Supply 1 Supply Defined What is supply Supply

Supply 1

Supply Defined What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. • As price increases, the quantity producers make increases • As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns 2

Example of Supply You own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these prices? Supply Schedule Price per lawn mowed $1 $5 $20 $50 $1000 Quantity Supplied 3

GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Draw this large in your notes $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 4

GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Supply $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 5

GRAPHING SUPPLY Supply Schedule Price $5 $4 $3 Quantity Supplied Price of Cereal Supply $5 What if new 50 companies start making 40 cereal? 30 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 6

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Supply $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 7

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Supply $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 8

Change in Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 $3 30 50 Price of Cereal Supply $5 4 3 2 $2 20 40 1 $1 10 30 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 9

Change in Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 $3 30 50 Price of Cereal Supply S 2 $5 4 3 2 $2 20 40 1 $1 10 30 o Increase in Supply Prices didn’t change but there is MORE cereal produced 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 10

Change in Supply Schedule Price $5 $4 $3 Quantity Supplied Price of Cereal Supply $5 What if a drought 50 destroys corn and wheat 40 crops? 30 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 11

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Supply $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 12

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 Price of Cereal Supply $5 4 3 2 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 13

Change in Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 $3 30 10 Price of Cereal Supply $5 4 3 2 $2 20 1 1 $1 10 0 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 14

Change in Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 $3 30 10 Price of Cereal Supply S 2 $5 4 3 Decrease in Supply Prices didn’t change but there is LESS cereal produced 2 $2 20 1 1 $1 10 0 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 15

Change in Supply Schedule Price $5 $4 $3 Quantity Supplied Price of Cereal Supply $5 4 What if cereal companies 50 3 find a quicker way to make 40 2 cereal? 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 16

6 Shifters (Determinants) of Supply 1. 2. 3. 4. Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies 5. Opportunity Cost of Alternative Production 6. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve. 17

Elasticity shows how sensitive quantity is to a change in price.

1. Elasticity of Demand • Measurement of consumers responsiveness to a change in price. • What will happen if price increase? How much will it effect Quantity Demanded Who cares? • Used by firms to help determine prices and sales • Used by the government to decide how to tax

Inelastic Demand

Inelastic Demand INelastic = Quantity is INsensitive to a change in price. • If price increases, quantity demanded will fall a little • If price decreases, quantity demanded increases a little. In other words, people will continue to buy it. A INELASTIC demand curve is steep! (looks like an “I”) Examples: • Gasoline • Milk • Diapers • Chewing Gum • Medical Care • Toilet paper

Inelastic Demand General Characteristics of INelastic Goods: • Few Substitutes • Necessities • Small portion of income • Required now, rather than later

Elastic Demand

Elastic Demand Elastic = Quantity is sensitive to a change in price. • If price increases, quantity demanded will fall a lot • If price decreases, quantity demanded increases a lot. In other words, the amount people buy is sensitive to price. An ELASTIC demand curve is flat! Examples: • Soda • Boats • Beef • Real Estate • Pizza • Gold

Elastic Demand General Characteristics of Elastic Goods: • Many Substitutes • Luxuries • Large portion of income • Plenty of time to decide • Elasticity coefficient greater than 1