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Why It Matters
J
ust as a coin has two sides, so does a
market. A coin has heads and tails; a
market has a buying side and a selling
side. The previous chapter discussed demand,
which is the buying side of
the market. This chapter
discusses supply, the selling side.
In your life, you will be
both buyer and seller. You
These personally autowill buy many goods, and
graphed guitars are being you will also sell some
examined prior to an aucgoods. You will certainly
tion. Before reading this
end up selling a resource—
chapter, can you guess
your labor. In Chapter 4
how the supply of these
guitars will affect the price we learned about you as a
buyer. In this chapter, we
that people will pay for
will have the chance to
them in the auction?
learn about you as a seller.
110
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The following events occurred one day
in April.
7:04 A.M. Tara has young twin boys, Dave and Quentin.
She has tried repeatedly to get both Dave and Quentin to behave
better than they have been behaving. Yesterday she promised
that she would take them to a movie if they behaved better.
Dave ended up behaving a lot better, but Quentin behaved only
slightly better. Right now she is asking Quentin why his behavior didn’t improve as much as his brother’s.
• What does a concept like “elasticity of supply” have to
do with the twins?
9:10 A.M. Georgia and Tom are sitting on a train
that is traveling from East Hampton, New York, into downtown Manhattan. Georgia is reading an article about taxes
in the newspaper. It seems that the government wants to
place a tax on the production of cigarettes. For every cigarette pack produced, the government wants cigarette
manufacturers to pay a $2 tax. Georgia tells Tom about
the article. “What do you think of that?” she asks. Tom
responds, “I think that tax is going to end up reducing
the supply of cigarettes.”
• Will the tax reduce the supply of cigarettes?
11:03 A.M. Angie owns a small oil company in Texas. She believes the price of a barrel of
crude oil will be higher in three months than it is
today. She is thinking about not selling her current
oil supply until the oil price goes up. She knows she
will lose the interest on the oil revenue she would
have if she sold the oil now, but thinks that the
higher price in three months might more than compensate for lost interest.
• Would you advise Angie to wait until later to
sell her oil?
2:38 P.M. Frank and Pete are having coffee
at their local Starbuck’s. Frank owns a construction
company, and Pete is his business manager. Frank
says, “I’m not sure how many more people will want
to work for us if we pay a higher wage. No matter
how much money we offer, people just don’t want to
work in construction the way they once did.” Pete just
says, “I don’t know. Money is a powerful motivator.”
• Will more people want to work in the construction
industry if Frank increases the wage rate (dollars per
hour) he pays his employees?
111
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Focus Questions
Understanding
Supply
Key Terms
supply
law of supply
direct relationship
quantity supplied
supply schedule
supply curve
What Is Supply?
supply
The willingness and ability of sellers to produce
and offer to sell different
quantities of a good at
different prices during a
specific time period.
law of supply
A law stating that as
the price of a good
increases, the quantity
supplied of the good
increases, and as the
price of a good
decreases, the quantity
supplied of the good
decreases.
direct relationship
A relationship between
two factors in which the
factors move in the
same direction. For
example, as one factor
rises, the other rises, too.
112 Chapter 5 Supply
What is supply?
Are all supply curves upward sloping?
What is the difference between a supply
schedule and a supply curve?
Like the word demand, the word supply
has a specific meaning in economics. It refers
to the willingness and ability of sellers to produce and offer to sell different quantities of a
good at different prices during a specific time
period. The supply of a good or service
requires both a supplier’s willingness and ability to produce and sell. Willingness to produce and sell means that the person wants or
desires to produce and sell the good. Ability to
produce and sell means that the person is
capable of producing and selling the good.
E X A M P L E : Jackie is willing to build
and sell wooden chairs, but unfortunately
she doesn’t know how to build a chair. In
other words, she has the willingness but not
the ability. Outcome: Jackie will not supply
chairs.
What Does the Law
of Supply Say?
Suppose you are a supplier, or producer, of
TV sets, and the price of a set rises from $300
to $400. Would you want to supply more or
fewer TV sets at the higher price? Most people would say more. If you did, you instinctively understand the law of supply, which
says that as the price of a good increases, the
quantity supplied of the good increases, and
as the price of a good decreases, the quantity
supplied of the good decreases. In other
words, price and quantity supplied move in
the same direction. This direct relationship
can be shown in symbols:
Law of Supply
If P ↑ then Qs ↑
If P↓ then Qs↓
(where P price and Qs quantity supplied)
When economists use the word supply,
they mean something different from what
they mean when they use the words
quantity supplied. Again, supply refers to
the willingness and ability of sellers to
produce and offer to sell different quantities of a good at different prices. For example, a supply of new houses in the housing
market means that firms are currently willing and able to produce and offer to sell
new houses.
05 (110-127) EMC Chap 05
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?
Page 113
Are
You Nicer
to Nice
People?
B
usiness firms supply cars,
clothes, food, computers, and
much more. The quantity of each
good or service they supply depends
on price. According to the law of
supply, the higher the price, the
greater the quantity supplied. In
other words, the higher the price of
notebook paper, the greater the
quantity supplied of notebook paper.
Do you think the law of supply
might apply to personal, as well as
business, situations? Do you think
people might behave differently
toward others depending on the
reactions to their emotions and
behavior? Let’s look at some examples of one “product” that people
can supply to a greater or lesser
degree: niceness.
Wouldn’t you say that people
can supply different amounts of
niceness? Think about your own
behavior: You can be very nice to a
person, moderately nice, a little
nice, or not nice at all. What determines how much niceness you supply to people? (In other words, why
are you nicer to some people than
to others?)
One factor that may determine
how nice you are to someone is
how much someone “pays” you to
be nice. It may be a stretch, but
think of yourself as selling niceness,
in much the same way you might
think of yourself selling shoes,
T-shirts, corn, or computers. The
quantity of each item you supply
depends on how much the buyer
pays you.
