ChapterChapter

SupplySupply

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Chapter ObjectivesStudents will learn: How the law of supply works. To apply it to simple situations. How the law of variable proportions

applies to productivity. What factors cause a change in

market supply.

Defining Supply

• Market: exchange between buyers and sellers of goods and services.

• Supply: the amount of goods and services that sellers are willing to sell at various prices at particular times.

• Demand: the amount of goods and services consumers are willing to buy at various prices at particular times.

The Law of Supply

“If all other things are equal, the higher the price of a product or service, the more of it suppliers will offer for sale.”

The reverse is also true: “The lower the price of a product or

service, the less of it suppliers will offer for sale.”

Profit Motive:

• The law of supply is based on the profit motive.

• Can you explain how? Profit Motive:

The desire of

individuals and

businesses to make

money.

Graphing Supply

• Supply schedule: list of quantities supplied at various prices.

• Supply curve: points on a graph connected by line.

NOTICE: In what direction does the supply curve go?

Factors of Production

1. Natural Resources

2. Labor

3. Capital Resources• Suppliers use the factors of production to

produce a product or service. • A change in the amount of any of these

resources can affect supply in the long run.• Only labor can affect production in the short

run.

The Law of Variable Proportions

“In the short run, output or supply will change as one resource is varied,

even though other resources do not change.”

Relationship:

Input of resources—supply of good or service

Marginal Product:

• Extra output or change in the total product caused by adding a worker.

Why does adding a sixth worker increase the marginal product less?

Stages of Production

• 1st stage: adding more workers results in more efficient use of tools and resources.

• 2nd stage: Total product keeps growing but by smaller and smaller returns (principle of diminishing returns).

• 3rd stage: Negative returns.

Marginal Product Simulation:

Directions:Directions:• Carry paperclips, one at a time, from the first container to

the second, and from the second to the third, as quickly as possible, without running.

• Each paperclip must be set down and released into the container before it can be picked up and moved again.

• Each paperclip must be placed in all containers along the way.

1 2 3

Market Supply

• Sellers can be companies or individuals.

• Market supply=

total output of all sellers within a market.

Changes in Market Supply• Causes of shifts in supply:

– Productivity– Taxes=costs more– Subsidy=costs less– Regulation=rules that control (Ex: FDA)– Opinions=predicting the future– Competition

• More sellers increase supply• Fewer sellers decrease supply

• Supply Elasticity