Download The law of supply

Supply
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What is supply? What is the law of supply?
What is the difference between supply and
quantity supplied?
What is the difference between individual and
market supply?
What is a supply curve? How is it made?
Scenario
Betty works at her parents’ bakery. Every Saturday morning, she
goes to work with her parents at 3 A.M. and helps them prepare
strudel, bread, rolls, desserts, and cookies.
Her parents told her that weekends require a larger
inventory of their baked goods. They explained that
the Saturday Market, which is just a block away,
brings more people to the store. Opening the store
an hour before the market opens allows them to sell
large quantities of baked goods. Throughout the day
they are also able to serve many more customers.
Their product line is larger than during the week, and
it is priced higher. Because they can charge a higher
price, they are able to make higher profits on
weekends than the rest of the week.
Why would the bakery charge higher prices on Saturday than the
rest of the week? What would you to do to encourage some of the
Saturday customers to come back during the week?
A few basics…
• Supply—the various quantities of a good (or
service) a firm is willing and able to
produce/supply to the market for sale at all
prices, during a particular time period, ceteris
paribus
– Presented as a schedule or a curve (supply curve)
• Quantity supplied—the amount of goods or
services sellers offer for sale at one time at a
specific price.
The law of supply
The law of supply: there is a
positive causal
relationship between
quantity supplied and
price of a good over time,
ceteris paribus
– As price increases, so does
the quantity supplied
– This makes sense to us:
producers will spend more
on making a product if they
expect to make more
money on it
• Sellers have a profit incentive
to charge higher prices.
• At a higher price, suppliers
devote more resources to a
product, which results in a
greater quantity supplied.
Some quick points:
The law of supply causes producers to react in
predictable ways to a change in price of a g/s
As producers supply more at higher prices
(increase), and less at lower prices (decrease), the
quantity supplied “moves along the supply curve.”
•This is called the change in quantity supplied
•It is only caused by a change in price
How to show a change
in quantity supplied
• Use a supply schedule
(table of data)
• Then, graph the supply
curve!
• Remember, this graph
would be used for a
change in price only.
P
Qs
• Any change in
Qs will be along
the curve, not a
new one.
Individual/Market Supply Curves
• Individual supply
curve—supply data
for a single producer
• Market supply
curve—sum of all
individual supply
curves in a market
Gut check!
What is supply?
Amount of a g/s producers are willing & able to offer for sale at all
prices in a given period.
What is quantity supplied?
Amount of g/s producers are willing & able to offer for sale at a specific
price.
What is the relationship between quantity supplied and price in a
market?
As price increases, quantity supplied increases (direct relationship)
How do we show this relationship?
Using a supply curve (shows how price influences Qs)
What is total revenue?
• Businesses care about elasticity of demand—it
helps them figure out their total revenue, and
whether demand for a product is elastic or
inelastic
• Total revenue—total amount of a company's
sales and other sources of income.
– does not include earnings or profits, which take
expenses into account.
– high total revenue is desirable for any company.
How do you calculate total
revenue?
• It’s simple!
# of units sold
X price of unit
revenue
or
TR=P x Q
• Practice 1: Backyard
BBQ Co. sold 4,088 grills
at a price of $89 each.
What was their total
revenue?
• Practice 2: Alex’s
Lemonade sold 1,250
glasses of original
lemonade at $1.50 a
glass. They sold 1,300
glasses of pink lemonade
at $1.75 a glass. What
was their total revenue?
What does total revenue look like
on a graph?
• The demand
schedule can help
you make a demand
curve, then you point
out areas of elasticity.
Price
Qd
TR
Elasticity
What does total revenue look like
on a graph?
• Multiply the Qd by the
price in the demand
curve to create a TR
graph