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Chap. 5 Sect. 1 Understanding Supply
Goals: Explain the “Law of Supply”. Interpret a supply schedule and use it to create a supply curve. Define “elasticity of supply” and determine whether a good is elastic or inelastic in terms of its supply.
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Law of Supply Supply – the amount of a good that is available You own a sunglass factory…Beyoncé was just photographed wearing your glasses. You find out that people were selling your $40 glasses on E-Bay for $100 and up. What would you do? Law of Supply – suppliers tend to offer more of a good when the price goes up, and less of a good when the price drops Not only will current supplier supply more- new producers will come forward and try to cash in as well
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Price and Supply = Direct Relationship
Law of Supply It is true because… The promise of increased revenues when prices are high encourages firms to produce more of their good Rising prices and the potential for profits draws new firms into the market and they begin to produce the good as well Price and Supply = Direct Relationship
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Supply Schedule -Chart that lists how much of a good a supplier will offer at different prices Supply curves can be for individual businesses or for an entire market (large group) Ceteris Paribus applies here as well – the assumption that only the price is changing
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Supply Curve Price Quantity Prices still on vertical axis & Qty. on the horizontal Supply Curves go up as you move from left to right Suppliers will adjust their supply levels according to costs- if production costs go up- supply will decrease and vice versa
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Elasticity of Supply -measurement of how much the qty supplied reacts to a change in price Main Factor in Elasticity is TIME In the short run- firms and factories cannot easily change their output so supply is inelastic TV prices go up = Sony could increase production in its factories, but would have to order more parts, hire more workers, and possibly expand its assembly lines – it all takes time. What about a start-up TV company?
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Inelastic Supply and Time cont.
Oranges - How quickly could the supply of oranges be increased in response to higher prices? Why? If prices drop suddenly, can the orange grove owner change how much fruit will grow on his trees? Oranges, TV’s = Inelastic Inelastic Supply – when suppliers cannot quickly adjust to changes in prices, increases and decreases in prices will have little effect in the qty supplied
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Services = tend to be elastic in the short run
Elasticity of Supply Can you think of any businesses that could respond quickly to an increase in price? Service based businesses- Hair & Nail Salons, Dentists, Garages etc. They would simply hire more people or stay open more hours If price drops, they let people go or reduce their hours. Services = tend to be elastic in the short run The more time a supplier has to react, the more elastic they become. Over several years, even oranges can become elastic.
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Goals: Explain the “Law of Supply”. Interpret a supply schedule and use it to create a supply curve. Define “elasticity of supply” and determine whether a good is elastic or inelastic in terms of its supply.
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