Chapter 5 Supply

Chapter 5, which deals with the supply side of the market, is a natural continuation of the preceding chapter on demand.

Section 1 focuses on the nature of supply

Section 2 introduces the theory of production, which explains how output varies when inputs change

Section 3 explains the role of costs in determining productivity, and provides an analysis of total and marginal revenues

Chapter 5

I. What is Supply?A. Objectives

1. Understand the meaning and concepts of supply

2. Explain the difference between the supply schedule and the supply curve

3. Explain what is meant by a change in quantity supplied

4. Specify the reasons for a change in supply

B. An Introduction to Supply1. Economists want to know how much of a

certain product or commodity sellers will supply at each and every possible market price

2. Supply- The ability and willingness of producers to provide products over a wide range of prices

a. If someone asks you to supply baby-sitting or yard work services after school, what is the first thing that comes to your mind?

Money, Cash, Greenbacks, Moolah…

b. Let’s negotiate!

1) What generalization can you make?

a) The higher I pay, the more work you are willing to supply

2) Supply is the amount of production, in this case your efforts, provided over a wide range of prices

3) If you are looking for a job, you are a supplier (service for sale)

a) What factor of production are your?

laborb) What market are you selling

your labor at? factor product

Pay per hour

Yard Work

Baby Sitting

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$14.00

$18.00

$20.00

$25.00

How many hours are you willing to work in the hot, hot sun or with a drooling wailing kid if I pay you that amount Per hour?

C. Supply Schedule and Supply Curve1. If you are an owner of a business, you

are more eager to make a product when the price is high

a. Why?b. You are making a higher profit

2. A supply schedule tells the quantities of a commodity offered at each and every possible market price

Directions: Complete the Venn diagram below to compare and contrast demand and supply schedules

Title and labels List the highest

dollar amount on top

Tally numbers The highest

quantity number equals the number in focus group

Inverse relationship between price and quantity

Begin to tally from the top

The quantity increases as you move down the schedule

Direct relationship between price and quantity

Begin to tally from the bottom

The quantity decreases as you move down the schedule

Supply ScheduleDemand Schedule

Price Quantity

(thousands)

$140 40

$120 35

$100 20

$80 15

$60 6

$40 3

Supply Schedule Price Quantit

y(thousands

)

$140 4

$120 8

$100 15

$80 20

$60 27

$40 35

Demand Schedule

a. Steps for Creating a Supply Schedule

1) Draw blank chart

2) Put the dollar amounts in schedule from Highest to Lowest

 3) Tally and mark off dollar amounts from your focus group

 4) Start with Lowest Dollar amount, put quantity supplied

number in schedule by adding up the old and new tally marks

 5) Check- Does your highest tally mark equal the number

in the highest dollar amount in schedule?

Tally Dollar Quantity Supplied

$ 30

$ 15

$ 20105 1

IIIII 5

I 1lIII 4

$30$30 $30$30$20 $20$20$15 $20 $30

Practice TimeDirections: For each set of data, create

a supply schedule with the raw data from your focus group interviews

Date Set # 1Product: Huge, yellow, fluffy, happy,

huggable, smilie face pillows$40, $90, $35, $85, $70, $70, $85,

$90, $75, $85, $50, $65

Data Set # 2Product: uPhone- the next generation of

the iPhone$100, $140, $150, $120, $150, $140,

$135, $140, $150, $135, $145

Data Set # 4Product: Z-Box- the newest dance-craze

instructional video so you can be hip-hopping coooool!

$20, $18, $25, $15, $25, $20, $30, $20, $25, $16, $27

Data Set # 3Product: Garden frogs that

croak and glow in the dark

$15, $20, $10, $20, $11, $18, $18, $20, $15, $19

Data Set # 5Product: 6 wheeler all-terrain vehicle $155,000; $177,000; $166,500; $160,000; $188,000; $177,000; $166,500; $199,000; $177,000

3. Supply Curvea. Data represented in the

supply schedule shown graphically

b. Slopes upward and to the right or has a positive slope to reflect the tendency of suppliers to offer greater quantities for sale at higher prices

