SUPPLY

1. SUPPLY

2. Supply • What is the Law of Supply? • Suppliers will give more product at a higher price • Suppliers will give less product at a lower price • About how many hours do you spend studying every night? How many hours would you study if you were paid $1 an hour? $10 an hour? If you will study more for a higher price, you are following the Law of Supply.

3. I normally eat one, but at this low price, I’m having two. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price. Consumers & Producers Feel Differently About High & Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend.

4. “I want a clean diaper.” Supply & Demand[Bread & Butter of Econ] [assuming “perfectly competitive markets”] [No individual can control price.] The law of supply and demand is learned in infancy. Infants demand clean diapers and are willing to supply peace and quiet in exchange. Mothers demand peace and quiet and are willing to supply clean diapers in exchange. The terms of trade are arranged. “One scream equals one diaper. The price of one diaper is one scream.” Supply – producers “willingness to sell.” Or, the amount of products suppliers are “willing & able to sell” at each price during a specific time period.”

5. Figure 5.1 The concept of supply can be illustrated in the form of a table or a graph. The supply schedule is a listing of the various quantities of a particular product supplied at all possible prices in the market. The only difference between a supply schedule and a demand schedule is that prices and quantities move in the same direction for supply–rather than in opposite directions for demand.

6. Figure 5.2 Individual and Market Supply Curves The market supply curve shows the quantities offered at various prices by all firms that offer the product for sale in a given market.

7. Figure 5.3 Change in Supply Schedule and Graph When both old and new quantities supplied are plotted in the form of a graph, it appears as if the supply curve has shifted to the right, showing an increase in supply.

8. Change in QS [“Change in “price”] Decrease in “QS” [caused by a “decrease in price”] Increase in “QS” [caused by an “increase in price”] S S P2 1. Price change 2. Movement 3. Point to point [“Snap shot of 1 pt in time] P1 P2 P1 QS1 QS2 QS1 QS2 Change in “S” [RATNEST] S2 S1 S1 S2 1. Non-price 2. Whole curve 3. Shift [“Time passes”] P P “Decrease in S” “Increase in S” What could cause an “increase in supply?” (RATNEST4. Increase in number of producers 1. Decrease in resource cost [wages/raw materials] 5. Increase in technology 2. Decrease in the price of analternative outputfor “X”6. Increase in subsidies 3. Producer expectations of a price decrease7. Decrease in taxes

9. Let's Take A Look At The Seven Supply Shifters ["RATNEST"]

10. 1.ResourceCost[wages & raw materials][Inverse] Wages Raw Materials If resource cost increases supply Decreases [making less $] If resource cost decreases supply Increases [making more $] S2 S1 S2 P

11. Resource Cost Example S3 S2 S1 ResourceCost [wages & raw materials] [inverse] 58. Increase in wages (increases/decreases) supply. Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. P

12. I only have 200 acres 2. Alternative Output Price Change [Inverse] These are “things that can be supplied with the same resources”. Corn S1 Broccoli S2 P1 S P2 P QS1 QS2 Producers want to produce more of the good where price is increasing, Corn Broccoli S1 S P1 S2 P P2 QS1 QS2 or at least, where the price is not going down. “Substitutes in production” [Remember, productive resources are scarce]

13. Alternative Output Example S3 S1 S2 AlternativeOutput price changes[inverse] If the price of corn decreases, thesupply of broccoli(increases/decreases). P S1 S2 P Supply of broccoli

14. “Can’t wait till milking time.” 3. Technological Improvement This lowers production costs & increases “S”. Ex: Suppose a new milking machine called “The Invisible Hand” has a very soothing effect on cows; cows find the new machine so “udderly” delightful that they produce 30% more milk. This technological advance will cause a shift to the right.

