve when there is no time to produce more

A Firm’s Supply Curve vs. a Market Supply Curve A firm’s supply curve is a supply curve for that particular firm. A market supply curve is the sum of all firms’ supply curves.

Supply Curve Shifts

When Supply Changes, the Curve Shifts  Supply can go up or down. These changes in supply will create a shift in the supply curve. As supply increases, the supply curve shifts to the right. As supply decreases, the supply curve shifts to the left.

TRANSPARENCY 5-3: Shifts in a Supply Curve  When supply increases, the supply curve moves to the right, from S 1 to S 2.  When supply decreases, the supply curve moves to the left, from S 1 to S 3.

Figure 7 Shifts in the Supply Curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

Eight Factors that Cause Supply Curves to Shift 1. The prices of resources influence the supply of a good. When resource prices fall, sellers are willing and able to produce more of the good and offer it for sale. 2. Technology also causes a shift in the supply curve.  Technology is the body of skills and knowledge concerning the use of resources in production.  An advancement in technology is the ability to produce more output with a fixed amount of resources.  An advancement in technology can help lower the per-unit cost, which is the average cost of producing the good.

What Factors Cause Supply Curves to Shift? 3. Taxes on production can increase the per-unit costs of producing a good. Taxes cause the supply curve to shift to the left. 4. Subsidies are financial payments made by the government for certain actions. Subsidies can increase production, causing the supply curve to shift to the right. 5. Quotas are restrictions on the number of units of a foreign-produced good, or import, that can enter a country. A quota decreases supply, shifting the supply curve to the left.

What Factors Cause Supply Curves to Shift? 6. The number of sellers can also impact the supply curve. If more sellers begin producing a good, supply increases, shifting the supply curve to the right. 7. Expectations of future price movements can cause sellers to either increase or decrease the current supply. 8. Weather can also affect the supply of a good. Think of the effect that weather can have on the supply of agricultural goods such as corn and wheat.

What Factor Causes a Change in Quantity Supplied? Price is the only factor that will change the quantity supplied of a good.

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

Elasticity of Supply

Elasticity  Similar to elasticity of demand, elasticity of supply is the relationship between the percentage change in quantity supplied and the percentage change in price. Elastic supply exists when the percentage change in quantity supplied is greater than the percentage change in price. Inelastic supply exists when the percentage change in quantity supplied is less than the percentage change in price. Unit-elastic supply exists when the percentage change in quantity supplied is the same as the percentage change in price.