1. CONTEMPORARY ECONOMICS
6/7/2019
Chapter 5 Supply
5.1 The Supply Curve
5.2 Shifts of the Supply Curve
5.3 Production and Cost
CONTEMPORARY ECONOMICS: LESSON 5.1
LESSON 5.1

2. Consider Chapter 5 Supply
Why might a firm decide to store its products in a warehouse rather than offer them for sale?
What’s the meaning of the old expression “Too many cooks spoil the broth”?
Can a firm shut down without going out of business?
Why do movie theaters have so many screens?
CONTEMPORARY ECONOMICS: LESSON 5.1

3. LESSON 5.1 The Supply Curve
Objectives
LESSON 5.1 The Supply Curve
Understand the law of supply.
Describe the elasticity of supply, and explain how it is measured.
CONTEMPORARY ECONOMICS: LESSON 5.1

4. LESSON 5.1 The Supply Curve
CONTEMPORARY ECONOMICS
6/7/2019
Key Terms
LESSON 5.1 The Supply Curve
supply
law of supply
supply curve
elasticity of supply
CONTEMPORARY ECONOMICS: LESSON 5.1
LESSON 5.1

5. Law of Supply Role of profit Supply More willing to supply
More able to supply
Supply versus quantity supplied
Individual supply and market supply
CONTEMPORARY ECONOMICS: LESSON 5.1

6. Role of Profit Profit equals total revenue minus total cost.
Total revenue is the total sales (dollars) received from consumers for a certain time period.
Total cost includes the cost of all resources used by a firm in producing goods or services.
Over time, total revenue must cover total cost for the firm to survive.
CONTEMPORARY ECONOMICS: LESSON 5.1

7. Supply
Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant.
The law of supply says that the quantity supplied is usually directly related to its price, other things constant.
The supply curve is a curve or line showing the quantities of a particular good supplied at various prices during a given time period, other things constant.
CONTEMPORARY ECONOMICS: LESSON 5.1

8. Supply Schedule $15 28 12 24 9 20 6 16 3 12 Price Quantity Supplied
per Pizza per Week (millions)
$15 28
12 24
9 20
6 16
3 12
CONTEMPORARY ECONOMICS: LESSON 5.1

9. Supply Curve 12 16 20 24 28 Millions of pizzas per week $15 9 6 3
Price per pizza S
CONTEMPORARY ECONOMICS: LESSON 5.1

10. More Willing to Supply
As a price increases, a producer becomes more willing to supply the good.
Prices act as signals to existing and potential suppliers about the rewards for producing various goods.
A higher price makes production more profitable and attracts resources from lower-valued uses.
CONTEMPORARY ECONOMICS: LESSON 5.1

11. More Able to Supply
Higher prices also increase the producer’s ability to supply the good.
The marginal cost of production increases as output increases.
A higher price makes producers more able to increase quantity supplied.
CONTEMPORARY ECONOMICS: LESSON 5.1

12. Supply Versus Quantity Supplied
Supply is the entire relation between the price and quantity supplied, as reflected by the supply schedule or supply curve.
Quantity supplied refers to a particular amount offered for sale at a particular price, as reflected by a point on a given supply curve.
CONTEMPORARY ECONOMICS: LESSON 5.1

13. Individual Supply and Market Supply
Individual supply—the supply of an individual producer
Market supply—the supply of all producers in the market
CONTEMPORARY ECONOMICS: LESSON 5.1

14. Summing Individual Supply Curves to Find the Market Supply Curve
CONTEMPORARY ECONOMICS: LESSON 5.1

15. Elasticity of Supply
The elasticity of supply measures how responsive producers are to a price change.
CONTEMPORARY ECONOMICS: LESSON 5.1

16. Measurement
Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price.
Elasticity of supply =
Percentage change in quantity supplied
Percentage change in price
CONTEMPORARY ECONOMICS: LESSON 5.1

17. Categories of Supply Elasticity
Supply is elastic if supply elasticity exceeds 1.0.
Supply is unit elastic if supply elasticity equals 1.0.
Supply is inelastic if supply elasticity is less than 1.0.
CONTEMPORARY ECONOMICS: LESSON 5.1

18. Determinants of Supply Elasticity
One important determinant of supply elasticity is the length of the adjustment period under consideration.
The elasticity of supply is typically greater the longer the period of adjustment.
CONTEMPORARY ECONOMICS: LESSON 5.1

19. Market Supply Becomes More Elastic Over Timew S y
$1.25
1.00
Price per gallon
100
200
300
Millions of gallons per day
CONTEMPORARY ECONOMICS: LESSON 5.1