If people want to buy niceness
from you, what kind of payment will
they offer? A person could come up
to you and say, “I will pay you $100
if you will be nice to me,” but usually
things don’t work that way. People
Quantity supplied refers to the number
of units of a good produced and offered for
sale at a specific price. Let’s say that a seller
will produce and offer to sell five hamburgers when the price is $2 each. Five is the
quantity supplied at this price. As you work
your way through this chapter, you will see
why it is important to know the difference
between supply and quantity supplied.
buy, and therefore pay for, niceness
not with the currency of dollars and
cents but with the currency of niceness. In other words, the nicer they
are to you, the more they are paying
you to be nice to them.
Suppose a person can pay three
prices of niceness: the very-nice
price (high price), the moderately
nice price, and the little-nice price
(low price). Now consider two persons, Caprioli and Turen. Caprioli
pays you the very-nice price, and
Turen pays you the little-nice price.
Will you be nicer to Caprioli, who
pays you the higher price, or to
Turen, who pays you the lower price?
If you answer that you will be
nicer to Caprioli, you are admitting
that you will supply a greater quantity of niceness to the person who
pays you more to be nice. You have
found the law of supply in your
behavior. Again, you are nicer to
those persons who pay you more
(in the currency of niceness) to
be nice.
THINK
ABOUT IT
Do you think that
when it comes to the
quantity supplied of niceness, most
people behave in a manner consistent with the law of supply?
The Law of Supply in
Numbers and Pictures
We can represent the law of supply in
numbers, just as we did with the law of
demand. The law of supply states that as
price rises, quantity supplied rises. Exhibit 51(a) shows such a relationship. As the price
goes up from $1 to $2 to $3 to $4, the quantity supplied goes up from 10 to 20 to 30 to
quantity supplied
The number of units of
a good produced and
offered for sale at a
specific price.
Section 1 Understanding Supply
113
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Why All the
Reality T V
Shows?
???
I
n 1992, MTV launched a program called The Real World.
Seven young people from across
the country came together in an
apartment in New York City. In
2000, CBS launched a show called
Survivor. The show placed people
on an island and then watched as
they tried to “outwit, outplay, and
outlast” each other for a prize of
$1 million.
Both The Real World and
Survivor were reality TV shows. After
Survivor, it wasn’t long before television became deluged with reality
shows. In other words, the supply of
reality shows increased. We will
learn in this chapter that one of the
factors that can increase supply is
the number of sellers. In other
words, the greater the number of
sellers of a good, the larger the supply of that good. The number of sellers does not increase for no reason;
something acts as a catalyst, pushing
upward the number of sellers. That
thing is profit, which is closely tied to
supply schedule
A numerical chart illustrating the law of supply.
supply curve
A graph that shows the
amount of a good sellers
are willing and able to
sell at various prices.
114 Chapter 5 Supply
Page 114
success. The immense popularity of
CBS’s Survivor—as evidenced in its
high television ratings—meant that
CBS could sell commercial time on
the show for huge sums of money,
in the process earning high profits.
“Of all seven shows that
could be labeled phenomenal hits in the last four
years, all but one . . . have
been reality shows.”
—Bill Arter, New York Times,
May 19, 2003
Soon not only was CBS airing
more reality shows, but NBC and
ABC quickly came out with reality
shows of their own. After all, everyone wanted to earn big profits.
Over time, other reality shows hit
the air waves: For Love of Money,
Fear Factor, Meet My Folks, The
Restaurant, Average Joe, Paradise
Hotel, The Amazing Race, Big
Brother, The Apprentice, The
Bachelor, The Bachelorette, Tommy
Lee Goes to College, and many
more. In 2004, four years after the
first Survivor, some reality shows
were earning big profits for their
networks. For example, a 30-second
spot on Survivor was selling for
$327,000 and earning CBS an
annual profit of $73 million. A
40. A numerical chart like this one that illustrates the law of supply is called a supply
schedule.
We can also show the law of supply in picture form by plotting the data in the supply
schedule, as in Exhibit 5-1(b). Point A is the
first combination of price and quantity sup-
30-second spot on American Idol,
considered a reality show, was
being sold for $414,700 and was
earning its company, Fox, $260 million in profit (for the year).
When people wonder where all
the reality TV shows are coming
from, they are really asking, “What
caused the increase in the supply of
reality shows?” The answer is that
supply increases as the number of
sellers (of a good or service)
increases. So, what increases the
number of sellers of a good or service? The answer is the chance to
earn big profits. In short, money.
THINK
ABOUT IT
One lesson to be
learned from the history of reality shows appearing on
television is that success is copied.
Survivor was successful and so it
was copied. What other successful
products can you think of that have
been copied?
plied from the supply schedule, with a price
of $1 and a quantity supplied of 10. Point B
represents a price of $2 and a quantity supplied of 20; Point C, a price of $3 and a
quantity supplied of 30; and Point D, a price
of $4 and a quantity supplied of 40.
Connecting points A through D creates a
5/8/06
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supply curve, a line that slopes upward
(from left to right) and shows the amount of
a good sellers are willing and able to sell at
various prices. The upward-sloping supply
curve in Exhibit 5-1(b) is the graphic representation of the law of supply.
A Vertical Supply Curve
The law of supply, which holds that as
price rises, quantity supplied rises, does not
hold true for all goods; nor does it hold true
over all time periods. First, it does not hold
for goods that cannot be produced any
longer, such as Stradivarius violins. These
violins were made by Antonio Stradivari
more than 250 years ago. It is impossible for
an additional Stradivarius violin to be produced today, because Stradivari died in
1737. No matter how high the price goes, the
quantity supplied cannot increase to more
than the total number of Stradivarius violins
that currently exist. Thus, the supply curve
of Stradivarius violins is not upward sloping
but vertical, straight up and down, as shown
in Exhibit 5-2(a).
