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SUPPLY
Understanding Supply
Chapter 5 Section 1
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
Objectives:
Explain the law of supply.
 Interpret a supply graph using a supply
schedule.
 Explain the relationship between elasticity of
supply and time.

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 Focus:
 As
a owner of a business, what would
you do if you discovered that your
customers were willing to pay twice as
much for your product?
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 Most
entrepreneurs would try to
produce more product in order to
take advantage of the higher prices.
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– the amount of goods
available.
 Supply
of Supply – the quantity of a
product supplied varies directly with
price {the higher the price, the larger the
 Law
quantity that is produced}.
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
The Law of Supply means that a
producer will increase their supply as the
price goes up, other factors held
constant.
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Economists use the term Quantity
Supplied to describe how much of a
good is offered for sale at a specific
price.
 Much like Quantity Demanded has to do
with the amount consumers would
demand, Quantity Supplied has to do
with the amount producers will put on the
market at that price level.

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
Supply Schedule

It shows the relationship between Price and Quantity Supplied
It compares two factors that can change

Price
$ .50
$ 1.00
$ 1.50
$ 2.00
$ 2.50
$ 3.00
Quantity Supplied
100
150
200
250
300
350
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
Supply Graph
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
Law of Supply develops from the choices
of both current producers and new
producers. As the price of a good rises,
existing firms will produce more in order
to earn additional revenue. At the same
time, new firms will enter the market to
earn a profit for themselves.
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
IF the price of a good falls….
some firms will produce less.
 some firms will drop out or leave the
marketplace.


These two movements just described
combine to create a new supply curve.
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
IF a firm is already earning a profit by selling a good,
then an increase in the price – it will increase the firm’s
profit.
 This promise of higher revenues for each sale
encourages the firm to produce more.
 Profits also appeal to people who may decide to join
the marketplace. These companies will come in and
compete with the already existing firms and try to get
their share of the profit pie.
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 Individual
Supply Schedule
 Reports
the amount that would be
supplied by each individual producer.
 Market
Supply Schedule
 Reports
the amount that would be
supplied by all producers in the
market.
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
Price

$ 1.00
$ .90
$ .80
$ .70
$ .60
$ .50
$ .40
$ .30
$ .20
$ .10
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Coca-Cola
Quantity Supplied
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
Supply Graph

4 Parts – Price on V-axis, QS on H-axis, Title, and
Supply Curve labeled with an “S”
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Market Period – a period of time when
all production has taken place so the firm
has a fixed quantity it is trying to sell. It is
right now. Producers cannot change
anything.
 A set # of goods, all production has
taken place.
 Supply Curve is a Vertical Line!

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
Short Run – a period of time when at least
one factor of production is fixed, but the firm
can vary output by increasing or decreasing
other factors of production.

Short enough period of time that a firm can’t do something like
build a factory, train new employees, etc.
It is long enough to change the remaining factors of production
(adding new materials or buying more equipment)

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
Short Run Supply Curve
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
Short Run Supply

It is upward sloping because as costs rise as more
goods are produced.

The company has to raise the price of the good to
cover those increasing costs.
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
Long Run – a period of time when no
factors of production are fixed.
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Enough time to change all factors of
production. {Land, Labor, & Capital}
 A period of time that allows a company to
change all of its factors of production –
they can buy more land, build a new
factory, hire & train new employees in
that factory, and buy more materials,
machines, and tools.

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There are two Supply Curves in the Long
Run.
 2 different outcomes of increasing
production

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S1 – represents a company who, as costs
rise, must increase price to cover this cost. It
looks like the short run supply curve – this
company has not figured out a way to
decrease its costs as supply increases.
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
S1 example would be dwindling oil
reserves are causing the long run cost of
gasoline to increase because firms are
having to drill deeper and in more remote
areas to find oil.
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S2 – slopes downward because this
company has increasing specialization,
which lowers the costs as they produce
more.
 This happens because as the company
makes more of a good they figure out
ways to become more efficient and to
save costs in the production process.

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
S2 example would be the long run supply
curve of personal computers. Its supply curve
is downward sloping because as the volume of
PCs has expanded, computer firms have been
able to adopt more specialized equipment and
that will lower the cost of production.
 Specialization increases the efficiency of the
production process.
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
For our purposes in this class, we will
focus our attention on the short-run
supply curve. So we will deal with
upward sloping supply curves, that
assumes costs increase as output
increases.
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
Elasticity of Supply

This is a measure of the way suppliers
respond to a change in price. {much like
elasticity of demand}
Elasticity tells how firms will respond to
changes in the price of a good.
 3 Types:
 Elastic
Inelastic
Unit Elastic

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Elastic Supply – when supply is very
sensitive to price change.
 Inelastic Supply – when supply is not
responsive to price change.
 {Much like elasticity of demand}
 Unit Elastic – when a percentage
change in price is perfectly matched by
an equal percentage change in QS

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What determines whether the supply of a
good will be elastic or inelastic?
 TIME – In the short run, a firm cannot
easily change its output level, so supply
is inelastic.
 In the long run, firms are more flexible,
so supply is more elastic.
