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Learning Objective:

Learn about the Law of Supply, Supply Elasticity, and the Role of Profit in economics. Understand supply curves, pricing, and supply elasticity categories.

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Learning Objective:

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  1. Learning Objective: • Today I will be able to explain the Law of Supply and Supply Elasticity in a brief summary. • Agenda • Learning Objective • Vocabulary: Ch. 4 & 5 • Lecture: Ch. 5.1 Law of Supply • Exit Slip CONTEMPORARY ECONOMICS: LESSON 5.1

  2. Role of Profit • In trying to earn profit, firms transform productive resources into products. • Total revenue is the total sales (dollars) received from consumers for a certain time period. CONTEMPORARY ECONOMICS: LESSON 5.1

  3. Role of Profit • Profit=total revenue-total cost. • Total cost includes the cost of all resources used by a firm in producing goods or services. CONTEMPORARY ECONOMICS: LESSON 5.1

  4. Role of Profit • Over time, total revenue must cover total cost for the firm to survive. • When firms break even, total revenue just covers total cost. CONTEMPORARY ECONOMICS: LESSON 5.1

  5. Role of Profit • entrepreneurs are always eager to pursue their dreams b/c of profit. CONTEMPORARY ECONOMICS: LESSON 5.1

  6. Check for Understanding • Why are entrepreneurs willing to take risks?? • What are the risks??? CONTEMPORARY ECONOMICS: LESSON 5.1

  7. Supply • Supplyindicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant. CONTEMPORARY ECONOMICS: LESSON 5.1

  8. The law of supplysays that the quantity supplied is usually directly related to its price, other things constant. • If Price then Quantity Supplied • If Price then Quantity Supplied • 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. CONTEMPORARY ECONOMICS: LESSON 5.1

  9. Price Quantity Supplied per Pizza per Week (millions) $15 28 12 24 9 20 6 16 3 12 Supply Schedule CONTEMPORARY ECONOMICS: LESSON 5.1

  10. $15 S 12 9 Price per pizza 6 3 0 12 16 20 24 28 Millions of pizzas per week Supply Curve CONTEMPORARY ECONOMICS: LESSON 5.1

  11. 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. CONTEMPORARY ECONOMICS: LESSON 5.1

  12. 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. CONTEMPORARY ECONOMICS: LESSON 5.1

  13. More Able to Supply • A higher price makes producers more able to increase quantity supplied. CONTEMPORARY ECONOMICS: LESSON 5.1

  14. More Able to Supply • As the price declined, the quantity supplied declined. CONTEMPORARY ECONOMICS: LESSON 5.1

  15. More Able to Supply • In short, a higher price makes producers more willing and better able to increase quantity supplied. CONTEMPORARY ECONOMICS: LESSON 5.1

  16. Check for Understanding • What is the Law of Supply??? • When are producers more able and willing to supply? CONTEMPORARY ECONOMICS: LESSON 5.1

  17. Supply Vs. 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. CONTEMPORARY ECONOMICS: LESSON 5.1

  18. Individual Supply and Market Supply • Individual supply —the supply of an individual producer • Market supply —the supply of all producers in the market • Individual supply curves are summed across to get a market supply CONTEMPORARY ECONOMICS: LESSON 5.1

  19. Summing Individual Supply Curves to Find the Market Supply Curve CONTEMPORARY ECONOMICS: LESSON 5.1

  20. Elasticity of Supply • The elasticity of supply measures how responsive producers are to a price change. CONTEMPORARY ECONOMICS: LESSON 5.1

  21. % change in quantity supplied Elasticity of supply = % change in price Measurement • Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. CONTEMPORARY ECONOMICS: LESSON 5.1

  22. Categories of Supply Elasticity • Supply is elastic if more than 1.0 • Supply is unit elastic if = 1.0. • Supply is inelastic if less than 1.0. CONTEMPORARY ECONOMICS: LESSON 5.1

  23. 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. CONTEMPORARY ECONOMICS: LESSON 5.1

  24. S y S m S w Market Supply Becomes More Elastic Over Time $1.25 1.00 Price per gallon 0 100 200 300 Millions of gallons per day CONTEMPORARY ECONOMICS: LESSON 5.1

  25. Check for Understanding • What does the elasticity of Supply measure? • What is the formula? • So then, what determines Supply Elasticity? CONTEMPORARY ECONOMICS: LESSON 5.1

  26. CONTEMPORARY ECONOMICS: LESSON 5.1

  27. Exit Slip • What is the Law of Supply? • What does Elasticity of Demand measure? CONTEMPORARY ECONOMICS: LESSON 5.1

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