Supply Schedule for T-Shirts

Price

Quantity

$30 350

$27 330

$24 300

$21 240

$18 190

$14 140

$12 70

$9 20

$6 0

Supply Curve for T-Shirts

$0

$5

$10

$15

$20

$25

$30

$35

0 100 200 300 400

Quantity of T-Shirts Supplied

Pri

ce p

er T

-Sh

irts

Supply Curve

c. Directions on Creating a Supply Curve

Price

Quantity Supplied

$190 20

$175 18

$160 15

$150 10

$130 5

1) Label “Price” on Y axis, “Quantity” on X axis, and write the title2) By looking at the schedule, figure out a scale and write it on the graph

Supply Curve of Radios

Pric

e

Quantity

2 4 6 8 10 12 14 16 18 20

190

170

150

130

110

100

3) Place a dot at the intersection of each corresponding “Price” and “Quantity”

4) Draw a general line over the dots

S5) Label the line with a “S”

Demand Curve

$0

$20

$40

$60

$80

$100

$120

$140

$160

0 5 10 15 20 25 30 35 40

Quantity

D

Supply Curve

$0

$20

$40

$60

$80

$100

$120

$140

$160

0 10 20 30 40 50

Quantity

S

Directions: complete the Venn diagram by comparing and contrasting a demand and supply curve

Title “Price” is

labeled on the Y axis

“Quantity is labeled on the X axis

Slopes downward Has a negative

slope Greater amounts

would be bought at lower prices

Inverse relation between price and quantity

Demand curves are labeled “D”

Shared Traits

Slopes upward Has a positive

slope Greater amounts

would be offered for sale at higher prices

Direct relation between price and quantity

Supply curves are labeled “S”

Demand Curve Supply Curve

Practice Time

Directions: For each set of data, create a supply schedule with the raw data from your focus group interviews, create a supply curve and answer the questions

                                                                                                                                                                                                                                       

                                                                                                                                                                                                                                       

Data Set #1

Product: Stereo System

$500, $450, $300, $600, $500, $400, $600, $550, $600, $400

Data Set #2

Product: Computer

$3,000, $1,200, $2,400, $3,000,$2,000, $2,400, $2,800, $1,800, $1,600

Data Set #3

Product: Mega Pack of Cinnamon Extra Gum

$4.00, $3.75, $3.50, $3.00,$2.50, $2.00, $1.50, $1.00, $0,75, $ 0.50

How many packs of gum will Extra Co. be willing to supply at $1.50 a pack?

How many more packs of gum will Extra Co. Be willing to supply at $3.00 a pack?

Using the answer from the last question, how may more packs of gum will Extra Co. be willing to supply at $3.65 a pack?

Data Set #4

Product: Ford Explorer

$70,000, $65,000, $60,000 ,$55,000, $50,000, $75,000, $80,000, $75,000

How many Ford Explorers will Ford Motor Co. be willing to supply at $75,000?

How many less Ford Explorers will Ford be willing to supply at $60,000?

Using the answer from the last question, how many more Ford Explorers will Ford be willing to supply at $72,000?

Data Set #5

DVD Collection of Dexter

$75.00, $70.00, $55.00, $70.00, $60.00, $75.00, $60.00, $80,00, $60.00, $65.00, $80.00

Data Set #6

Product: Stuffed Teddy Bear

$60.00, $55.00, $65.00, $90.00, $85.00, $70.00, $85.00, $90.00

How many DVD Dexter sets would Showtime be willing to supply at $65.00?______How many more DVD Dexter sets would Showtime be willing to supply at $75.00?______How many less DVD Dexter sets would Showtime willing to supply at $63.00?______

4. Law of Supplya. The tendency of suppliers to offer more for sale at high prices than

low prices1) If you sell something on E-bay, would you rather sell your “thing”

at a high price or a low price?2) If you sell something on E-bay at a REALLY good price, do you

wish that you had more of that product to sell?

b. “The quantity supplied, or offered for sale, varies directly with its price”

Price SupplyHigh/More

Low/Less

How Does the Law of Demand Compare to the Law of Supply

Law of Demand

“the quantity demanded varies inversely with its

price”

Quantity people are willing and able to buy or

purchase a product

Inverse

High demand

Low demand

The Law states…

DefineDemand Supply

Relation between price and quantity

Low Price

High Price

Law of Supply

“the quantity supplied, or offered for sale,

varies directly with its price”

