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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