In another example, a theater in St. Louis
is sold out for tonight’s play. Increasing
ticket prices from $40 to $50 would not create additional seats tonight, because time
does not allow enlarging the theater to add
more seats. For tonight’s performance, the
supply curve of theater seats is vertical, as
illustrated in Exhibit 5-2(b).
EXH I BIT
5-2
EXH IBIT
5-1
Supply Schedule and Supply Curve
Price
(dollars)
Quantity
supplied
(units)
$1
2
3
4
10
20
30
40
(a)
D
$4
Price (dollars)
05 (110-127) EMC Chap 05
C
$3
B
$2
$1
0
A
10
20
30
40
Quantity supplied (units)
(b)
A Firm’s Supply Curve and a
Market Supply Curve
Most of the goods supplied in the United
States are supplied by business firms. For
example, computers are supplied by Dell,
Hewlett-Packard, and so on. A firm’s supply
curve is different from a market supply
curve. A firm’s supply curve is what it
sounds like: it is the supply curve for a particular firm. A market supply curve is the
sum of all firms’ supply curves.
Supply Curves When No More Can Ever Be Produced
or There Is No Time to Produce More
Supply curve
of Stradivarius
violins
Supply
curve
Supply curve
of theater
seats for
tonight’s
performance
(a) A supply
schedule for a good.
Notice that as price
increases, quantity
supplied increases.
(b) Plotting the four
combinations of
price and quantity
supplied from part
(a), and connecting
the points, yields a
supply curve.
When additional
units cannot be produced or there is no
time to produce
more, the supply
curve is vertical.
Section 1 Understanding Supply
115
05 (110-127) EMC Chap 05
EXH I BIT
5-3
11/17/05
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From Firms’ Supply Curves to Market Supply Curve
Price of fans
SFirm A
SFirm B
Firm A’
As
supply
curve
$50
0
Page 116
100
+
Firm B’s
supply
curve
$50
0
150
SFirm C
+
$50
Firm C’s
supply
curve
0
200
=
$50
Market
supply curve
SAll
suppliers
0
450
Quantity supplied of fans
(a)
(b)
(c)
(d)
In parts (a) through (c) we show the supply curve for firms A, B, and C, respectively. The
market supply curve, shown in part (d), is simply the sum of the firms’ supply curves. Stated
differently, we know that at a price of $50 per fan, firm A’s quantity supplied of fans is 100,
firm B’s is 150, and firm C’s is 200. It follows that all three firms together will offer 450 fans
at a price of $50 per fan. This point is identified on the market supply curve in part (d).
Suppose that only three
suppliers of fans exist in the whole world:
firm A, firm B, and firm C. At a price of $50
a fan, quantity supplied is 100 for firm A,
150 for firm B, and 200 for firm C. As a
result, the market supply curve would have a
point representing a price of $50 per fan
and a market quantity supplied of 450 fans
(100 150 200).
EX AM P LE:
Defining Terms
1. Define:
a. supply
b. law of supply
c. direct relationship
d. quantity supplied
e. supply curve
f. supply schedule
2. Use the term quantity
supplied correctly in a
sentence. Use the word
supply correctly in a
sentence.
Reviewing Facts and
Concepts
3. a. State the law of supply.
b. Explain the direct
relationship between
the price of a good
116 Chapter 5 Supply
To see this concept graphically, look at
Exhibit 5-3 above. In parts (a) through (c)
you see the supply curves for firms A, B, and
C, respectively. (To keep things simple, we
identify only one point on the supply curve
for each firm.) Now look at part (d). Here
you can see the market supply curve, which
is the combination of all the individual market supply curves. and the quantity
supplied.
4. Do all supply curves
graphically represent the
law of supply? Explain
your answer.
5. Identify a good that has
an upward-sloping supply curve. Identify a good
that has a vertical supply
curve.
Critical Thinking
6. Three months ago the
price of a good was $4,
and the quantity supplied was 200 units.
Today the price is $6, and
the quantity supplied is
400 units. Did the quan-
tity supplied rise because
the price increased, or
did the price rise because
the quantity supplied
increased?
Applying Economic
Concepts
7. Suppose three
McDonald’s restaurants
operate in your town, and
each pays its employees $6
per hour. If McDonald’s
started paying $9 per hour
to its employees, would
more, fewer, or the same
number of people want to
work for McDonald’s,
according to the law of
supply?
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Focus Questions
The Supply
Curve Shifts
What does it mean when a supply curve
shifts to the right?
What does it mean when a supply curve
shifts to the left?
What factors can change supply?
What factor can change quantity
supplied?
Key Terms
quota
elasticity of supply
elastic supply
inelastic supply
technology
advancement in
technology
per-unit cost
subsidy
Supply can go up, and it can go down. For
example, the supply of computers can rise or
fall. Every time the supply of a good changes,
the supply curve for that good “shifts.” By
shift we mean that it moves; it moves either
to the right or to the left.
EXH IBIT
5-4
Shifts in a Supply Curve
Original
supply curve
S3
Price (dollars)
When Supply Changes,
the Curve Shifts
C
$1,000
S1
A
S2
B
Change in supply → Shift in supply curve
For example, if the supply of computers
increases, the computer supply curve shifts
to the right. If the supply of computers
decreases, the supply curve shifts to the left.
We can understand shifts in supply curves
better with the help of Exhibit 5-4.
Look at the curve labeled S1 in Exhibit 5-4.
Suppose this supply curve represents the
original (and current) supply of computers.
