5.1 What Is Supply?

Objectives:
Understand the difference between the supply schedule and the supply curve. Explain how market supply curves are obtained.
Specify the reasons for a change in supply.

Economics and You

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.

Introduction
Supply - the amount of a product that would be offered for sale at all possible prices that could prevail in the market. Because the producer is receiving payment for the products, its no surprise that more will be offered at higher prices. Law of Supply - the principle that suppliers will normally offer more for sale at high prices and less at lower prices.

An Introduction to Supply
An individual supply curve shows how the quantity that a producer will make varies depending on the price that will prevail in the market. A market supply curve shows the quantities and prices that all producers will offer in the market for any given product or service.

The Supply Schedule

Figure 5.1

When the supply data is graphed, it forms a supply curve with an upward slope.

The Market Supply Curve

Figure 5.2

Discussion Question
How do you explain that prices and quantities move in the same direction in a supply schedule? Producers will produce high quantities at the highest prices and low quantities at the lowest prices.

Change in Quantity Supplied

A change in quantity supplied is the change in amount offered for sale in response to a change in price.

Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. If the price rises, the producer can step up production levels.

Discussion Question
What steps do you suppose a producer must go through in setting an introductory price for a product it brings to the market for the first time? Answers will vary but students may indicate that the producer must study the pricing system for similar products and risk that competing producers, in short order, will offer a like product at a lower price.

Change in Supply
A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.
Figure 5.3

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Change in Supply (cont.)

Factors that can cause a change in supply include: the cost of resources; productivity levels; technology;

taxes or the level of subsidies;

Expectations; government regulations.

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Discussion Question
Why does using new technology almost always increase supply?

It generally leads to greater efficiency, which lowers production costs, even though producers must initially train workers and adapt or create new production processes that accommodate the new technology.

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Elasticity of Supply
Supply is elastic when a small increase in price leads to a larger increase in output and supply.
Figure 5.4a

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Elasticity of Supply (cont.)

Supply is inelastic when a small increase in price cause little change in supply.
Figure 5.4b

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Elasticity of Supply (cont.)

Figure 5.4c

Supply is unit elastic when change in price causes a proportional change in supply.
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Elasticity of Supply (cont.)

Figure 5.4d

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Elasticity of Supply (cont.)

Determinants of supply elasticity are related to how quickly a producer can act when the change in price occurs. If adjusting production can be done quickly, the supply is elastic.

If production is complex and requires much advance planning, the supply is inelastic.
Another factor is substitution: if substituting for a given product is easy, the supply is elastic; if it is difficult to substitute, the supply is inelastic.
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Discussion Question
What is the difference between demand elasticity and supply elasticity? Both measure the way quantity (whether bought or produced) adjusts to a change in price.

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