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CHAPTER 5
Supply
5.1 The Supply Curve
5.2 Shifts of the Supply Curve
5.3 Production and Cost
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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CHAPTER 5
Key Terms
 supply
 law of supply
 supply curve
 elasticity of supply
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CHAPTER 5
Law of Supply
 With demand, the assumption is that
consumers try to maximize utility, a goal
that motivates their behavior.
 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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CHAPTER 5
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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CHAPTER 5
Starts and Closures of Employer
Firms, 2005–2009*
Figure 5.1
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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CHAPTER 5
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 law of supply says that the quantity supplied
is usually directly related to its 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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CHAPTER 5
Supply Schedule and Supply Curve
for Pizza
Figure 5.2
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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
Summing Individual Supply Curves
to Find the Market Supply Curve
Figure 5.3
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CHAPTER 5
Elasticity of Supply
 The elasticity of supply measures how
responsive producers are to a price change.
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CHAPTER 5
The Supply of Pizza
Figure 5.4
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CHAPTER 5
Measurement
 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
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CHAPTER 5
Categories of Supply Elasticity
 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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CHAPTER 5
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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CHAPTER 5
Market Supply Becomes More
Elastic Over Time
Figure 5.5
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CHAPTER 5
5.2 SHIFTS OF THE SUPPLY
CURVE
Learning Objectives
LO1 Identify the determinants of supply, and
explain how a change in each affects the
supply curve.
LO2 Contrast a movement along the supply
curve with a shift of the supply curve.
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CHAPTER 5
Key Terms
 movement along a supply curve
 shift of a supply curve
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CHAPTER 5
Determinants of Supply
 Five determinants of market supply
(other than price)
 Cost of resources used to make the good
 Price of other goods these resources could
make
 Technology used to make the good
 Producer expectations
 Number of sellers in the market
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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
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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CHAPTER 5
An Increase in the Supply of Pizza
Figure 5.6
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CHAPTER 5
An Decrease in the Supply of Pizza
Figure 5.7
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CHAPTER 5
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 price-quantity 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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CHAPTER 5
5.3 PRODUCTION AND COST
Learning Objectives
LO1 Explain how marginal product varies as a firm
hires more labor in the short run.
LO2 Explain the shape of the firm’s marginal cost
curve and identify what part of that is the
firm’s supply curve.
LO3 Distinguish between economies of scale and
diseconomies of scale in the long run.
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CHAPTER 5
Key Terms





short run
long run
total product
marginal product
law of diminishing
returns
 fixed cost






variable cost
total cost
marginal cost
marginal revenue
economies of scale
long-run average curve
cost
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CHAPTER 5
Production in the Short Run
 Fixed and variable resources
 Increasing returns
 Law of diminishing returns
 Marginal product curve
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CHAPTER 5
Short-Run Relationship Between Units of
Labor and Tons of Furniture Moved
Units of the Variable Resource
(worker-days)
Total Product
(tons moved per day)
Marginal Product
(tons moved per day)
0
0
—
1
2
2
2
5
3
3
9
4
4
12
3
5
14
2
6
15
1
7
15
0
8
14
−1
Figure 5.8
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CHAPTER 5
Marginal Product of Labor
Figure 5.9
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CHAPTER 5
Costs in the Short Run
 Fixed and variable costs
 Total cost
 Marginal cost
 Marginal cost curve
 Marginal revenue
 Maximizing profit and minimizing loss
 The firm’s supply curve
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CHAPTER 5
Short-Run Cost Data for Hercules
Figure 5.10
1
Tons Moved
per Day
2
3
Workers Variable
Per Day
Cost
4
5
6
7
Fixed
Cost
Total
Cost
Change in total cost ÷
Change in tons moved =
Marginal
Cost
0
0
0
$200
$200
—
2
1
$100
$200
$300
$100 ÷ 2
$ 50.00
5
2
$200
$200
$400
$100 ÷ 3
$ 33.33
9
3
$300
$200
$500
$100 ÷ 4
$ 25.00
12
4
$400
$200
$600
$100 ÷ 3
$ 33.33
14
5
$500
$200
$700
$100 ÷ 2
$ 50.00
15
6
$600
$200
$800
$100 ÷ 1
$100.00
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CHAPTER 5
Marginal Cost Curve for Hercules
Figure 5.11
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CHAPTER 5
Short-Run Supply Curve for Hercules
Figure 5.12
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CHAPTER 5
Production and Costs in the
Long Run
 Economies of scale
 Diseconomies of scale
 Long-run average cost curve
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CHAPTER 5
Economies of Scale
 Economies of scale—forces that reduce a
firm’s average cost as the firm’s size, or
scale, increases in the long run
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CHAPTER 5
Diseconomies of Scale
 If the firm’s long-run average cost increases
as production increases, this reflects
diseconomies of scale.
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CHAPTER 5
Long-Run Average Cost Curve
 Long-run average cost curve shows the
lowest average cost of producing each level
of output.
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CHAPTER 5
A Firm’s Long-Run Average
Cost Curve
Figure 5.13
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CHAPTER 5