Download Understanding Supply

Do Now:
 If you were running a
business, what would
you do if you found
out people would pay
twice as much for
your product?
 You would produce
more to make more
money
 Others would enter
the market as well.
Understanding
Supply
Aim: How does the Law of Supply effect
production?
The Law of Supply
 The Law of Supply – the higher the price,
the larger the quantity produced.
As prices go up, existing firms produce
more. New firms also enter the market
because the incentive is high.
Example
 Apple IPOD increased prices and demand
did not change.
 Apple produces more (Why?)
 Other companies enter the MP3 player
market as well
Law of Supply
 If prices fall, firms
produce less
because they will
make less money.
 Ex. Walkmans sell
for under $5
 Firms do not make
them anymore
Quantity Supplied
Quantity Supplied – a
term used to
describe how much
of a good is offered
for a certain price
Higher Production
 If a firm is already
making a profit, than
an increase in price
will lead to an
increase in profit.
 This increase in profit
will lead the firm to
produce more
Predicting Supply?
 Why would firms need
to predict supply?
 So they do not end up
with too much
(surplus)
 A surplus causes
lower prices
You Practice
 Use the supply schedule to draw a supply curve
 There are three main reasons why supply curves are drawn as
sloping upwards
 1. The profit motive: When the market price rises, it becomes more
profitable for businesses to increase their output. Higher prices send
signals to firms that they can increase their profits by satisfying
demand in the market.
 2. Production and costs: When output expands, a firm’s production
costs rise, therefore a higher price is needed to justify the extra
output and cover these extra costs of production.
 3. New entrants coming into the market: Higher prices may create
an incentive for other businesses to enter the market leading to an
increase in supply.
How can we predict
supply?
1. Supply Schedule – a chart that lists how
much of a good a supplier will offer at
different prices.
2. Supply Curve – a graph of the quantity
supplied at different prices.
Supply and Elasticity
 Elasticity of Supply- a measure of the
way quantity supplied reacts to the
change in price.
 When a good is elastic it is very
responsive to changes in price
 When it is inelastic price has little effect
on supply
Elastic
 a small increase in price has a big effect
on supply
Inelastic
 A small increase in price does not effect
supply
Law of Supply
Do Now
 What is your ultimate goal as a
business owner?
 How do you obtain this goal?
Terms
 Law of Supply –The higher the price, the
higher quantity suppliers will provide.
 Quantity supplied – The quantity a
supplier is willing and able to supply at a
certain price.
Higher Production
 Ceteris Paribus
 Cost of production is held constant
 What will happen to profits for a firm
when prices increase?
 If prices decrease?
Tendency of Suppliers
 As price increases
 Existing firms will produce more to make
additional revenue.
 New firms will enter market to capitalize of
high prices.
 As price decreases
 Existing firms will produce less.
 Other firms will drop out of market.
Entering the Market
 What will happen to the number of firms
entering the market if…
 Prices are high?
 Prices are low?
 Why is this true?
Entering the Market
examples
 Grunge Rock




1990s
Seattle, WA
Nirvana
Pearl Jam
 Emo
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1985, 2000 – present
Washington DC
Rights of Spring
My Chemical Romance
Grunge Timeline