Quantity producers are willing and able to produce a product

Direct

Low supply

High supply

Price Price Quantity

Quantity

5. Basic Supply Curve1. Using two lines, make a 90 degree angle opening to the

right2. Label “Price” on Y axis, “Quantity” on X axis, and write

the title3. Draw an upward or positive sloping curve4. Label the curve “S”5. Pick a spot on the Y axis and mark a P1

6. Draw a line to the curve and then draw down to the X axis and mark a Q1

Price

Quantity

Basic Supply Curve

S

P1

Q1

D. Change in Quantity Supplied

1. The amount that producers bring to market at any ONE price is called quantity supplied

2. A change in quantity supplied is the change in amount offered for sale in response to a change in price

Supply Schedule for T-Shirts

Price perT-Shirt

Quantity of T-Shirts Supplied

$30 35027 33024 30021 24018 19014 14012 709 206 0

a. At $30 (P1), 350 T-shirts are supplied (Q1)

b. If the price decreases to $15 (P2), 160 T-shirts are supplied (Q2)

c. This change illustrates a change in the quantity supplied, which also represents a movement along the supply curve

AP1

Q1

B

Q2

P2

3. Reasons for Change in Quantity Supplieda. Usually the interaction of supply and

demand determines the final priceb. The producer has the freedom to adjust

production4. Types of graphs

a. Increase in Change in Quantity Supplied

b. Decrease in Change in Quantity Supplied

Directions: Read the situation, draw the supply curve making sure you have all of the pertinent information, and finally tell me if it decreases or increases

Practice Time

1. The price the automobile producers will receive for their product decreases

2. The price that a producer of shoes can receive for their product increases

3. The price that a producer of gummy bears receives goes down

4. The price that an apple producer can receive goes up

E. Change in Supply1.  When producers offer different amounts of products for sale

at all possible prices in the market2. When a fundamental change in the economy causes an

increase or decrease in the amount supplied at every price3. The price doesn’t change, but something in the economy as

a whole changes

S1 S2S3

Pric

e

Quantity

P1

Q1 Q2Q3

a. Overall line shifts to the right to show an increase in supply

b. Overall line shifts to the left to show a decrease in supply

Reasons Vocabulary

Definition Increase Supply

Decrease Supply

Examples

Cost of Inputs 

input resources that are required for industrial production, such as capital goods, labor services, raw materials/capital, etc. (review Chapter 1)

if the price of inputs goes down, producers can produce more at each and every price

if the price of inputs goes up, producers will not be willing to produce as many products at each and every price

Increase Corn prices go down, so it is cheaper to raise hogs

Decreaseminimum wage increases

cost an outlay or expenditure of money, time, labor, trouble, etc… to require the payment of money or something else with value in an exchange for a commodity

   

4. Seven Reasons for Change in SupplyDirections: the seven reasons and new vocabulary is given to you. In the box provided, fill in a complete definition of each reason , then explain how it would increase supply, then decrease supply, and finally give examples for each.

Reasons Vocabulary Definition Increase Supply

Decrease Supply

Examples

Productivity productivity   more motivated, better trained, and happy workers increase productivity

unmotivated, untrained, or unhappy workers decrease productivity

Increase classes at LHS

Decrease

Technology technology the specific methods, materials, and devices used to solve practical problems especially in industry or commerce

introducing new machines, chemicals, or industrial processes can affect supply by lowering the cost of production

  Increase writing an excellent essay by means of paper/pencil or word processorDecrease

commerce an interchange of goods or commodities; trade; business 

Reasons

Vocabulary

Definition Increase Supply

Decrease Supply

Examples

Number of Sellers

sellers person or business that transfers goods or renders services for another in exchange for money

when more sellers get into the market

when sellers leave the market

Increase in a growing economy, sellers open business and join the market; in a recession, sellers go bankrupted and leave the marketDecrease

render to do; perform; provide

 

Reasons Vocabulary

Definition Increase Supply

Decrease Supply

Examples

Taxes and Subsidies

taxes a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.

taxes are the same as the cost of inputs; taxes decreased

taxes are the same as the cost of inputs; taxes increase

Renaissance Zone are virtually free of all state and local taxes for businesses located within their boundaries; There are over 150 geographic areas in Michigan that are designated as renaissance zones; Carson/Bloomer/ North Shade, City of Stanton, Howard/Pierson/ Reynolds,Montcalm Township, Village of Edmore http://ref.michigan.org/medc/services/sitedevelopment/renzone/index.asp

levied an imposing or collection by authority or force

 

