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SUPPLY CHAPTER 5 LAW OF SUPPLY SUPPLY: AMOUNT OF GOODS AVAILABLE PRICE INCREASES: SUPPLY INCREASES PRICE DECREASES: SUPPLY DECREASES HIGHER PRODUCTION HIGHER REVENUES: ENCOURAGE FIRMS TO PRODUCE MORE PIZZA EXAMPLE: – PIZZA PRICE INCREASES? – PIZZA PRICE DECREASES? SUPPLY SCHEDULE SIMILAR TO A DEMAND SCHEDULE SHOWS RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED PRICE PER SLICE $.50 $1.00 $1.50 $2.00 $2.50 $3.00 SLICES SUPPLIED 1000 1500 2000 2500 3000 3500 SUPPLY CURVE A GRAPH OF QUANTITY SUPPLIED OF A GOOD AT DIFFERENT PRICES UPWARD SLOPING FROM LEFT TO RIGHT Y AXIS PRICE X AXIS OUTPUT ELASTICITY OF SUPPLY REACTION TO A CHANGE IN PRICE ELASTICITY OF SUPPLY TELLS HOW FIRMS WILL RESPOND TO CHANGES IN THE PRICE OF A GOOD ELASTIC, INELASTIC, UNITARY ELASTIC, PERFECTLY INELASTIC ELASTICITY OF SUPPLY ELASTICITY GREATER THAN 1 = ELASTIC ELASTICITY LESS THAN 1 = INELASTIC ELASTICITY = 1 : UNITARY ELASTIC (SUPPLY IS VERY SENSITIVE TO CHANGES IN PRICE) (SUPPLY IN NOT VERY SENSITIVE TO CHANGES IN PRICE) REVENUE REMAINS CONSTANT) (TOTAL CHANGES IN SUPPLY What causes supply curves to shift to the left or to the right? 1. Cost in production (cost of raw materials) 2. Technology (lower production costs) 3. Subsidies – Government gives payment to producers to promote supply CHANGES IN SUPPLY 4. Taxes – Government can place an excise tax on certain goods 5. Imports 6. Expectations of Prices? If you expected the price of corn to double in 2 months what would you do with your corn if you were a farmer? 7. Competition - # of suppliers in the market