Chapter 4: Supply From the seller’s point of view

Opportunity costs (again!) Experienced by a person who produces goods & services How? –Payment for designing –Payment for producing –Payment for selling

Marginal Cost=the cost of each additional item Usually increases as production increases –More resources used as rate of production goes up (more scarcity) Only produce & sell larger quantities at prices that offset higher cost Quantity produced depends on price received

Supply The various quantities a producer is willing & able to sell at different possible prices Producers want to sell more at higher prices –Price effect on amount supplied

Market supply All the sellers in the market

Price Elasticity of Supply =the size of the price effect When price effect is large, supply is elastic When price effect is small, supply is inelastic See paragraphs 1 thru 3 on p. 54

Price Elasticity of Supply cont’d Supply tends to be more elastic when resources can be easily & quickly shifted into or out of production Elasticity depends on the time producers have to increase or decrease production when price changes –The longer producers have to make adjustments, the more elastic supply tends to be

Price Effect Refers to the changes in the amount producers want to sell, given the supply available

Changes in Supply Happens when producers are willing & able to sell different amounts at all possible prices. Represented graphically by a shift in the supply curve to left or right.

Change in Supply cont’d How is the supply curve different from a demand curve?

Causes of a Change in Supply A change in the marginal cost of production An increase or decrease in the number of sellers A change in expectations

Price Elasticity of Supply How to test for it

With Demand… Price effect was big when a price increase causes total revenue to fall Price effect was small when a price increase causes total revenue to rise Cola & Milk example from p. 25 –Δ price from $1 to $1.50 caused Cola sales to drop from 70 to 40 per day –Revenue fell from $70 to $60 per day –(70x$1=$70) and (40x$1.50=$60) Milk sales dropped from 70 to 60 per day –Revenue went from $70 to $90 per day –(70x$1=$70) and (60x$1.50=$90) Elastic Inelastic

With Supply… The Revenue Test Does NOT work! –A higher price will always increase that amount supplied Instead: compare the percentage change in price with the percentage change in the amount supplied

For Example… If 5% increase in price causes the amount supplied to rise by MORE than 5%, supply is ELASTIC If the amount supplied rises by less than 5%, supply is inelastic Use the graph on p 32: –5% change in milk price ($2 to 2.10) –Produces a Δ quantity supplied (23 million gallons to 24 million gallons) What is the percent change in amount supplied? Is it elastic or inelastic? 4.3%

REMEMBER… If price affects the amount supplied, it shows PRICE EFFECT If anything else affects the amount supplied, it shows A CHANGE IN SUPPLY –Δ marginal cost (usually as a result of higher or lower costs from your suppliers of component parts) –Increase or decrease in number of sellers –Δ expectations

Your Assignments… Plotting Supply Curves P. 29 & 30 Amazing Tortillas Together P. 31 (interpret data—change in supply) The Economic News (difference between price effect & change in supply) And finally, p Take about 10 minutes to finish these so we can discuss