15. 4. Number of Producers [Direct] S3S1 S2 If more firms enter an industry, the supply curve will shift to the (left/right). • When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. A new professional football league will (increase/decrease)the supply of football games. P

16. 5. Producer Expectations about Future Price [“INVERSE”] S2 S1 S2 59.If oil producers expectfuture oilprices todecline, they will (increase/decrease) current production. Oil Prices expected to decrease Oil Prices expected to increase P If oil producers expect future oil prices to increase, they will (increase/decrease) current production. For example, if the cattle farmerexpects higher prices for beef in the future, he will send (more/less) cattle to market now.  He will keep them on the farm now and would send the cattle to the market in the future when prices are expected to be higher. 

17. 6. Subsidies – free money from government [Direct] S3 S1 S2 P Free money from the government (subsidies) induces suppliers to supply more. If subsidies are taken away, then suppliers are losing money and will decrease supply.

18. 7. Taxes Take Away Business Profits & Decrease Supply. [Inverse] S3 S1 S2 P I’m losing profits.” If business have their taxes decreased, it moves the supply curve to the right. 55. If business have their taxes increased, it moves the supply curve to the (left/right).

19. Supply Shifters [“RATNEST”] • ResourceCost[wages & raw materials] [inverse] • Alternative Output price changes[inverse] • Technology [direct] • Number ofSuppliers[direct] • Expectation(Suppliers) about future price [inverse] • Subsidies [direct] Taxes [inverse] Decr in “S” of broccoli Bigger supply of games “Take this money.” Up down

20. Juicy “Orange” Prices R Decide if the price of oranges is going to rise,fall, or stay the same. ___1. All of the growers meet & agree to grow fewer oranges next year. ___2. Growers plant more acres of orange trees. ___3. Orange growers promote oranges as a symbol of good health. ___4. One grower [out of thousands] retires and stops growing oranges. ___5. Growers develop a bigger and better tasting orange. ___6. Orange growers struck by the disease-causing Mediterranean fruit fly. F R S R R Quantity of Oranges

21. Practice “Supply Quiz” 1. Which would cause a “decrease in supply”for MP3 Players? a. decrease in the price of MP3s b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase 2. Which would cause a “decrease in QS”for MP3s? a. decrease in the price of MP3s b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase 3. Which would cause an “increase in supply”for MP3 Players? a. decrease in the price of MP3 Players b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase 4. Which would cause an “increase in QS” for MP3s? a. decrease in price of MP3s b. increase in price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase 5. An increase in the price of asparagus will (increase/decrease) the supply of the alternative outputpeas. 6. A 50% decrease in the price of “computer chips” will (increase/decrease) the (supply/QS) for “computers”. 7. Which would cause an “increase in supply” for MP3 Players? a. increase in wages for MP3 Player workers. b. subsidies($100 per computer) are given to MP3 Player companies. c. subsidies for MP3 Player makers being taken away.

22. Supply Elasticity • a measure of the way in which quantity supplied responds to a change in price.  • If a small increase in price leads to a relatively larger increase in output, supply is elastic.  • If the quantity supplied changes very little, supply is inelastic. • Three kinds • Elastic Supply • Inelastic Supply • Unit Elastic Supply

23. Figure 5.4a • The supply curve in Figure 5.4a is elastic because the change in price causes a relatively larger change in quantity supplied.

24. Figure 5.4b • The supply curve in Figure 5.4b is inelastic because the change in price causes a relatively smaller change in quantity supplied.

25. Figure 5.4c • The supply curve in Figure 5.4c is a unit elastic supply curve because the change in price causes a proportional change in the quantity supplied.

26. If a firm can adjust to new prices quickly, then supply is likely to be elastic.  • If the nature of production is such that adjustments take longer, then supply is likely to be inelastic. Click the mouse button or press the Space Bar to display the information.

27. The elasticity of supply is different from the elasticity of demand in several important respects.  • First, the number of substitutes has no bearing on the elasticity of supply.  • In addition, considerations such as the ability to delay the purchase or the portion of income consumed have no relevance to supply elasticity even though they are essential for demand elasticity. Click the mouse button or press the Space Bar to display the information.

28. W Worksheet: Applying the Law of Supply