Reasons Vocabulary Definition Increase Supply

Decrease Supply

Examples

cont… Taxes and Subsidies

subsidies a grant made by a government to some individual or business in order to maintain an acceptable standard of living or to stimulate economic growth

when an individual or business receives a subsidy

when an individual or business losses the subsidy

Increase Federal Pell Grant; subsidized housing; free or reduced breakfast and/or lunch; farm programs; Decreasegovernment or organizations are in declining growth so they stop or lessen subsidizing

grant a sum of money, that does not have to be repaid by the individual or business; provided by a government, local authority, public fund/foundations to help finance educational study, those in need, or to encourage or produce a certain type of economic activity

Reasons Vocabulary Definition Increase Supply

Decrease Supply

Examples

Expectations expectations anticipation of future events

if producers expect prices for their output to lower, they may try to get rid of as much supply or inventory as possible now

if producers think it is likely for the price of their output will go up in the future, they may withhold or keep some of their supply or inventory now

Increase Farm Future Market, poor reports for future earningsDecreasereports for strong future earnings

Government Regulations 

  government make laws requiring companies to do required things

  the government mandates something, this makes it higher cost to production

Increase Government gets rid of mandatesDecreaseNo Child Left Behind Environment regulations

mandates to authorize or decree (a particular action), as by the enactment of law

 

Practice Time

Directions: Read the situation, draw a Change in Supply curve making sure you have all of the pertinent information, tell if it is increasing or decreasing, which of the broad categories it belongs to and why.

1. Cost of inputs increase.    

 2. New technology makes it easier and more efficient to produce items.

3. Number of sellers declines due to recession.   

 4. Expectations for the future are positive.

5. New government regulations require more strict and costly cleanup plans.    

 6. Productivity declines due to layoff at a plant.

7. Tax breaks are given to area businesses.   

 8. Subsidies are given to business to aid in research and development.

9. A hurricane destroys 10 factories in North Carolina.

10. Cost of inputs decreases due to surplus of item in the market.

Change in Quantity Supplied or Change in Supply?

Directions: For each situation, tell if it is a Change in Quantity Supplied or Change in Supply

1. The price that an automobile producer can receive for his product decreases

2. Cost of cotton, tread, ink, labor, etc. increase for a tee-shirt producer

3. The ability of workers to produce products improves with professional development.

4. Less producers of sugarcane are in business due to a catastrophic hurricane.

5. The federal business tax is repealed. 6. Subsidies are made available for cancer drug producers for research and development.

7. New technology makes it easier and more efficient to produce a product.

8. The price that a producer of shoes can receive for her product increases.

9. More lenient government regulations make it less costly to produce aluminum.

10. Expectations are positive for a producer of beach towels.

F. Elasticity of Supply1. Elasticity of Supply: a measurement of a supply curve’s

sensitivity to changes in pricea. Elastic supply is used to describe a supply curve which is

shaped such that a change in price would result in a more-than-proportional change in quantity supplied

1) If a small increase/decrease in price causes a relatively larger increase/decrease in output, the supply curve is said to be elastic

Elastic Supply

Note: this is why is strongly suggested that the lengths of the X and Y axis were equal (not the scale, but the number of lines used). If you do this, then you don’t have to do the following slide to figure out proportion.

a) More than proportionalb) Decreasing the price by

50% ($40 to $20) created a decrease in supply by 76% (50 units to 12 units)

Want to know how much we lost in percent… but how?

1. Figure out how much we lost for price and quantity

Price 40-20= 20 Quantity 50-12= 38

2. Change the amount that we lost into a percent

Percent is the amount or part of something compared to the whole thing. I know that for price I started at 40 which would be the whole, then the price lowered to 20 which means I lost 20 which would be the part. For

Quantity my whole would be 50, then I produced 12 which means I lost 38 which would be the part. (Ohhhh… another way of looking at quantity would be opportunity cost?)

