P RODUCERS AND S UPPLY 9 Master Curriculum Guides in Economics: Teaching Strategies

B ELLRINGER Copy the objective: I will be able to explain the law of supply and the factors involved. List the names of producers of familiar goods, such as soft drinks, blue jeans, or athletic shoes. What do you think would happen to the quantity produced if the price of any of these goods increased. For example, if the price of soft drinks increased from $2.99 for a six-pack to $5.00, predict what would happen to the quantity of soft drinks producers of Coca-Cola, Pepsi-Cola, and 7-Up would be willing to supply.

B ACKGROUND Producers: are the sellers (or suppliers) of output in a market. In the circular flow of economic activity, businesses are suppliers in the market for goods and services; individuals and households are the suppliers in the market for resources. Sellers make production decisions about what, how, and how much to produce in order to make as great a profit as possible. Costs of production are an important influence in determining the supply of any product. Supply is the relationship between alternative prices and the quantities of a product a producer is willing to produce and sell during some given time period. Supply, like demand, indicates a set of possible prices. A supply schedule shows these prices and the corresponding quantities producers are willing to produce and sell at each price. (A specific time period is indicated so all of the quantities are consistent.) All factors, other than the price of the product, are held constant. As a result, the quantity changes are attributed only to changes in the price. It is correct to say a price change causes a change in quantity supplied. It is incorrect to say a change in price for a product causes a change in supply of that product. When discussing supply, it is generally assumed the product is produced under competitive market conditions. In a competitive market, the quantity supplied increases as the price increases. Conversely, as the price falls, producers will produce less. The law of supply states that price and quantity supplied are directly related. An important factor in explaining the law of supply is the concept of opportunity cost. Most firms produce more than one product. When the price of one product increases, the opportunity cost of producing other products is higher since they become relatively less profitable, other things being equal. So the firm has the incentive to produce more of the product that has a higher price and less of other products, thereby earning additional profits.

L YNDA ’ S S UPPLY S CHEDULE Price$4$3$2$1 Quantity Supplied

D ISCUSS What happened to the quantity supplied as price decreased? (Quantity supplied decreased.) What happened to the quantity supplied as price increased? (Quantity supplied increased.) Why do you suppose Linda was willing to baby-sit more hours when prices were higher? (She was more willing to give up time for doing other things because prices were higher.) If Linda received $5 an hour for baby-sitting, do you think she would rather watch television or baby-sit after school? (Probably, Linda would prefer baby-sitting.) If Linda received 50¢ an hour for baby-sitting, do you think she would rather watch television or baby-sit after school? (If Linda valued her free time more than 50¢ an hour, she would probably prefer watching television.) What is Linda’s opportunity cost of baby-sitting? (Linda’s next best alternative instead of baby-sitting, such as watching television, studying, shopping, playing sports, talking on the phone, or visiting with friends)

W ONDER B ARS This is the Willy Wonder Inc. supply table for producing Gourmet Wonder Bars for one day. 1. Draw a graph on your white board, label the horizontal axis Quantity Supplied. Number the lines on the horizontal axis by 5’s from 0– Now label the vertical axis Price. Number the lines on the vertical axis by.10’s from 0–$ Plot the supply schedule on the graph and connect the points with a line. 4. Label the graph A Supply Curve for Gourmet Wonder Bars. Price$2.00$1.50$ Quantity Supplied

D ISCUSSION What happened to the quantity supplied of Gourmet Wonder Bars as price increased? (increased) Describe what this supply curve looks like. (It is upward-sloping.) What does this graph of the supply schedule tell us about the relationship between price and quantity supplied? (There is a direct relationship between price and quantity supplied; that is, as price increased, quantity supplied increased, and as price decreased, quantity supplied decreased.) What do you think the law of supply states? (As price increases, quantity supplied increases and as price decreases, quantity supplied decreases.) Supply Video

