Supply and Demand Michael Powell, All Rights Reserved

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April Perkins
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The law of supply says that when the price of a good or service rises, the producer (the business) will want to make or produce more of that good.

1 Supply and Demand We have learnt that demand is the amount of a good or service consumers are willing to buy. The opposite of demand is supply. Supply is how much of a good or service a producer (a business) is able and willing to make for sale to consumers. The law of supply says that when the price of a good or service rises, the producer (the business) will want to make or produce more of that good. Why would a producer want to make more of something when prices rise? Profit! The higher the price a producer can sell a good for, the higher the profit they will most likely earn. Hence, the business will want to make more of that good. Profit serves as an incentive (encouragement); it encourages a business to produce more of a good as prices rise. The bigger opportunity to make more profit, the more incentive a company has to figure out how to make more of something. However, if the price of a good falls or decreases, there is less of an incentive to make more of it. A business can t survive if they are not making a profit. Therefore, the law of supply also states that as a price of a good or service falls, producer will make less of it. Answer each question with a complete sentence on a separate piece of paper. 1. What is the opposite of demand? 2. What does supply mean? 3. What does the law of supply say? 4. Why does a producer (a business) want to make more of a good when prices rise? 5. What does profit serve as for a business? 6. The bigger the opportunity for a business to make more profit, will lead to what? 7. If the price of a good decreases, what happens with the incentive to produce the good?

Farmers serve as a great example of how the law of supply works.

However, if the price of tomatoes goes up to $10 a basket, the farmer now has an incentive to make more money (profit).

To do this, he may worker harder, work more hours, use more land to grow more tomatoes, hire help, or even buy better equipment. But, what if the price for a basket of tomatoes falls to $3.

2 Farmers serve as a great example of how the law of supply works. For instance, if a farmer is able sell his tomatoes for $5 dollars a basket, he would be willing to work his land to produce 100 baskets. However, if the price of tomatoes goes up to $10 a basket, the farmer now has an incentive to make more money (profit). Therefore, he will try and figure a way to produce even more tomatoes, more than the 100 baskets. To do this, he may worker harder, work more hours, use more land to grow more tomatoes, hire help, or even buy better equipment. But, what if the price for a basket of tomatoes falls to $3.00 a basket? The farmer will now decide to decrease the production of tomatoes because there is a lack of an incentive to grow so many. He may even begin to grow another crop that is more profitable. 8. Who serves as a great example of how the law of supply works? 9. If the price of tomatoes increases, what will the farmer decide to do? a. Why would he do this? 10.What might the farmer do in order to be able to produce more tomatoes? 11.What would the farmer decide to do if the price of tomatoes drops? a. Why would he do this?

Just like demand, supply can also be shown in a chart and graph. Below is a supply curve schedule for Ipads and supply curve graph. Supply Schedule for Ipads Price for one Ipad.

3 Just like demand, supply can also be shown in a chart and graph. Below is a supply curve schedule for Ipads and supply curve graph. Supply Schedule for Ipads Price for one Ipad. The amount (quantity) of Ipads supplied. $ = is the amount the business (Apple) will be willing to make and supply. $ $ $ Looking at the supply curve graph above, you can see that as the price of an Ipad increases, the business is willing to supply more of them. At $1000 per Ipad, the business is willing to supply 25 Ipads. 12. What is the CHART called that shows the supply of Ipads depending on their price? 13. What is the graph called that shows the quantity of Ipads that Apple is willing to supply at a certain price. 14. If the price for Ipads decreases to $400 dollars each, how many will Apple be willing to supply? 15. As the price for Ipads increase, what is Apple going to do with supply?

4 Supply Curve Shift Price is not the only factor that influences the amount of a good that a producer is willing to make. There are several other factors that change how much of a good a business will supply. The Cost of Production The cost of production of a good is one of the most important things that can affect supply. The cost of production is how much it costs to make something. When It Cost More to Make a Good: If the cost of any of the resources, such as labor or materials, that it takes to make a good increase, it will cost the business more to produce it. When it cost a business more to make a good, its profits decrease. This decrease in profits causes the business to make less of the good; it will decrease supply. Therefore, anytime the cost of production of a good increases, a business will most often decide to decrease the supply. When it Cost Less to Make a Good: Sometimes, the cost of production of a good can decrease or become cheaper. If it cost less to make something, then a business will want to make more of that good. Often, a lower cost to make something means bigger profits. And as we have learned, a potential of making more profit encourages a producer to increase supply. Answer each question with a complete sentence on a separate piece of paper. 1. Beside price, what is one of the most important factors that can affect supply? 2. What does the cost of production mean? 3. What does an increase in the cost of production do to profits? 4. A decrease in profit will lead a business to do what with supply? 5. An increase in the cost of production of a good, will lead a business to do what with supply? 6. What does a lower cost to make a good mean for a business? 7. What will a decrease in the cost of production cause a business to do with supply?