part x 100 = percent (cuz everything is out of 100%) whole

Price 20 (20 divided by 40) =0.5 to figure percent 0.5x 100= 50% 40

Quantity 38 (38 divided by 50)= 0.76 to figure percent 0.76X 100= 76% 50

b. Inelastic Supply: used to describe a supply curve which is shaped such that a change in price would result in a less-than-proportional change in quantity supplied1) If an increase/decrease in price causes the quantity

supplied to change very little, supply is inelastica) Less than proportionalb) Decreasing the price by 50% ($40 to $20) created a

decrease in supply by 12.5 % i. (32 units to 28 units) (5 units/32 units x100)

Inelastic Supply

c. Unitary Elastic Supply: used to describe a supply curve which is shaped such that a change in price would result in a proportional change in quantity supplied1) a given change in price causes a proportional change in the

quantity supplied, supply is unit elastica) Proportionalb) The price decreased by 50% ($40 to $20) and the quantity

supplied also decreased by 50% (40 units to 20 units)

0 10 20 30 40 50 600

10

20

30

40

50

60

Quantity

P1

P2

Q2 Q1

S

Pri

ce

Unit Elastic

elastic inelastic

0 10 20 30 40 50 600

10

20

30

40

50

60

Quantity

P1

P2

Q2Q1

S

Similarities

1. Change in Quantity Supplied graph

2. The price change

unit elasticDifferences

1. A decrease in price causes a relatively larger decrease in output

2. Price drops 50% and quantity drops 76%

3. More than proportionate

Similarities

1. Change in Quantity Supplied graph

2. The price change

Similarities

1. Change in Quantity Supplied graph

2. The price change

Differences

1. A decrease in price causes a relatively smaller decrease in output

2. Price drops 50% and quantity drops 12.5%

3. Less than proportionate

Differences

1. A decrease in price causes a proportionate decrease in output

2. Price drops 50% and quantity drops 50%

3. Change is proportionate

Practice Time

II. The Theory of Production

A. Objectives1. Explain the theory of production2. Understand the importance of marginal

product and its application to the economy3. Describe the three states of production

and how they relate to the concept of diminished returns

B. Theory of Production1. Explains the relationship between the factors of production

(land, labor, or capital)and the output of goods and services2. It looks at how output changes when input changes3. The theory is based on the short run

a. Short Run- a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied (2nd edition of Parkin and Bade's "Economics“)

1) We normally assume that the quantity of capital inputs (e.g. plant and machinery) and the amount of land available for production are fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labor, components, raw materials and energy inputs

b. Long run- is a period of time in which the quantities of all inputs can be varied (2nd edition of Parkin and Bade's "Economics“)

C. Law of Variable Proportions1. In the short run, output will change as one input is varied while the

others are held constant2. Looks at the relationship between the input of productive resources

and the output of final productsa. As the amount of input (chili power) increases, so does the output

(the quality of the chili)1) If you make chili, the first teaspoon of chili powder will make the

chili taste better2) Two teaspoons may make it taste better yet3) However, at some point the chili begins to taste terrible

3. Helps to answers the questions, “How is the output of the final product affected as more units of one variable input or resources are added to fixed amount of other resources?”

a. Farmer may have land, machines, workers, and other items needed to produce a crop, however the farmer may have some questions about fertilizer and the amount needed

1) The variable input is the fertilizer added per acre

D. The Production Function1. The Law of Variable Proportions can be illustrated by

using a production functiona. Production function is a concept that relates

changes in output to different amounts of a single input while other inputs are held constant

b. Production Schedule is a chart that details the total product, marginal product and the one variable in one production function

1) Total Product is total output produced by the firm and the one variable changes, but all other variables stay the same

2) Marginal Product is the extra output generated by adding one more unit of variable input

a) Change in total product caused by the addition of one more unit of variable input

Production Schedule Using Varying Amounts of Labor

Number of

Workers

Total Produc

t (In Units)

Marginal

Product (In

Units)0 0 0

1 14 14

3 75 33

2 42 28

4 112 37

6 180 30

5 150 38

7 203 23

8 216 13

10 190 -17

9 207 -9

The number of workers is the only thing that changes in this schedule. No changes occur in the amount of machinery used, level of technology, or quantities of raw materials (unprocessed natural products used in production). Under these conditions, any change in output must be the result of the variation in the number of workers.

Marginal product- the extra output generated by adding one more unit of variable input. (Change in total product caused by the addition of one more unit of variable input)

Total Product- total output produced by the firm (Add up all of the marginal products)