ECONOMICS TOPIC 3 LESSON 4

ECONOMICS TOPIC 3 LESSON 4

Fundementals of Supply

ESSENTIAL QUESTION

How do we affect the economy?

The Effect of Price on Supply

Just as the relationship between price and demand is governed by basic economic law, supply and price are directly linked. We will now explore the ways in which changes in price affect supply.

Suppliers Follow the Law of Supply

Supply is the amount of a good or service that is available.

According to the law of supply, producers offer more of a good or service as its price increases and less as its price falls.

Economists use the term quantity supplied to describe how much of a good or service a producer is willing and able to sell at a specific price.

The Effect of Price on Production

If a firm is already earning a profit by selling a good or service, then an increase in the price—ceteris paribus—will increase the firm’s profits. The promise of higher revenues generated by each sale encourages the firm to produce more. 

Open Ended

The price of a good determines how much of that good a supplier will provide. Contrast How is the law of supply different from the law of demand?

The Effect of Price on Number of Suppliers

One of the benefits of the economic system of the United States, with its emphasis on free markets, is that markets are open to new suppliers. Entrepreneurs can enter growing markets to respond to these trends as long as they can assemble the needed factors of production and are willing to take the risk.

Multiple Choice

Generate Explanations Which factor causes firms to increase production when the price of a good or service goes up?

• desire for profits

• increase in demand

• need to unload inventory

• reduction in costs

Understanding Supply Schedules

Similar to a demand schedule, a supply schedule shows the relationship between price and quantity supplied for a specific good or service, or how much of a good or service a supplier will offer at various prices. 

Changes in the Quantity Supplied

Economists use the word supply to refer to the relationship between price and quantity supplied, as shown in the supply schedule. 

Open Ended

This schedule shows how many slices one pizzeria owner will supply at different prices. Analyze Charts What would you expect from this pizzeria if prices rose to $7 a slice?

All Suppliers and the Market Supply Schedule

All of the supply schedules of individual firms in a market can be added up to create a market supply schedule. A market supply schedule shows the relationship between prices and the total quantity supplied by all firms in a particular market. 

The Supply Graph

When we graph the data points in the supply schedule, we create a supply graph—also known as a supply curve. A supply curve is a graphic representation of a supply schedule. A supply curve is very similar to a demand curve, except that the horizontal axis now measures the quantity of the good supplied, not the quantity demanded. 

Open Ended

Analyze Graphs a. How much pizza will the individual pizzeria supply per day at $3 a slice? b. How much pizza will the market supply each day at $4 a slice?

Multiple Choice

Check Understanding Which variables does a supply schedule show?

• quantity demanded and price

• quantity demanded and quantity supplied

• quantity supplied and price

• quantity supplied by individual firms and the market

Elasticity of Supply

measures how firms will respond to changes in the price of a good or service.

Elasticity of Supply Over a Short Time

An orange grove is one example of a business that has difficulty adjusting to a change in price in the short term. Orange trees take several years to mature and grow fruit. If the price of oranges goes up, an orange grower can buy and plant more trees, but he will have to wait several years for this investment to pay off. 

Elasticity of Supply Over a Longer Time

Like demand, supply becomes more elastic over time. The orange grower could not increase his output much when the price of oranges rose, but he can plant more trees to increase his supply over time. After several years, he will be able to sell more oranges at the higher price.

Open Ended

Apply Concepts How is a business that is highly elastic respond to a drop in prices?

Multiple Choice

Compare and Contrast Which of the following explains why firms differ in elasticity of supply in the short term?

• quality of decision-making

• ease of changing quantity supplied quickly

• inability to understand the law of supply

• changes in market demand

Open Ended

How do we affect the economy?