1. Understanding Supply What is the law of supply?
What are supply schedules and supply curves?
What is elasticity of supply?
What factors affect elasticity of supply?
Understanding Supply

2. According to the law of supply, suppliers will offer more of a good at a higher price.
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls
The Law of Supply

3. quantity supplied: how much of a good is offered for sale at a specific price.
increased revenues when prices are high encourages firms to produce more.
Rising prices draw new firms into a market and add to the quantity supplied of a good.
(in other words, healthy profits appeal to producers already in the market and people who may decide to join the market)

4. Great Example: the music business
New Suppliers Add to Total Supply
Great Example: the music business
1970’s: Disco Disco Hits - A Video Compilation of Disco Music from the 70's - YouTube
1980’s: Hair Bands 80s Hair Bands
today: Gangsta Rap (yeah…I know)

5. Price per slice of pizza Slices supplied per day
Supply Schedules
A market supply schedule is a chart/table that lists how much of a good all suppliers will offer at different prices.
$.50
1,000
Price per slice of pizza
Slices supplied per day
Market Supply Schedule
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500

6. Output (slices per day)
Supply Curves
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.
Supply
Remember: total supply moves in the same direction as prices !

7. Elasticity of Supply
Elasticity of supply measures the degree to which quantity supplied reacts to a change in price.
If supply is not very responsive to changes in price, it is considered inelastic.
An elastic supply is very sensitive to changes in price.
Remember: total supply moves in the same direction as prices !

8. What Affects Elasticity of Supply?
Time !
In the short run, a firm cannot easily change its output level, so supply is inelastic.
In the long run, firms are more flexible*, so supply can become more elastic.
*They can hire more workers…add more equipment/machines
Remember: total supply moves in the same direction as prices !

9. SEC 2. Production Costs Total cost = fixed costs + variable costs
A fixed cost is a cost that is independent of how much of a good is produced. It occurs whether few or many units are produced.
Examples:
Variable costs are costs that rise or fall with how much is produced.
Total cost = fixed costs + variable costs

10. SEC. 3 Changes in Supply (shift of supply curve)
Remember: total supply moves in the same direction as prices !
How do input costs affect supply? How can the government affect the supply of a good? What other factors influence supply?

11. Input Costs and Supply
Input: any/every factor required to produce
- Raw materials labor
- machinery / tools / equipment shipping costs
- rent / electricity / etc taxes.
Any change in the cost of an input will affect supply.
As input costs increase, profits AND supply decrease.
Input costs can also decrease. New technology usually lowers production costs and increases supply.
Remember: total supply moves in the same direction as prices !

12. Remember: total supply moves in the same direction as prices !
Example:
You own a lemonade stand.
You sell each cup for $0.50
INPUTS (your costs)
lemons $0.09
sugar $0.04
cup $0.05
ice $0.02
Cost of Inputs $0.20
Selling Price: $0.50
Minus costs: $0.20
Profit: $0.30
What happens if one or more of your input costs goes up?
Remember: total supply moves in the same direction as prices !

13. Change in Supply = Shift of the Supply Curve
Supply decreases S1 S2
Supply increases
Price
Quantity

14. Your turn to graph…again
Create your own supply schedule at the bottom of the page using the same prices as you did for S1, but with different quantities
If your last name has an EVEN # of letters, your S2 will show declining supply
If your last name has an ODD # of letters, your S2 will show rising supply
Finally, create S2…Be sure you identify S1 and S2

15. Government Influences on Supply
By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.
Subsidies
A subsidy is a gov’t. payment that supports a business or industry… can cause the supply of a good to increase. (examples)
Taxes
The gov’t.can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. (examples)
Regulation
Regulation occurs when the gov’t. steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises production costs. (examples)
Remember: total supply moves in the same direction as prices !

16. Other Factors Influencing Supply
The Global Economy
The supply of imported goods and services has an impact on the supply of the same goods and services here.
Government import restrictions will cause a decrease in the supply of restricted goods.
Future Expectations of Prices
Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect.
Number of Suppliers
If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.
Remember: total supply moves in the same direction as prices !

17. Quick Video Review
The Economic Lowdown