Transcript File
Chapter 5 Section 1 • If you were running a business, what would you do if you discovered that consumers were suddenly willing to pay twice as much for your product? • Law of supply – tendency of suppliers to offer more of a good at a higher price • Quantity supplied – the amount a supplier is willing and able to supply at a certain price • As the price of a good rises, existing firms will produce more in order to earn additional revenue • New firms have an incentive to enter the market , to earn a profit • If price of a good falls, firms will produce less or drop out of the market • Ceteris paribus – Latin phrase meaning ‘all other things held constant’ • When price goes up suppliers recognize the chance to make more money and work harder to produce more • When price falls suppliers produce less • Supply schedule – a chart that lists how much of a good a supplier will offer at different prices • Variable – a factor that can change • In a pizzeria, a supply schedule shows the price of pizza. All other factors (including cost of labor, rent, and tomato sauce) remain constant. Pizzeria Supply Schedule Price per slice of pizza $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 Slices supplied per day 100 150 200 250 300 350 This supply schedule states that if a slice of pizza is sold for $0.50 that a supplier will supply 100 slices. • Economists use the word supply to refer to the relationship between price and quantity supplied • A rise or fall in price will cause quantity supplied to change but not supply • Market supply schedule – a chart that lists how much of a good all suppliers will offer at different prices Pizzeria Market Supply Schedule Price per slice of pizza Slices supplied per day $0.50 1000 $1.00 1500 $1.50 2000 $2.00 2500 $2.50 3000 $3.00 3500 • When a factor of a product other than price affects output, you have to build a new supply schedule for the market conditions • Market supply schedules show the relationship between prices and total quantity supplied by all firms in a particular market • Like and individual supply schedule, market supply schedules reflect the law of supply • Supply Curve – a graph of quantity supplied of a good at different prices • A Supply curve is like a demand curve except the horizontal axis now measures the quantity of the good supplied and not quantity demanded • Market supply curve – a graph of the quantity supplied of a good by all suppliers at different prices Supply Curve P R I C E Output (slices per day) Market Supply Curve P R I C E Supply Output (slices per day) • The Key Feature of a supply curve is that it always rises from left to right • Elasticity of supply – a measure of the way quantity supplied reacts to a change in price • Elasticity is labeled three ways; elastic, inelastic, and unitary elastic • If elasticity is greater than one, supply is sensitive to change in price and is elastic • If supply is not sensitive to price change and is less than one, it’s inelastic • When percentage change in price is equal to percentage change in quantity supplied, elasticity is exactly one and is unitary elastic • The key factor in determining whether the supply of a good will be elastic or inelastic is time • Supply becomes more elastic if a supplier has more time to respond to a change in price Elasticity Example #1: Orange Grove • If the price of oranges go up, it is very hard for an orange grower to produce more oranges. It takes several years for an orange tree to grow. The orange grower will have to wait for several years to increase his output. People would tell you this is inelastic because the owner can’t grow more oranges right on the spot. Elasticity Example #2: Hair Cuts • Unlike orange groves, a hair salon can increase or decrease it’s output, and it won’t have much effect on the business. If the price of a haircut rises, salons can hire new workers. If the price of a haircut drops, people may close their shops early. Hair Cuts are highly elastic. Market Entry Example: Music Market • In the late 1970’s disco music became popular. The music industry quickly recognized the popularity and more groups began releasing disco music. Music groups that performed soul music switched to disco. New entrants entered the market to take advantage of the potential for profit. By the 1980’s, disco Music Market (cont.) • music was out. Radios didn’t play it, and stores didn’t sell albums on their shelves. In the early 1900’s, “grunge” music emerged from Seattle. Within a few years grunge lost its appeal. Swing music did the same in the late 1900’s. Supply Over Time • Supply can become more elastic over time. • For Example, the orange grower. Over time, the supplier could plant more trees and increase his output of oranges. • Like demand, supply can become more elastic over time. Consider the example of the orange grower who could not increase his output much when the price of oranges rose. Over time, he could plant more trees to increase his supply of oranges. These changes will become more effective over time as trees grow and bear fruit. After several years, he… QUESTIONS!!!!! Question 1 • What is the difference between supply schedule and market supply schedule? Question 2 • What is the difference between supply curve and market supply curve? Question 3 • Explain the law of supply in your own words? Question 4 • What is the difference between supply and quantity supply? Question 5 • How does the quantity of a good with a large elasticity of supply react to a price change? Question 6 • Explain whether you think the supply of the following goods is elastic or inelastic and why? a) Hotel Rooms b) Taxi Rides c) Photographs Question 7 • When the price of a good rises, total supply in the market will rise, but some entrepreneurs might actually choose to work less. Why might they make this choice? Question 8 • How is the law of supply different from the law of the demand? Question 9 • What happened in the music market? Question 10 • How does the elasticity of supply affect producers decisions?