Transcript Law of Supply

Do Now
1. A new video game system is released just before Christmas, and
everyone's "gotta have it." As parents race to the store to buy the system
for their kids, the price throughout December holds steady at $349.99.
What do you think will happen to the price in January? …February?
…June?
2. Local stores sell a fleece jacket for about $50. Sales of the jacket are
good, but not great. However, when consumers learn that Lebron James
wears this jacket, sales increase. What do you think will happen to the
price?
3. When a motorcycle manufacturer announces that it will no longer
make its most popular model of bike, what do you think will happen to the
price of the bike?
4. Mrs. Taylor sells chocolate molasses cookies. They are delicious, and
she is the only one in town who makes them. However, when Ms. Brown
moves to town, she begins to make cookies, without any difference in
quality or beauty from Mrs. Taylor's cookies. What will likely happen to
the price of Mrs. Taylor's cookies?
Supply
How do suppliers decide what
goods and services to offer?
Law of Supply
• Supply: the amount of goods available
• Law of Supply: producers offer more of a
good as its price increases, and less as its
price falls
• Quantity supplied: the amount that a
supplier is willing and able to supply at a
specific price
• Supply is slightly more difficult to understand than
demand, because most of us have little direct
experience on the supply side of the market.
• Supply comes from a producer's desire to maximize
profits. When the price of a product rises, the
supplier has an incentive to increase production
because he can justify higher costs to produce the
product, which increases the potential to earn larger
profits ($$$).
• Profit is the difference between revenues and costs.
If the producer can raise the price and sell the same
number of goods while holding costs constant, then
profits increase.
Law of Supply
• The law of supply says that, other things equal,
as the price of a good rises, its quantity supplied
will rise, and vice versa.
• This table lists the
quantity supplied of
rental videos for
various prices.
– At $5, the producer has
an incentive to supply
50 videos. If the price
falls to $4 quantity
supplied falls to 40, and
so on. The figure titled
"Supply Curve" plots this
positive relationship
between price and
quantity supplied.
Price
$5
Quantity
Supplied
50
$4
40
$3
30
$2
20
$1
10
Supply Curve
• A supply curve is a
graphical depiction of
a supply schedule
plotting price on the
vertical axis and
quantity supplied on
the horizontal axis.
The supply curve is
upward-sloping,
reflecting the law of
supply
Supply Schedule
• A Supply Schedule is a chart that shows how much of a
good a supplier will offer at various prices
• Variables: factors that change
Price per slice of pizza
Slices supplied per day
$1.00
100
$2.00
150
$3.00
200
$4.00
250
$5.00
300
$6.00
350
Supply and Elasticity
• Elasticity of Supply:
a measure of the way
quantity supplied
reacts to a change in
price
How does the Law of Supply affect
the quantity supplied?
Quantity
supplied
rises
Law of
Supply
Supply inelastic
in the
short term
Supply
Quantity
supplied
declines
Elasticity
Supply elastic
In long run