Notice that the quantity supplied at a price
of $1,000 is 4,000 computers. Now suppose
the supply of computers increases. For
whatever reason, people want more computers. This increase in supply is shown by
0
1,000
2,000
3,000
4,000
5,000
6,000
Quantity supplied of computers
Moving from S1 (the original supply curve) to S2 represents a rightward shift in the supply curve. Supply has increased. Moving from S1 to
S3 represents a leftward shift in the supply curve. Supply has decreased.
the supply curve S1 shifting to the right and
becoming S2.
What does it mean for a supply curve to
shift rightward? The answer is easy if you
Section 2 The Supply Curve Shifts
117
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Where Do TiVo,
Podcasts, and
Blogs Come From?
??????????????????
I
t is important to distinguish
between increasing the supply
of a good that has existed for some
time (increasing the supply of corn,
paper, or shoes) and creating the
supply of a good that has never
existed before. Many goods that we
have today—digital video recorders
(first introduced by TiVo), podcasts,
and blogs, for example—weren’t
available to us in the past. Where
did these goods and the ideas for
them come from?
Two answers come to mind:
new technology and entrepreneurship. To illustrate how these two
factors sometimes work together,
consider a blog. A blog, or weblog,
is a personal Web site with a dated
log (diary-like) format that contains
commentary and links to other Web
sites. Only about 30 blogs existed at
the beginning of 1999. Today, you
can find millions. The first blogs
were hand-coded by Web developers who taught themselves HTML (a
markup language designed to create
Page 118
Web pages). Then, programmers
created new software programs (a
technological development), and
entrepreneurs responded to the
unfulfilled demand for posting
items on the Web, leading to the
vast supply of blogs today. Now
anyone can go to Blogger at
www.blogger.com/start and create
a blog within minutes.
No digital video recorder (sometimes called a personal video
recorder) could exist before the
software had been developed to
provide programming information
and encode data streams. The DVR
is a new product brought to us
through an advancement in technology, and by the entrepreneurs who
saw that the television public
wanted more control over their
personal television viewing.
again look at Exhibit 5-4 and focus on the
horizontal axis and the numbers on it, along
the bottom of the graph. What is the quantity supplied on curve S2 at the price of
$1,000? The answer is 6,000 computers. In
other words, an increase in supply (or a shift
rightward in the supply curve) is the same
thing as saying, “Sellers want to sell more
of a good at each and every price.” In our
118 Chapter 5 Supply
Podcasting, which delivers
recorded audio programs through
the Internet to iPods or other
portable music players, would not
exist without the software that
makes it easy to beam a podcast
from a home computer to someone
who has signed up to receive it. It
would also not exist without the
entrepreneurs who saw an unfulfilled demand on the part of consumers for more choices and greater
control over their entertainment.
New technology and entrepreneurship—the combination that
today gives us many of our new
products—are the catalysts behind
the supply of new products.
THINK
ABOUT IT
Do you think the technology exists today to
develop new products that aren’t
being developed because entrepreneurs think no one would buy
them? What might these new products (that could be developed but
aren’t being developed) do? Will
they brush your teeth for you? Will
they make your bed for you? If you
were an entrepreneur, what new
products would you supply?
example, sellers want to sell more computers
at $1,000.
How would we graphically represent a
decrease in supply? In Exhibit 5-4, again let’s
suppose that S1 is our original (and current)
supply curve. A decrease in supply is represented as a shift leftward in the supply curve
from S1 to S3. This decrease in supply means
that sellers want to sell less of the good at
05 (110-127) EMC Chap 05
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Page 119
each and every price. Specifically, if we look
at the price $1,000, we see that sellers who
once wanted to sell 4,000 computers now
want to sell 2,000 computers.
Supply increases → Supply curve shifts rightward
Supply decreases → Supply curve shifts leftward
What Factors Cause Supply
Curves to Shift?
Supply curves do not shift to the right or
left without cause. They shift because of
changes in several factors. These factors
include a change in resource prices, technology, taxes, subsidies, quotas, number of
sellers, future price, and weather.
Resource Prices
Chapter 1 identified four resources, or
factors of production: land, labor, capital,
and entrepreneurship. For now, concentrate
on land, labor, and capital. These resources
are used to produce goods and services.
When resource prices fall, sellers are willing and able to produce and offer to sell
more of the good (the supply curve shifts to
the right). The reason is that it is cheaper to
produce the good. When resource prices
rise, in contrast, sellers are willing and able
to produce and offer to sell less of the good
(the supply curve shifts to the left); it is more
expensive to produce the good.
Suppose the cost of labor
rises for employees working for a car manufacturer, while everything else remains the
same. Wage rates rise from, say, $20 an hour
to $22 an hour. As a result, the car manufacturer will produce and offer to sell fewer
cars; the supply curve shifts leftward. EX AM P LE:
Technology
Technology is the skills and knowledge
used in production. For example, the technology of farming today is much different
from 200 years ago. Today, unlike 200 years
ago, tractors, pesticides, and special fertilizers are used in farming.
An advancement in technology is the
ability to produce more output with a fixed
I
n 1921, a seller sold something to a buyer for $100. In 2005, a seller sold
something to a buyer for $100. Were the two sales, in 1921 and 2005,
equivalent? Not at all, because a dollar was worth more in 1921 than in
2005. In fact, a $100 purchase in 1921 was the equivalent of a $1,079.89
purchase in 2005. In other words, buying something for $100 in 1921 was
the same as buying something for $1,079.89 in 2005. To find out what any
dollar purchase in the past is equivalent to today, go to the Bureau of Labor
Statistics inflation calculator at www.emcp.net/inflation. Here we list the
2005 dollar equivalent of several purchases made in 1961. For example,
a person who paid $15 for dinner when going out to eat in 1961 would pay
$96.22 for an equivalent dinner in 2005.
