1. Supply CHAPTER 5 5.1 The Supply Curve 5.2 Shifts of the Supply Curve
5.3 Production and Cost

2. 5.1 The Supply Curve Learning Objectives
LO1 Explain the law of supply.
LO2 Describe the elasticity of supply, and explain how it is measured.
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3. CONTEMPORARY ECONOMICS
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Key Terms
supply
law of supply
supply curve
elasticity of supply
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4. CONTEMPORARY ECONOMICS
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Law of Supply
With demand, the assumption is that consumers try to maximize utility, a goal that motivates their behavior.
With supply, the assumption is that producers try to maximize profit.
Profit is the goal that motivates the behavior of suppliers.
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5. Profit = Total revenue – Total cost
Role of Profit
Profit equals total revenue minus total cost.
Profit = Total revenue – 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.
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6. Starts and Closures of Employer Firms, 2005–2009*
Figure 5.1
Source: U.S. Dept. of Commerce, Census Bureau, Administrative Office of the U.S. Courts, U.S. Dept. of Labor, Business Employment Dynamics (BED).
*Estimates based on Census data and BED trends
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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.
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8. Supply Schedule and Supply Curve for Pizza
Figure 5.2
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9. 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.
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10. 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.
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11. 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.
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12. Individual Supply and Market Supply
Individual supply—the supply of an individual producer
Market supply—the supply of all producers in the market
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13. Summing Individual Supply Curves to Find the Market Supply Curve
Figure 5.3
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14. Elasticity of Supply
The elasticity of supply measures how responsive producers are to a price change.
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15. The Supply of Pizza
Figure 5.4
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16. Measurement
Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price.
Percentage change in quantity supplied
Percentage change in price
Elasticity of supply =
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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.
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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.
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19. Market Supply Becomes More Elastic Over Time
Figure 5.5
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20. 5.2 Shifts of the Supply Curve
Learning Objectives
LO1 Identify the determinants of supply, and explain how a change in each affects the supply curve.
LO2 Contrast a movement along the supply curve with a shift of the supply curve.
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21. Key Terms movement along a supply curve shift of a supply curve
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22. Determinants of Supply
Five determinants of market supply (other than price)
Cost of resources used to make the good
Price of other goods these resources could make
Technology used to make the good
Producer expectations
Number of sellers in the market
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23. Changes in the Cost of Resources
Any change in the costs of resources used to make a good will affect the supply of the good.
An increase in supply means that producers are more willing and able to supply more goods at each price.
An increase in the price of a resource will reduce supply, meaning a leftward shift of the supply curve.
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24. Changes in the Prices of Other Goods
A change in the price of another good certain resources could make affects the opportunity cost of making a particular good.
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25. Changes in Technology
Discoveries in chemistry, biology, electronics, and many other fields have created new products, improved existing products, and lowered the cost of production.
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26. Changes in Producer Expectations
Any change that affects producer expectations about profitability can affect market supply.
An expectation of higher prices in the future could either increase or decrease current supply, depending on the good.
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27. Changes in the Number of Suppliers
Government regulations may influence market supply.
Any government action that affects a market’s profitability, such as a change in business taxes, could shift the supply curve.
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28. An Increase in the Supply of Pizza
Figure 5.6
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29. An Decrease in the Supply of Pizza
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An Decrease in the Supply of Pizza
Figure 5.7
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30. Movements Along a Supply Curve Versus Shifts of a Supply Curve
A change in price, other things constant, causes a movement along a supply curve from one price-quantity combination to another.
A change in one of the determinants of supply other than the price causes a shift of a supply curve, changing supply.
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31. 5.3 Production and Cost Learning Objectives
LO1 Explain how marginal product varies as a firm hires more labor in the short run.
LO2 Explain the shape of the firm’s marginal cost curve and identify what part of that is the firm’s supply curve.
LO3 Distinguish between economies of scale and diseconomies of scale in the long run.
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32. Key Terms short run long run total product marginal product
law of diminishing returns
fixed cost
variable cost
total cost
marginal cost
marginal revenue
economies of scale
long-run average curve cost
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33. Production in the Short Run
Fixed and variable resources
Increasing returns
Law of diminishing returns
Marginal product curve
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34. Short-Run Relationship Between Units of Labor and Tons of Furniture Moved
Units of the Variable Resource (worker-days)
Total Product (tons moved per day)
Marginal Product (tons moved per day) — 1 2 5 3 9 4 12 14 6 15 7 8 −1
Figure 5.8
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35. Marginal Product of Labor
Figure 5.9
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36. Costs in the Short Run Fixed and variable costs Total cost
Marginal cost
Marginal cost curve
Marginal revenue
Maximizing profit and minimizing loss
The firm’s supply curve
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37. Short-Run Cost Data for Hercules
Figure 5.10 1 2 3 4 5 6 7
Tons Moved per Day
Workers Per Day
Variable Cost
Fixed Cost
Total Cost
Change in total cost ÷ Change in tons moved =
Marginal Cost
$200 —
$100
$300
$100 ÷ 2
$ 50.00
$400
$100 ÷ 3
$ 33.33 9
$500
$100 ÷ 4
$ 25.00 12
$600 14
$700 15
$800
$100 ÷ 1
$100.00
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38. Marginal Cost Curve for Hercules
Figure 5.11
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39. Short-Run Supply Curve for Hercules
Figure 5.12
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40. Production and Costs in the Long Run
Economies of scale
Diseconomies of scale
Long-run average cost curve
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41. Economies of Scale
Economies of scale—forces that reduce a firm’s average cost as the firm’s size, or scale, increases in the long run
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42. Diseconomies of Scale
If the firm’s long-run average cost increases as production increases, this reflects diseconomies of scale.
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43. Long-Run Average Cost Curve
Long-run average cost curve shows the lowest average cost of producing each level of output.
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44. A Firm’s Long-Run Average Cost Curve
Figure 5.13
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