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Chapter 5.1: Supply Objectives 1. Explain the law of supply. 2. Interpret a supply schedule and a supply graph. 3. Examine the relationship between elasticity of supply and time. Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 2 Bell Ringer • Divide into groups of 3…instructions to follow: – Each group list and number the brand names of as many bottled beverages as you can in four minutes (non-alcoholic)` • Mt Dew, Vitamin Water, Sprite etc etc – Once four minutes is up, decide how to divide your list into categories • Example – Type of beverage, price, type of container, marketed as sports/health/thirst quenching. Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 3 Bell Ringer • How many did you list? • How did you categorize? • Why are there so many varieties in each category?? • Why is there more than one type of bottled water!!?? • PEOPLE ARE WILLING TO PAY FOR IT!! Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 4 Understanding Supply Suppose you own a bakery. Even after you raised prices, you can’t keep products on the shelf. What will you do? Supply The amount of goods available Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 5 Understanding Supply Law of Supply Producers offer more of a good as its price increases and less as its price falls Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 6 Law of Supply • How does the law of supply affect the quantity supplied? – As prices rise, producers will offer more – New suppliers will enter the market in the hopes of making a profit. Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 7 The Law of Supply • The law of supply includes two movements: • Individual firms changing their level of production • Firms entering or exiting the market Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 8 Understanding Supply Quantity supplied The amount that a supplier is willing and able to supply at a specific price Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 9 Market Entry • Checkpoint: Why do firms increase production when the price of a good goes up? – To make more money. Duh. – What type of music is popular now? • Why are so many bands/artists supplying this type of music? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 10 Supply Schedule • The supply schedule lists how many slices of pizza one pizzeria will offer at different prices. The market supply schedule represents all suppliers in a market. – What does the individual supply schedule tell you about the pizzeria owner’s decisions? – How does the market supply schedule compare to the individual supply schedule? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 11 Understanding Supply What are the only two variables in a supply or market supply schedule? • Price charged • Quantity supplied variable A factor that can change Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 12 The Supply Graph • A supply schedule goes opposite direction than demand. SUPPLY = WUZZ SUP! – A supply curve always rises from left to right because higher prices leads to higher output. – Checkpoint: What are the two variables represented in a supply schedule or supply curve? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 13 Elasticity of Supply • Elasticity of supply, based on the same concept of elasticity of demand, measures how firms will respond to changes in the price of a good. – Elastic • When elasticity is greater than one, supply is very sensitive to price changes – Inelastic • When elasticity is less than one, supply is not very responsive to price changes. Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 14 Elasticity • What is the main factor that determines whether the supply of a good will be elastic or inelastic? – Remember, we are thinking how much/little a business is willing and able to supply • Time. In the short run, a firm can’t easily change its output level. • Read “Elasticity of Supply in the Short Run” pg 114 Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 15 Elasticity in the Short Run In the short run, it is difficult for many firms to change its output level, so supply is inelastic. Name a business which has inelastic supply in the short run. On the other hand, some businesses are elastic in the short run. Name one. Barbershops/salons. Why? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 16 Trivia Time! • What is this barber shop thingie called? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 17 Elasticity in the Long Run • In the long run, supply can become more elastic. • Just like demand, supply becomes more elastic if the supplier has a longer time to respond to a price change. • How does a business that is highly elastic respond to a fall in prices? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 18 Review • Now that you have learned how the law of supply affects the quantity supplied, go back and answer the Chapter Essential Question. – How do suppliers decide what goods and services to offer? Chapter 5, Section 1 Copyright © Pearson Education, Inc. Slide 19