Good/service
Dinner
Book
Haircut
1961 price
$
2005 equivalent
15
$
4
96.22
25.66
3
19.24
3,000
19,244.15
Furniture
500
3,207.36
Hammer
2
12.83
200
1,282.94
Car
Attorney services
amount of resources. Again, consider farming. With the use of fertilizers and pesticides, farmers today can produce much
more output on an acre of
land than they could many “What is wrong with our world
years ago. This advancement is that love is in short supply.”
in technology, in turn, low—Anonymous
ers the per-unit cost, or
average cost, of production for farmers.
Farmers respond to lower per-unit costs by
being willing and able to produce and offer
to sell more output. In other words, the supply curve shifts to the right.
Taxes
Some taxes increase the per-unit costs.
Suppose a shoe manufacturer must pay a $2
tax for each pair of shoes it produces. This
“extra cost” of doing business causes the
manufacturer to supply less output. (It is
similar to the price of a resource rising and
thus making it more expensive and less profitable for the producer to manufacture the
good. As a result, the producer produces less
output.) The supply curve shifts to the left. If
the tax is eliminated, the supply curve will
shift rightward to its original position.
technology
The body of skills and
knowledge concerning
the use of resources in
production.
advancement in
technology
The ability to produce
more output with a fixed
amount of resources.
per-unit cost
The average cost of a
good. For example, if
$400,000 is spent to produce 100 cars, the average, or per-unit, cost is
$4,000.
Section 2 The Supply Curve Shifts
119
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Page 120
Subsidies
Subsidies have the opposite effect of
taxes. A subsidy is a financial payment
made by government for certain actions.
Suppose the government subsidizes the
production of corn by paying corn farmers
$2 for every bushel of corn they produce.
Farmers will then want to produce more
corn at every price, which means the supply curve of corn shifts rightward. Removal
of the subsidy causes the supply curve to
shift to the left, back to its position prior to
the subsidy.
subsidy
A financial payment
made by government for
certain actions.
quota
A legal limit on the number of units of a foreignproduced good (import)
that can enter a country.
Number of Sellers
If more sellers begin producing a particular good, perhaps because of high profits,
supply increases and the supply curve shifts
to the right. If some sellers stop producing a
particular good, perhaps because of losses,
the supply curve shifts to the left.
Quotas
Future Price
Quotas are restrictions on the number of
units of a foreign-produced good (import)
that can enter a country. For example, suppose Japanese producers are currently sending, and want to continue to send, 100,000
cars to the United States each year. Now suppose the U.S. government imposes a quota
on Japanese cars at 80,000 a year. This quota
means that no more than 80,000 Japanese
cars can be imported into the United States.
Sellers who expect the price of a good to
be higher in the future may hold back the
good now and supply the good to the market in the future. Sellers who expect the price
of a good to be lower in the future may want
to supply the good now instead of later.
S
uppose you are an oil producer
and you want to know the
price of oil today and the
expected (future) price of oil. Where
would you look to find the current and future price of oil?
To find the current price, you might go to www.emcp.net/
oil. Here you will see the current (or sometimes called spot)
price for oil, such as Nymex Crude. On the day we checked,
the price was $51.25 a barrel. If you want to check the
future price of oil, go to www.emcp.net/oil_futures or simply click on “Commodity Futures” in the left margin of
your first screen (the screen that shows the current price of
crude oil). On the day we checked, the (expected) future
price of crude oil was $51.35. Notice that the difference
between the current price ($51.25) and the future price
($51.35) is only 10 cents, which means that oil producers
don’t have much incentive (if any at all) to shift oil from
current supply to future supply.
120 Chapter 5 Supply
A quota decreases supply, so the supply
curve shifts to the left. The elimination of a
quota causes the supply curve to shift rightward to its original position.
Ricky is thinking of selling
his house. He just heard that the price of
houses is expected to rise three months from
today. Instead of offering to sell his house
today, he waits until three months later. Why
did he wait? Ricky believed the future price
of a house would be higher than the current
price of a house. Notice that we are talking
about a nonperishable good here (houses).
In other words, waiting a few months, or
even a year, to sell a house doesn’t lead to a
change in the quality of a house.
A different type of a good is a perishable
good, such as eggs. If the egg seller believes
that the future price will be higher than the
current price of eggs, he may want to hold
his eggs off the market today and sell them
later. He can’t really do that, though, because
eggs spoil if kept too long. EX AM P LE:
Weather (in Some Cases)
Weather can affect the supply of a good.
Bad weather reduces the supply of many
agricultural goods, such as corn, wheat, and
barley. Unusually good weather can increase
the supply. Weather can also impact the supply of non-agricultural products, as happens
when hurricanes damage fishing boats, shipping docks, and coastal oil refineries.
05 (110-127) EMC Chap 05
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What Factor Causes a
Change in Quantity
Supplied?
Supply Goes Up,
or Down?
We identified the factors (resource prices,
technology, etc.) that can cause supply to
change. As we stated earlier, a change in supply is represented as a shift in the supply
curve. The curve moves either right or left.
See Exhibit 5-5(a).
But what factor(s) can cause a change in
quantity supplied? Only one: price. For
example, the only thing that can cause sellers
to change their quantity supplied of computers is a change in the price of computers.
A change in quantity supplied is shown as a
movement along a given supply curve. See
Exhibit 5-5(b).
Many people are, at first, confused about
what leads to a change in quantity supplied
and what leads to a change in supply. To
many, it seems as if changes in quantity supplied and supply are the same thing.
To make sure you understand the difference, let’s look back at a couple of examples
in this chapter. Turn back to Exhibit 5-1 on
page 115 and look at point A. There you see
a price of $1 and a quantity supplied of 10.
