Chapter 4: Supply

From the seller’s point of view

Opportunity costs (again!)

Experienced by a person who produces goods & services

How?– Payment for designing– Payment for producing– Payment for selling

Marginal Cost=the cost of each additional item

Usually increases as production increases– More resources used as rate of production

goes up (more scarcity) Only produce & sell larger quantities at

prices that offset higher cost Quantity produced depends on price

received

Supply

The various quantities a producer is willing & able to sell at different possible prices

Producers want to sell more at higher prices– Price effect on amount supplied

Market supply

All the sellers in the market

Price Elasticity of Supply

=the size of the price effect When price effect is large, supply is

elastic When price effect is small, supply is

inelastic See paragraphs 1 thru 3 on p. 54

Price Elasticity of Supply cont’d

Supply tends to be more elastic when resources can be easily & quickly shifted into or out of production

Elasticity depends on the time producers have to increase or decrease production when price changes– The longer producers have to make

adjustments, the more elastic supply tends to be

Price Effect

Refers to the changes in the amount producers want to sell, given the supply available

Changes in Supply

Happens when producers are willing & able to sell different amounts at all possible prices.

Represented graphically by a shift in the supply curve to left or right.

Change in Supply cont’d

How is the supply curve different from a demand curve?

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1stQtr

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gallons

Causes of a Change in Supply

A change in the marginal cost of production

An increase or decrease in the number of sellers

A change in expectations

Price Elasticity of Supply

How to test for it

With Demand… Price effect was big when a price increase

causes total revenue to fall Price effect was small when a price increase

causes total revenue to rise Cola & Milk example from p. 25

– Δ price from $1 to $1.50 caused• Cola sales to drop from 70 to 40 per day

– Revenue fell from $70 to $60 per day– (70x$1=$70) and (40x$1.50=$60)

• Milk sales dropped from 70 to 60 per day– Revenue went from $70 to $90 per day– (70x$1=$70) and (60x$1.50=$90)

ElasticElastic

Inelastic

Inelastic

With Supply…

The Revenue Test Does NOT work!– A higher price will always increase

that amount supplied Instead: compare the percentage

change in price with the percentage change in the amount supplied

For Example… If 5% increase in price causes the amount

supplied to rise by MORE than 5%, supply is ELASTIC

If the amount supplied rises by less than 5%, supply is inelastic

Use the graph on p 32:– 5% change in milk price ($2 to 2.10)– Produces a Δ quantity supplied (23 million

gallons to 24 million gallons)• What is the percent change in amount

supplied?• Is it elastic or inelastic? 4.3%4.3%

REMEMBER…

If price affects the amount supplied, it shows PRICE EFFECT

If anything else affects the amount supplied, it shows A CHANGE IN SUPPLY– Δ marginal cost (usually as a result of

higher or lower costs from your suppliers of component parts)

– Increase or decrease in number of sellers– Δ expectations

Your Assignments…

Plotting Supply Curves P. 29 & 30 Amazing Tortillas Together P. 31 (interpret data—change in supply) The Economic News (difference

between price effect & change in supply) And finally, p. 32-33

Take about 10 Take about 10

minutes to finish minutes to finish

these so we can these so we can

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