Transcript Chapter 5 Supply

5.1 The Supply Curve
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5
Supply
5.1 The Supply Curve
5.2 Shifts of the Supply Curve
5.3 Production and Cost
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5.1 The Supply Curve
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CONSIDER
 Why would 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 is bigger not always better when it comes to the
size of a firm?
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5.1 The Supply Curve
Objectives
 Understand the law of supply.
 Describe the elasticity of supply, and
explain how it is measured.
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Key
Terms
5.1 The Supply Curve
Key Terms
 supply
 law of supply
 supply curve
 elasticity of supply
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5.1 The Supply Curve
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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
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Supply Schedule
and Supply Curve for Pizza
Price per
Pizza
8
Quantity
Supplied
per Week
(millions)
a
$15
28
b
12
24
c
9
20
d
6
16
e
3
12
Figure 5.1
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5.1 The Supply Curve
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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
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Individual Supply
and Market Supply
12
Individual supply—the supply of an
individual producer
Market supply—the supply of all producers
in the market
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5.1 The Supply Curve
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Summing Individual Supply Curves
to Find the Market Supply Curve
13
Figure 5.2
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Elasticity of Supply
The elasticity of supply measures how
responsive producers are to a price
change.
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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
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5.1 The Supply Curve
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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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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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5.1 The Supply Curve
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Market Supply Becomes
More Elastic Over Time
Sm
Sw
Sy
Price per gallon
$3.50
3.00
0
Figure 5.4
100
200
300
Millions of gallons per day
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