Now ask yourself what must happen before
you can move from quantity supplied of 10
EXH I BIT
5-5
On March 21, 2005, Dell
Computers opened its third Call
Center in India. (A Call Center is a
place where people who have purchased Dell computers call if they have
technical problems with their computers.) At
the time, Dell employed 7,500 people in India and
planned to hire about 1,500 more. Dell hires Indians to
service U.S. customer calls because it is cheaper to hire
Indians than Americans.
If Dell keeps its costs of building and
servicing computers down, how might
this affect the supply of Dell computers for sale?
ECONOMIC
THINKING
to 20, or from point A to B. Stated differently, what has to change before a move
from A to B will happen? The answer is that
the price (on the vertical axis) must increase
from $1 to $2. In other words, the only factor that will change the quantity supplied of
a good is a change in price: the factor that is
on the vertical axis.
A Change in Supply Versus a Change
in Quantity Supplied
S1
S2
S1
A
Price
Price
B
0
Quantity supplied
(a)
0
Quantity supplied
(b)
(a) A change in supply refers to a shift in the supply curve. A change in supply can be brought
about by a number of factors. (b) A change in quantity supplied refers to a movement along a given
supply curve. A change in quantity supplied is brought about only by a change in a good’s price.
Section 2 The Supply Curve Shifts
121
05 (110-127) EMC Chap 05
Will You
Live to
Be 100?
U
11/17/05
?
4:52 PM
sually, when we talk about
supply, we mean the supply
of goods and services. But can an
advancement in technology
increase the supply of people? One
way to increase the supply of people in the world is to increase the
length of life. For example, if people
start living an average of 100 years
instead of 70 years, it means more
people in the world.
Michael Rose, a biologist who
studies the aging process, found a
way to increase the average life span
of a fruit fly. The average fruit fly lives
for about 70 days, but Rose’s fruit
flies live for 140 days. If Rose and
other like-minded scientists can do
for human beings what they have
done for fruit flies, then people in
the future may live longer lives.
According to some scientists working
in the area of aging, ages of 100 or
150 years are not unreasonable.
elasticity of supply
The relationship
between the percentage
change in quantity supplied and the percentage
change in price.
122 Chapter 5 Supply
Page 122
Now suppose that scientists did
figure out how to slow the aging
process in humans, and people
began to live longer. Also suppose
that as a result of slowing the aging
process, an average 80-year-old in
the future felt the same way an
average 50-year-old feels today.
What economic effects would this
change have?
First, longer-living people would
probably work for more years than
we do today. People today often
start full-time work when they are
22 years old and retire at about 65,
a work life of 43 years. In the future,
they may start work at 22 and retire
at 85, a work life of 63
years.
People are
resources, and
resources are used to
produce goods and
services. More people
working would mean
more goods and services. In other words,
the current research
on aging, if successful,
would lead to a greater
supply of goods and
services in the world.
Now let’s move over to Exhibit 5-4 on
page 117. Take a look at S1. Ask yourself
what has to happen before S1 shifts to its
right and becomes S2. Does price (on the
vertical axis) have to change? No, as you can
see in the exhibit, we never change price
from $1,000. So, then, you know that a
change in a good’s actual price isn’t what will
shift a supply curve. What then does shift a
THINK
ABOUT IT
Some people believe
that the world has only
a finite number of jobs, and so with
more people—and the same number of jobs—many more people will
be unemployed in the future if people live to be 100. The problem
with this way of thinking, though, is
that in 2005, the population of the
United States was greater than it
was in 1982, but the unemployment rate in 1982 was higher than
the unemployment rate in 2005.
Do you think these numbers are
evidence that there “are not a finite
number of jobs in the world”?
supply curve? The answer is a change in
resource prices, technology, taxes, and so on.
Elasticity of Supply
Chapter 4 discussed elasticity of demand,
which deals with the relationship between
price and quantity demanded. Elasticity of
supply is the relationship between the per-
05 (110-127) EMC Chap 05
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Page 123
centage change in quantity supplied and the
percentage change in price. We can look at it
as an equation:
Percentage change in
quantity supplied
Elasticity of supply
Percentage change in price
Notice that the equation has a numerator
(percentage change in quantity supplied)
and a denominator (percentage change in
price). Elastic supply exists when the quantity supplied changes by a greater percentage
than price—that is, when the numerator
changes by more than the denominator. For
example, suppose the price of lightbulbs
increases by 10 percent, and the quantity
supplied of lightbulbs increases by 20 percent. The numerator (20%) changes by
more than the denominator (10%), so the
supply of lightbulbs is elastic.
Inelastic supply exists when the quantity
supplied changes by a smaller percentage
than price—that is, when the numerator
changes by less than the denominator. Finally,
unit-elastic supply exists when the quantity
supplied changes by the same percentage as
price—that is, when the numerator changes
by the same percentage as the denominator.
Defining Terms
1. Define:
a. elastic supply
b. inelastic supply
c. per-unit cost
d. subsidy
e. quota
f. technology
Reviewing Facts
and Concepts
2. Identify what happens
to a given supply curve
as a result of each of the
following:
a. Resource prices fall.
b. Technology advances.
c. A quota is repealed.
EXHIBIT
5-6
Elasticity of Supply
If supply is . . .
That means . . .
Elastic
Quantity supplied changes by a larger percentage
than price. For example, if price rises by 10 percent,
quantity supplied rises by, say, 15 percent.
Inelastic
Quantity supplied changes by a smaller percentage
than price. For example, if price rises by 10 percent,
quantity supplied rises by, say, 5 percent.
Unit-elastic
Quantity supplied changes by the same percentage
as price. For example, if price rises by 10 percent,
quantity supplied rises by 10 percent.
Exhibit 5-6 reviews the definitions of elastic,
inelastic, and unit-elastic supply.
