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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. 2 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Key Terms supply law of supply supply curve elasticity of supply 3 © 2013 Cengage Learning. All Rights Reserved. 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. 4 © 2013 Cengage Learning. All Rights Reserved. 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. 5 © 2013 Cengage Learning. All Rights Reserved. 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 © 2013 Cengage Learning. All Rights Reserved. 6 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. 7 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Supply Schedule and Supply Curve for Pizza Figure 5.2 8 © 2013 Cengage Learning. All Rights Reserved. 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. 9 © 2013 Cengage Learning. All Rights Reserved. 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. 10 © 2013 Cengage Learning. All Rights Reserved. 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. 11 © 2013 Cengage Learning. All Rights Reserved. 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 12 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Summing Individual Supply Curves to Find the Market Supply Curve Figure 5.3 13 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Elasticity of Supply The elasticity of supply measures how responsive producers are to a price change. 14 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 The Supply of Pizza Figure 5.4 15 © 2013 Cengage Learning. All Rights Reserved. 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 16 © 2013 Cengage Learning. All Rights Reserved. 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. 17 © 2013 Cengage Learning. All Rights Reserved. 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. 18 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Market Supply Becomes More Elastic Over Time Figure 5.5 19 © 2013 Cengage Learning. All Rights Reserved. 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. 20 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Key Terms movement along a supply curve shift of a supply curve 21 © 2013 Cengage Learning. All Rights Reserved. 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 22 © 2013 Cengage Learning. All Rights Reserved. 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. 23 © 2013 Cengage Learning. All Rights Reserved. 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. 24 © 2013 Cengage Learning. All Rights Reserved. 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. 25 © 2013 Cengage Learning. All Rights Reserved. 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. 26 © 2013 Cengage Learning. All Rights Reserved. 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. 27 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 An Increase in the Supply of Pizza Figure 5.6 28 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 An Decrease in the Supply of Pizza Figure 5.7 29 © 2013 Cengage Learning. All Rights Reserved. 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. 30 © 2013 Cengage Learning. All Rights Reserved. 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. 31 © 2013 Cengage Learning. All Rights Reserved. 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 32 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Production in the Short Run Fixed and variable resources Increasing returns Law of diminishing returns Marginal product curve 33 © 2013 Cengage Learning. All Rights Reserved. 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 34 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Marginal Product of Labor Figure 5.9 35 © 2013 Cengage Learning. All Rights Reserved. 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 36 © 2013 Cengage Learning. All Rights Reserved. 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 37 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Marginal Cost Curve for Hercules Figure 5.11 38 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Short-Run Supply Curve for Hercules Figure 5.12 39 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Production and Costs in the Long Run Economies of scale Diseconomies of scale Long-run average cost curve 40 © 2013 Cengage Learning. All Rights Reserved. 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 41 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Diseconomies of Scale If the firm’s long-run average cost increases as production increases, this reflects diseconomies of scale. 42 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 Long-Run Average Cost Curve Long-run average cost curve shows the lowest average cost of producing each level of output. 43 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5 A Firm’s Long-Run Average Cost Curve Figure 5.13 44 © 2013 Cengage Learning. All Rights Reserved. CHAPTER 5