Chapter 5

Producers people who provide goods or services Manufactures provide goods and services From nutrition bars, automobiles, to even farmers

Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls  According to the law of supply,

..  More profit  The promise of increased revenues when prices are high encourages firms to produce more.  Rising prices

 Supply schedule lists  A market supply schedule is a

$.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500

 Supply curve shows the data from a supply schedule in graph form  Market supply curve shows the data from a market supply schedule in graph form  Output refers to…

Market Supply Curve Price (in dollars) Output (slices per day) Supply  A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.

 What is the law of supply?  What are supply schedules and supply curves?

 3 workers, make jeans  Hire 1 more worker  Page 141  Specialization is  Automobiles

 Increasing returns-  Diminishing returns-  Difference?

1. Fixed costs- 2. Variable costs- 3. Total cost - 4. Marginal cost-

# of Workers Total Product Fixed Cost Variable Cost Total Cost (FC +VC) Marginal Cost

 Marginal revenue-  Total Revenue-  Profit maximizing output-

# of workers Total Product Total Cost (FC+VC) $ Marginal Cost $ Marginal Revenue (price) $ Total Revenue $ (TPxMR) Profit $ (TR-TC)

 Change in quantity supplied –  Change in supply-

1. Input costs 2. Labor Productivity 3. Technology 4. Government Action 5. Product Expectations 6. Number of Producers

Elasticity of supply  If supply is not very responsive to changes in price, it is considered inelastic.  An elastic supply is very sensitive to changes in price.

 Elasticity of supply is also a measure of how responsive producers are to price changes  If a change of price leads to a relatively larger change in price leads to a relatively larger change in quantity supplied, supply is elastic  Supply is very sensitive to changes in price  If a change of price leads to a relatively smaller change in quantity supplied, supply is inelastic  Supply is not very responsive or sensitive to changes in price

 Ex. You are a leather boot producer. As your boots gain popularity, a shortage develops  Price of the boots rises from $60 to $150  Supply went from 10,000 to 50,000 Elastic Supply Curve Price (in dollars) Quantity supplied of boots (in thousands)

 Ex. Gasoline is inelastic based off of demand  No matter the price people will pay for it  Supply of gas is also inelastic, when prices rose from 20 to 30 percent between 2004 to 2005  Suppliers were not able to increase supply by the same amount because the refineries of crude oil was limited

 Ex. Olive Oil  As the price of olive oil rose by a factor of four, supply could not keep up  They use previous season’s olives to make the oil  Page 155

 There are (fewer than demand) factors that affect the elasticity of supply  Time- more time the more elastic  Year or years lean towards elastic  Days, weeks, months leans towards inelastic  Response to change in price  Faster=elastic  Slower=inelastic

Time  In the long run, firms are more flexible, so supply can become more elastic. In the short run, a firm cannot easily change its output level, so supply is inelastic.