Firm A currently produces
400 skateboards a day at $50 a skateboard.
The price of skateboards increases to $55 a
skateboard and the firm then starts producing 420 skateboards a day. Because the quantity supplied of skateboards goes up (5%) by
a smaller percentage than the price of skateboards rises (10%), the supply of skateboards is inelastic. EX AM P LE:
d. A tax on the production of a good is
repealed.
3. If supply increases, does
the supply curve shift to
the right or to the left?
4. Identify whether a given
supply curve will shift to
the right or to the left as
a result of each of the
following:
a. Resource prices rise.
b. A quota is placed on a
good.
5. Give a numerical example
that illustrates elastic
supply.
elastic supply
The kind of supply that
exists when the percentage change in quantity
supplied is greater than
the percentage change
in price.
inelastic supply
The kind of supply that
exists when the percentage change in quantity
supplied is less than the
percentage change in
price.
Critical Thinking
6. The previous section
explained how a supply
curve can be vertical. If a
supply curve is vertical,
does it follow that supply
is (a) elastic, (b) inelastic,
(c) unit-elastic, or
(d) none of the above?
Explain your answer.
Graphing Economics
7. Graph the following:
a. an increase in supply
b. a decrease in supply
c. an increase in the
supply of good X that
is greater than the
increase in the supply
of good Y
Section 2 The Supply Curve Shifts
123
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Page 124
Investing in Yourself
W
hen most people think of
investing, they think of
investing in such things as stocks,
bonds, and real estate. Rarely do we
think of investing in ourselves. Investing
in yourself, however, is one of the most
important things you can do.
Everyone wants a high return
from their investments. What could
you invest in today—as a high school
student—that could provide you with a
high return tomorrow? Before we tell
you what it is, let’s look at how the
average 15- to 17-year-old spends his
or her time each week.
How You Spend Your Time
According to a University of
Michigan study, the average 15- to
17-year-old (in 2002–2003) each
week spent 32 hours in school, 4
hours and 47 minutes socializing or
It’s clear that if
you invest more
time, effort, and
money in your education, your level of
income will grow
substantially.
EXH I BIT
visiting with friends, 3 hours playing
sports, 1 hour and 17 minutes reading, 2 hours and 45 minutes on the
computer, 7 hours eating, 5 hours
and 43 minutes doing household
work, and 14 hours and 36 minutes
watching television.
Let’s focus on the 14 hours and
36 minutes a week watching television. Could we reallocate some of
the TV time toward something that
might provide us with a higher return
(than watching television provides us)?
For example, as a high school student, you might be thinking of attending college. Getting into a good
college could be the stepping stone
to a good-paying job in the future.
According to recent data, college graduates earn substantially more over
their lifetimes than those with only a
high school diploma (see Exhibit 5-7).
5-7
Average Annual Earnings
by Level of Education
Not a high school graduate
$18,826
High school graduate only
$27,280
Some college, no degree
$29,725
Associate’s degree
$34,177
Bachelor’ss degree
Bachelor
$51 194
$51,194
Master’s degree
$60,445
Ph.D. degree
$89,724
Source: Statistical Abstract of the United States, 2004–2005.
124 Chapter 5 Supply
You Are Preparing for
College, Aren’t You?
So, how do you get into a good
college? First, you need to have good
high school grades. Second, you need
to have a reasonably high score on
one of the two standardized tests that
college-bound high school juniors and
seniors take: the SAT and ACT.
Many high school students take
these standardized tests without
studying for them. They simply get a
good night’s sleep the night before
the test, and then take it.
Think of an alternative way to
proceed. Suppose, beginning either
at the end of your sophomore year
or at the beginning of your junior
year of high school, you were to
watch 2 hours less of television a
week and studied for the SAT or
ACT instead.
Now ask yourself how many
hours most juniors in high school
spend studying for the SAT or ACT.
Many say “no more than 5 hours.”
Yet, the SAT and ACT are important
factors considered by college admission offices. (If you have already
taken the SAT and ACT, apply the
following suggestions to college
courses and tests you’ll take in
the future. If you are a senior and
haven’t taken them, it’s not too late
to plan and prepare to take them.)
Are 100 Hours of Studying
Too Many?
What if instead of spending only
5 hours studying for the SAT or ACT,
a student spent 100 hours studying.
05 (110-127) EMC Chap 05
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4:52 PM
These 100 hours are easily found
if the average 15- to 17-year-old
would simply cut back his or her TV
viewing. If you are the average 15to 17-year-old, and watch 14 hours
and 36 minutes of television a
week, consider cutting that down to
12 hours and 36 minutes. With the
“freed up” 2 hours, you can now
study for the SAT or ACT. In 50
weeks, you would have studied
100 hours. Studying diligently for
2 hours a week for 50 weeks for the
SAT or ACT is likely to boost your
overall score.
Will you “earn a high return” at
the end of the 100 hours? We cannot guarantee how high the return
will be (how much you will boost
your score over not studying), but
certainly it could be substantial. A
substantial improvement in your
score could pave the way to a good
college in your future and everything
else that may follow.
The Best Use of Your Time
So how should you proceed if you
are now convinced that 2 hours of
investing in yourself might bring a
higher return than watching an additional 2 hours of television? With
respect to either the SAT or ACT, you
can go to the appropriate Web sites
to see what the tests look like. Go to
www.emcp.net/SAT for the SAT. For
the ACT, go to www.emcp.net/ACT.
We also strongly urge you to purchase one or two of the test preparation books (on the SAT and ACT) that
you can find at almost any bookstore. Most of these test prep books
not only provide you with sample
tests, but with plenty of study
material.
Page 125
The thing to do once you have
purchased these books is to study
slowly and carefully. Don’t just take the
sample tests and put the books away.
