CHAPTER 5
Supply
5.1 The Supply Curve
5.2 Shifts of the Supply Curve
5.3 Production and Cost
The Amazing Farmer Jones
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5.1 THE SUPPLY CURVE
Learning Objectives
LO1 Explain the law of supply.
LO2 Describe the elasticity of supply, and
explain how it is measured.
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Key Terms
 supply
 law of supply
 supply curve
 elasticity of supply
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Review: Demand
 Demand indicates how much of a product
consumers are both willing and able to buy
at each price during a given period, other
things constant.
With demand, the
assumption is that consumers
try to maximize utility, a goal
that motivates their behavior.
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Determinants of Demand
• What factors determine how much you will
buy?
• What factors determine how much you will
really purchase?
1)
2)
3)
4)
5)
6)
Product’s Own Price
Consumer Income
Prices of Related Goods
Consumer Tastes
Consumer Expectations
Number of Consumers
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Law of Demand
 The law of demand says that quantity
demanded varies inversely with price, other
things constant.
 The higher the price, the smaller the quantity
demanded.
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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 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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Law of Supply
 The law of supply says that the quantity
supplied is usually directly related to its
price, other things constant.
 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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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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Starts and Closures of Employer
Firms, 2005–2009*
The number of firms which start, close, or go bankrupt in a year.
Source: U.S. Dept. of Commerce, Census Bureau, Administrative Office of the U.S. Courts, U.S. Dept. of Labor, Business Employment Dynamics (BED).
*Estimates based on Census data and BED trends
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Supply Schedule and Supply Curve
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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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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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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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Individual Supply and Market Supply
 Individual supply—the supply of an individual producer
 Market supply—the supply of all producers in the market
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Elasticity of Supply
 The elasticity of supply measures how
responsive producers are to a price change.
 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
 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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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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Determinants of Supply
Anything that affects production costs and profit
opportunities helps shape the supply curve.
1) Price of the good
2) Cost of resources used to make the good
3) Price of other goods these resources could make
4) Technology used to make the good
5) Producer expectations
6) Number of sellers in the market
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Changes in the Cost of Resources
 Any change in the costs of resources used to
make a good will affect the supply of the good.
 An increase in supply means that producers are
more willing and able to supply more goods at
each price.
 An increase in the price of a resource will reduce
supply, meaning a leftward shift of the supply
curve.
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Changes in the Prices of
Other Goods
 A change in the price of another good
certain resources could make affects the
opportunity cost of making a particular
good.
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Changes in Technology
 Discoveries in chemistry, biology,
electronics, and many other fields have
created new products, improved existing
products, and lowered the cost of
production.
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Changes in Producer Expectations
 Any change that affects producer
expectations about profitability can affect
market supply.
 An expectation of higher prices in the
future could either increase or decrease
current supply, depending on the good.
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Changes in the Number of Suppliers
 Government regulations may influence
market supply.
 Any government action that affects a
market’s profitability, such as a change in
business taxes, could shift the supply curve.
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An Increase in the Supply
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An Decrease in the Supply
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Movements Along a Supply Curve
Versus Shifts of a Supply Curve
 A change in price, other things
constant, causes a movement along
a supply curve from one pricequantity combination to another.
 A change in one of the determinants
of supply other than the price causes
a shift of a supply curve, changing
supply.
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