S UPPLY C HANGES 10 Master Curriculum Guides in Economics: Teaching Strategies

S UPPLY AND DEMAND QUIZ The demand curve is a _______ sloping line and shows quantity on the ______ axis and price on the ______ axis. A. Upward, vertical, horizontal B. Horizontal, horizontal, vertical C. Vertical, horizontal, vertical D. Downward, horizontal, vertical Demand is the quantity buyers are ______ and _______ to buy at each possible price. A. Willing and able B. Considering and deciding C. None of these options D. Hoping and planning The supply curve is a(n)________ sloping line and shows quantity on the _______ axis and price on the ______ axis. A. Horizontal, horizontal, vertical B. Vertical, horizontal, vertical C. Downward, horizontal, vertical D. Upward, horizontal, vertical Supply is the quantity producers are ______ and ________ to make available at each possible price. A. Hoping and planning B. Willing and able C. None of these options D. Considering and deciding

N UMBER OF P RODUCERS More producers supply will increase and curve will shift to the right Less producers supply will decrease and curve will shift to the left Price Quantity

R ESOURCE P RICES When resource prices increases the cost of production increases and producers are not willing to produce the same level of output. Supply decreases and curve will shift left When resource prices decrease the cost of production decreases and producers are willing to produce the more output. Supply increases and curve will shift right Price Quantity

T ECHNOLOGICAL CHANGES A change in technology increases productivity. Increased productivity means that the price per unit is decreased. Decrease in unit price increases supply and curve will shift right. Price Quantity

P RICE OF OTHER PRODUCTS IN THE FIRM A firm produces 2 products. A change in the price of one product will increase quantity supplied of the second product and the curve will shift right Price Quantity

C HANGE IN Q UANTITY S UPPLIED If it suddenly costs less for Willy Wonder Inc. to produce Gourmet Wonder Bars because the price of an ingredient decreased, what do you think would happen to the quantity supplied of Gourmet Wonder Bars at a price of $2.00? $1.50? $1.00? 50¢? 20¢? (The quantity supplied would increase at every price. Supply would increase because of a decrease in the cost of production. When the cost of production decreases, the producer can earn more profit and is willing to supply more.) If Willy Wonder Inc. buys a new packaging machine that decreases its cost of production, what do you think would happen to the quantity of Gourmet Wonder Bars supplied at each price? (The quantity supplied would increase at every price. Supply would increase because of a technological change that decreases the cost of production. The producer can earn more profit and is willing to supply more.) If more companies started producing Gourmet Wonder Bars, what do you think would happen to the quantity of Gourmet Wonder Bars supplied at each price? (The quantity supplied would increase at every price. Supply would increase because of an increase in the number of producers.) Willy Wonder Inc. also produces Wonder Cereal. If the price of Wonder Cereal decreases, what do you think would happen to the quantity of Gourmet Wonder Bars supplied at every price? (The quantity supplied would increase at every price. Supply would increase because of a decrease in the price of other products the business produces.)

A CTIVITY Causes of a change in supply Change in the cost of production Change in the number of producers Change in prices of other goods or services the producer can produce Use the graph that you have one your whiteboard. Label the supply curve S1. Graph supply schedule 2 and label the curve S2. Price$2.00$1.50$ Quantity Supplied

D ISCUSSION What happened to supply? (It increased.) Describe the position of the new supply curve. (It has shifted to the right of S1.) How can you tell the law of supply still holds? (Price and quantity supplied are directly related.) When the whole curve changes this is called a change in supply or a supply shift.

A CTIVITY Use the graph that you have one your whiteboard. Label the supply curve S1. Label the second supply curve S2. Graph supply schedule 3 and label the curve S3. Price$2.00$1.50$ Quantity Supplied

DISCUSSION What happened to supply? (It decreased.) Describe the position of the new supply curve. (It has shifted to the left of S1.) Why do you think producers have decided not to produce any snack bars at 20¢? (It is most likely unprofitable for producers to produce at this price.) How can you tell the law of supply still holds? (Price and quantity supplied are directly related.)