You will also find sections in
these books on grammar, vocabulary
words, critical reading, writing an
essay, and more. Read each section
carefully, and then read it again. Do
all the exercises. Then do them
again. Take the sample tests. Then
make sure you know what you got
wrong on each sample test. Then
take more sample tests.
If you simply cut out 2 hours of
television a week, and devote that
time to studying for the SAT or ACT,
you will be surprised how much you
learn and how much you can boost
your test score.
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Chapter 5 Supply
125
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4:52 PM
Page 126
Economics Vocabulary
Chapter Summary
Be sure you know and remember the following
key points from the chapter sections.
Section 1
The supply of a good or service requires both a
supplier’s willingness and ability to produce
and sell.
The law of supply says that price and quantity
supplied move in the same direction—as price
increases, so does quantity supplied, and vice
versa—called a direct relationship.
Quantity supplied refers to the number of
units of a good produced and offered for sale
at a specific price.
The supply curve is an upward-sloping line
(from left to right) that shows the amount of a
good sellers are willing and able to sell at various prices.
A market supply curve represents the sum of
all individual firms’ supply curves for a particular good.
Section 2
Resource prices, advances in technology, subsidies, quotas, the number of sellers, future price
expectations, and weather are all factors that
can cause a shift in the supply curve.
The factor that causes a change in the quantity
supplied is price.
The elasticity of supply measures the relationship between the percentage change in price
and the percentage change in quantity
supplied.
Supply is elastic when quantity supplied
changes by a greater percentage than price.
Supply is inelastic when quantity supplied
changes by a smaller percentage than price.
Unit-elastic supply exists when quantity supplied changes by the same percentage as price.
126 Chapter 5 Supply
To reinforce your knowledge of the key terms in
this chapter, fill in the following blanks on a separate piece of paper with the appropriate word or
phrase.
1. A(n) ______ is the numerical representation of
the law of supply.
2. A(n) ______ is the graphic representation of
the law of supply.
3. According to the law of supply, as price
increases, ______ rises.
4. Supply is ______ if the percentage change in
quantity supplied is greater than the percentage
change in price.
5. Supply is ______ if the percentage change in
quantity supplied is less than the percentage
change in price.
6. ______ refers to the number of units of a good
produced and offered for sale at a specific price.
Understanding the Main Ideas
Write answers to the following questions to review
the main ideas in this chapter.
1. Explain the term supply as it applies to economics. What is the difference between supply and
quantity supplied?
2. Express the law of supply in (a) words,
(b) symbols, and (c) graphic form.
3. Luisa is willing but not able to produce and
offer to sell plastic cups. Is Luisa a supplier of
plastic cups? Explain your answer.
4. Are all supply curves upward sloping? Why or
why not?
5. Write out a supply schedule for four different
combinations of price and quantity supplied.
6. Identify whether the supply curve for each of
the following would be vertical or upward
sloping.
a. desks in your classroom at this moment
b. seats at a football stadium at this moment
c. television sets over time
d. Hewlett-Packard computers over time
e. Picasso paintings (Hint: Picasso is dead.)
7. What does it mean when a supply curve shifts to
the right? To the left?
05 (110-127) EMC Chap 05
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Page 127
8. Between the price of $10 and $14, supply is
inelastic. What does this statement mean?
9. Explain what happens to the supply curve of
television sets as a consequence of each of the
following.
a. Resource prices fall.
b. A technological advancement occurs in the
television industry.
c. A tax is placed on the production of television sets.
10. Identify the factors that can change supply.
Identify the factor that can change quantity
supplied.
11. In each of the following cases, identify whether
the supply of the good is elastic, inelastic, or
unit-elastic.
a. The price of books increases 10 percent, and
the quantity supplied of books increases 14
percent.
b. The price of bread increases 2 percent, and the
quantity supplied of bread increases 2 percent.
c. The price of telephones decreases 6 percent,
and the quantity supplied of telephones
decreases 8 percent.
12. What factor causes movement along a supply
curve?
Working with Graphs
and Charts
Doing the Math
Use your thinking skills and the information you
learned in this chapter to find solutions to the
following problems.
Do the calculations necessary to solve the following
problems.
1. A house-building company spends $40 million
to produce 400 houses. What is the average cost,
or per-unit cost, of a house?
2. Firm A sold 400 stereos for a total of $200,000,
and firm B sold 550 stereos for a total of
$275,000. Which firm is charging more per
unit? Graph the supply curve.
3. If the percentage change in price is 5 percent
and the percentage change in quantity supplied
is 10 percent, calculate the elasticity of supply.
4. Currently the price of a good is $10, and the
quantity supplied is 300 units. For every $1
increase in price, quantity supplied rises by 5
units. What is the quantity supplied at a price
of $22?
Use Exhibit 5-8 to answer the following questions.
P = price, and Qs = quantity supplied.
1. What does Exhibit 5-8(a) represent?
2. Which part of Exhibit 5-8 represents a change
in supply due to technological advancement?
5-8
EXHIBIT
S2
S1
S1
S
S2
B
P
A
Qs
0
(a)
(b)
(c)
3. What does Exhibit 5-8(c) represent?
4. Which part of Exhibit 5-8 represents a change
in supply due to an increase in resource prices?
Solving Economic Problems
1. Application. The law of supply pertains to
many goods. For example, if the price of shoes
rises, in time the quantity supplied of shoes will
rise, too. Devise an experiment to test whether
studying for an economics test is subject to the
law of supply.
2. Cause and Effect. Explain the process by
which a tax, applied to the production of a
good, changes the supply of the good.
Go to www.emcp.net/economics and choose Economics:
New Ways of Thinking, Chapter 5, if you need more help in
preparing for the chapter test.
Chapter 5 Supply
127