chapter 5 supply - pc\|macimages.pcmac.org/sisfiles/schools/al/madisoncity/bjhigh... ·...

$: Chapter 5 Supply - PC\|MACimages.pcmac.org/SiSFiles/Schools/AL/MadisonCity/BJHigh... · 2011-12-07 · 1 CONTEMPORARY ECONOMICS: LESSON 5.1 © SOUTH-WESTERN Chapter 5 ... 5.3 Production$
© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 5.11

Chapter 5

Supply

5.1 The Supply Curve

5.2 Shifts of the Supply Curve

5.3 Production and Cost


Chapter 5

Supply

Why might a firm decide to store its products in a

warehouse rather than offer them for sale?

What’s the meaning of the old expression “Too

many cooks spoil the broth”?

Can a firm shut down without going out of

business?

Why do movie theaters have so many screens?

Consider


LESSON 5.1

The Supply Curve

Understand the law of supply.

Describe the elasticity of supply, and

explain how it is measured.

Objectives


LESSON 5.1

The Supply Curve

supply

law of supply

supply curve

elasticity of supply

Key Terms


Law of Supply

Role of profit

Supply

More willing to supply

More able to supply

Supply versus quantity supplied

Individual supply and market supply


Role of Profit

Profit equals total revenue minus total cost.

Total revenue is the total sales (dollars)

received from consumers for a certain time

period.

Total cost includes the cost of all resources

used by a firm in producing goods or services.

Over time, total revenue must cover total cost

for the firm to survive.


Supply

Supply indicates how much of a good producers

are willing and able to offer for sale per period at

each possible price, other things constant.

The law of supply says that the quantity supplied

is usually directly related to its price, other things

constant.

The supply curve is a curve or line showing the

quantities of a particular good supplied at various

prices during a given time period, other things

constant.


Price Quantity Supplied

per Pizza per Week (millions)

$15 28

12 24

9 20

6 16

3 12

Supply Schedule


Supply Curve

12 16 20 24 28Millions of pizzas per week

$15

12

9

6

3

0

Price p

er

piz

za

S


More Willing to Supply

As a price increases, a producer

becomes more willing to supply the good.

Prices act as signals to existing and

potential suppliers about the rewards for

producing various goods.

A higher price makes production more

profitable and attracts resources from

lower-valued uses.


More Able to Supply

Higher prices also increase the

producer’s ability to supply the good.

The marginal cost of production

increases as output increases.

A higher price makes producers more

able to increase quantity supplied.


Supply Versus

Quantity Supplied

Supply is the entire relation between the

price and quantity supplied, as reflected

by the supply schedule or supply curve.

Quantity supplied refers to a particular

amount offered for sale at a particular

price, as reflected by a point on a given

supply curve.


Individual Supply

and Market Supply

Individual supply—the supply of an

individual producer

Market supply—the supply of all

producers in the market


Summing Individual Supply

Curves to Find the Market

Supply Curve


Elasticity of Supply

The elasticity of supply measures how

responsive producers are to a price

change.


Measurement

Elasticity of supply equals percentage

change in quantity supplied divided by

percentage change in price.

Elasticity

of supply=

Percentage change in

quantity supplied

Percentage

change in price


Categories of

Supply Elasticity

Supply is elastic if supply elasticity

exceeds 1.0.

Supply is unit elastic if supply elasticity

equals 1.0.

Supply is inelastic if supply elasticity is

less than 1.0.


Determinants of

Supply Elasticity

One important determinant of supply

elasticity is the length of the adjustment

period under consideration.

The elasticity of supply is typically

greater the longer the period of

adjustment.


Market Supply Becomes

More Elastic Over Time

100 200

Millions of gallons per day

0

$1.25

1.00

Pric

e pe

r ga

llon

300

S w S m

S y


LESSON 5.2

Shifts of the Supply Curve

Identify the determinants of supply, and

explain how a change in each will affect

the supply curve.

Contrast a movement along the supply

curve with a shift of the supply curve.

Objectives


LESSON 5.2

Shifts of the Supply Curve

movement along a supply curve

shift of a supply curve

Key Terms


Determinants of Supply

Five determinants of market supply

(other than the price of the good)

Cost of resources used to make the good

Price of other goods these resources could

make

Technology used to make the good

Producer expectations

Number of sellers in the market


Changes in the Price

of Resources

Any change in the costs of resources used to

make a good will affect the supply of the good.

An increase in supply means that producers

are more willing and able to supply more goods

at each price.

An increase in the price of a resource will

reduce supply, meaning a leftward shift of the

supply curve.


Changes in the Prices

of Other Goods

A change in the price of another good

certain resources could make affects the

opportunity cost of making a particular

good.


Changes in Technology

Discoveries in chemistry, biology,

electronics, and many other fields have

created new products, improved existing

products, and lowered the cost of

production.


Changes in

Producer Expectations

Any change that affects producer

expectations about profitability can affect

market supply.

An expectation of higher prices in the

future could either increase or decrease

current supply, depending on the good.


Changes in the Number of

Sellers in the Market

Government regulations may influence

market supply.

Any government action that affects a

market’s profitability, such as a change in

business taxes, could shift the supply

curve.


An Increase in the

Market Supply for Pizza


$15

12

9

6

3

0

Price

pe

r p

izza

S S'

gh


An Decrease in the

Market Supply for Pizza


$15

12

9

6

3

0

Price

pe

r p

izza

SS''

gi


Movements Along a Supply Curve

Versus Shifts of a Supply Curve

A change in price, other things constant,

causes a movement along a supply

curve from one price-quantity

combination to another.

A change in one of the determinants of

supply other than the price causes a

shift of a supply curve, changing

supply.


LESSON 5.3

Production and Cost

Understand how marginal product varies as a

firm employs more labor in the short run.

Explain the shape of the firm’s marginal cost

curve and identify what part of that is the firm’s

supply curve.

Distinguish between economies of scale and

diseconomies of scale in the long run.

Objectives


LESSON 5.3

Production and Cost

short run

long run

total product

marginal product

law of diminishing

returns

fixed cost

variable cost

Key Terms

total cost

marginal cost

marginal revenue

competitive firm’s supply

curve

economies of scale

long-run average curve

cost


Production in the Short Run

Fixed and variable resources

Increasing returns

Law of diminishing returns

Marginal product curve


Marginal Product of Labor


Costs in the Short Run

Fixed and variable costs

Total cost

Marginal cost

Marginal cost curve

Marginal revenue

Short-run losses and shutting down

The firm’s supply curve


Marginal Cost Curve for

Hercules At Your Service


Supply Curve for

Hercules At Your Service


Production and

Costs in the Long Run

Economies of scale

Diseconomies of scale

Long-run average cost curve


Economies of Scale

Economies of scale—forces that reduce

a firm’s average cost as the firm’s size, or

scale, increases in the long run


Diseconomies of Scale

If the firm’s long-run average cost

increases as production increases, this

reflects diseconomies of scale


Long-Run Average

Cost Curve

Long-run average cost curve shows

the lowest average cost of producing

each level of output


A Firm’s Long-Run

Average Cost Curve

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