SupplySupply

Economics 1Economics 1

The Law of SupplyThe Law of Supply

Supply is the amount of goods Supply is the amount of goods availableavailableThe higher the price, the larger The higher the price, the larger the quantity producedthe quantity producedQuantity supplied is used to Quantity supplied is used to describe how much of a good describe how much of a good is offered for sale at a specific is offered for sale at a specific pricepriceAs the price of a good rises, As the price of a good rises, existing firms will produce existing firms will produce more in order to earn more in order to earn additional revenueadditional revenueIt is all about profit!!!!It is all about profit!!!!If the price of a good falls, If the price of a good falls, some firms will produce lesssome firms will produce less

Increase of ProductionIncrease of Production

If a firm is already earning If a firm is already earning a profit by selling a good, a profit by selling a good, then an increase in the then an increase in the price will increase the price will increase the firm’s profitsfirm’s profitsThe promise of a high The promise of a high revenue encourages revenue encourages companies to produce companies to produce moremoreKeep in mind the pizzeria Keep in mind the pizzeria in your questions….If in your questions….If they are not making a they are not making a profit, they need to raise profit, they need to raise the price!the price!

Something to think about…Something to think about…

The “market” tends to follow trendsThe “market” tends to follow trendsMusicMusicFoodFoodClothes, etc.Clothes, etc.When the demand is gone, they supply something else!When the demand is gone, they supply something else!

A Supply ScheduleA Supply Schedule

Shows the Shows the relationship between relationship between price and the quantity price and the quantity supplied for a specific supplied for a specific goodgoodVery similar to a Very similar to a demand scheduledemand scheduleShows how much of a Shows how much of a good a supplier will good a supplier will offer at different offer at different pricesprices

Supply CurveSupply Curve

Measures the quantity Measures the quantity of the good supplied, of the good supplied, not the quantity not the quantity demandeddemanded

A higher price leads A higher price leads to higher outputto higher output

Elasticity of SupplyElasticity of Supply

Measures the way suppliers respond to a Measures the way suppliers respond to a change in pricechange in priceWhen elasticity is greater than one, supply is When elasticity is greater than one, supply is very sensitive to changes in price and is very sensitive to changes in price and is considered elasticconsidered elasticIf elasticity is less than one, supply is considered If elasticity is less than one, supply is considered inelastic because supply is not responsive to inelastic because supply is not responsive to changes in pricechanges in priceRemember…Unitary means equal to one…when Remember…Unitary means equal to one…when price and quantity supplied are exactly equal!price and quantity supplied are exactly equal!

Try This!Try This!

Analyze the following situations and Analyze the following situations and explain how elasticity of supply would explain how elasticity of supply would affect producer decisions in each case!affect producer decisions in each case! The price of apples increasesThe price of apples increases The price of an oil change increasesThe price of an oil change increases The price of dry cleaning services increasesThe price of dry cleaning services increases The price of tickets to a football game The price of tickets to a football game

increasesincreases