Chapter 5 Supply
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Transcript Chapter 5 Supply
5.1 The Supply Curve
SLIDE
1
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
SLIDE
2
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
SLIDE
5
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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6
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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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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5.1 The Supply Curve
SLIDE
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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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
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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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5.1 The Supply Curve
SLIDE
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
SLIDE
Summing Individual Supply Curves
to Find the Market Supply Curve
13
Figure 5.2
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5.1 The Supply Curve
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Elasticity of Supply
The elasticity of supply measures how
responsive producers are to a price
change.
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5.1 The Supply Curve
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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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16
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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5.1 The Supply Curve
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17
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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18
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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