CHAPTER 5: SECTION 1

Understanding Supply

What Is Supply?

Supply refers to the willingness and ability of sellers to produce and offer to sell a good.

What Does the Law of Supply Say?

The law of supply states that as the price of a good increases, the quantity supplied of the good increases, and as the price of a good decreases, the quantity supplied of the good decreases.

Price and quantity supplied move in the same direction, or have a(n) direct relationship. As one factor rises, the other rises, too.

Quantity supplied is the number of units of a good produced and offered for sale at a specific price.

Supply in Tables and Graphs

Supply scheduleSupply curve

A supply schedule is a numerical chart showing the law of supply.A supply curve is a graphical representation of the law of supply.

• The law of supply does not hold for goods that can no longer be produced. They supply curve for this type of good is vertical.

• Examples = Stradivarius violins (produced more than 250 years ago), and theater tickets

• The law of supply does not hold when there is no time to produce more of a good. The supply curve for this type of good is vertical.

Supply curve when there is no time to produce more

A Firm’s Supply Curve and a Market Supply Curve

A firm’s supply curve is a supply curve for that particular firm. A market supply curve is the sum of all firms’ supply curves.

Parts (a), (b), and (c) show the supply curves for firms A, B, and C, respectively.

The market supply curve, shown in (d), is the sum of the firms’ supply curves.

When Supply Changes, the Curve Shifts

Supply can go up or down. These changes in supply will create a shift in the supply curve.

• A rightward shift means that supply has increased.

• A leftward shift means that supply has decreased.

Shifts in a Supply Curve

When supply increases, the supply curve moves to the right, from S1 to S2.

When supply decreases, the supply curve moves to the left, from S1 to S3.

What Factors Cause Supply Curves to Shift?

Resource Prices

• A decrease in a resource price increases supply. The supply curve shifts to the right.

• An increase in a resource price decreases supply. The supply curve shifts to the left.

Technology

• Technology is the body of skills and knowledge concerning the use of resources in production.

• The ability to produce more output with a fixed amount of resources in an advancement in technology.

• Per-unit cost is the average cost of producing the good.

Taxes

• An increase in taxes decreases supply. The supply curve shifts to the left.

• If a tax is eliminated (repealed), the supply curve will shift back to the right.

Subsidies

• Financial payments made by government for certain actions. (add this to your notes in the margin)

• An increase in subsidies increases supply. The supply curve shifts to the right.

• If a subsidy is removed, the supply curve will shift back to the left.

Quotas

• A legal limit on the number of units of a foreign-produced good (or import) that can enters a country is a quota.

• A quota decreases supply. The supply curve shifts to the left.

• If a quota is eliminated, the supply curve will shift back to the right.

Number of Sellers

• An increase in the number of sellers increases supply, and the supply curve shifts to the right.

• A decrease in the number of sellers decreases supply, and the supply curve shifts to the left.

Future Price

• It is difficult for producers to keep their goods out of the market and wait for prices to rise if the goods are perishable (eggs, fruits, vegetables, etc.) because they will go bad, or spoil, before the price increase.

Weather

• Bad weather may decrease the supply of some agricultural products. Usually good weather can increase supply.

• Bad weather, such as hurricanes, can also affect the supply of non-agricultural products.

What Factor Causes a Change in Quantity Supplied?

The only factor that can cause a change in the quantity supplied of a good is a change in the price of the good.

A change in quantity supplied is shown as a movement along a give supply curve.

Elasticity of Supply

Elasticity of supply is the relationship between the percentage change in quantity supplied and the percentage change in price.

• Elastic supply exists when the percentage change in quantity supplied (the numerator) is greater than the percentage change in price (the denominator).

• Inelastic supply exists when the percentage change in quantity supplied is less than the percentage change in price.

• Unit-elastic supply exists when the percentage change in quantity supplied is the same as the percentage change in price.

Elasticity

Elasticity of supply =Percentage change in quantity supplied

Percentage change in price