5 Supply Curve Shift New Technology The introduction of new technology can also affect the amount of supply a business will produce. The use of new technology will almost always lower the cost to make something. And as mentioned before, the lower the cost to make something, the bigger the profit will be for a business. As we already know, businesses love bigger profits; it is their incentive to increase supply. Tax and Subsidies If the government imposes a tax on a business, then it will increase the cost of production for them. And, as we have learned an increase in the cost to make something, decreases profit for a business and leads them to decrease supply. Sometimes, the government decides to provide a subsidy to a business. A subsidy is extra money or a grant given to a business. The subsidy serves as an incentive for a business to increase supply. Competition Businesses compete with each other in the market. The number of businesses competing to make a type of good will affect the amount of a good supplied. More competition leads to an increase in supply. However, when there is less competition or no competition, there is a decrease in supply. 8. What does new technology almost always do? 9. If new technology lowers the cost of a good, what will occur with supply? 10. If the government taxes a business, what happens with the business s cost to produce a good? 11. A tax on a business, will cause what with supply? 12. What is a subsidy? 13. How will a subsidy affect supply? 14. When it comes to competition, the number of what will affect supply of a good? 15. What would more competition do to supply? 16. What would less competition do to supply?

Key Factors that Change Supply and Shift the Supply Curve Line Factors that cause an decrease Factors that cause an increase in in supply (line shifts to left) supply (line shifts to the right) Cost

the supply curve line to shift. If one of the factors causes an increase in supply, the supply curve will shift to the right. If there is a decrease in supply, the line will shift to the left. 17.

6 Key Factors that Change Supply and Shift the Supply Curve Line Factors that cause an decrease Factors that cause an increase in in supply (line shifts to left) supply (line shifts to the right) Cost of production increases taxes Less competition Cost of production decreases Subsidies More competition New technology Supply Curve Shift One or more of the factors that can change supply will cause the supply curve line to shift. If one of the factors causes an increase in supply, the supply curve will shift to the right. If there is a decrease in supply, the line will shift to the left. 17. What do these important factors that can change supply cause the supply curve to do? 18. If there is an increase in supply, which direction does the supply curve shift? 19. If there is a decrease in supply, which direction does the supply curve shift? 20. If the cost of production increases, will there be a decrease or increase in supply? a. In which direction will the supply curve shift? 21. In which direction would higher taxes on a business cause the supply curve to shift? a. Would there be a decrease or increase in supply? 22. In which direction will more competition shift the supply curve? 23. How would new technology for a business change supply? a. In which direction would it shift the supply curve?

7 Name Per. Date: Supply Curve Graph Directions: Use the supply schedule below to graph a supply curve for Steve s Farm Tomatoes in the blank graph provided and answer the related questions. Supply Schedule for Steve s Farm Tomatoes Price for One Basket of Tomatoes The Amount (Quantity) of Baskets of Tomatoes Supplied. $ 4 10 $ 6 40 $ $

8 Supply Curve Graph Using the supply graph you have created and what you have learned, answer each of the questions below. 1. If the price for a basket of tomatoes is $6, how many baskets will Steve s Farm supply? 2. As the price for tomatoes increases, what occurs with Steve s Farm willingness to supply them? 3. If the price for a basket of tomatoes is $10, how many baskets will Steve s Farm supply? 4. As the price for tomatoes decreases, what will occur with Steve s Farm willingness to supply tomatoes? 5. If prices for tomatoes falls to $2 a basket, what will Steve s Farm most likely decide to do? 6. When Steve s Farm decides to increase supply because of a major price increase, how might the farm increase its production?

Famous Jake s Donuts in the blank graph provided and answer the related questions.

(Quantity) of Donuts Supplied If the price for one donut is $1 5 = is the amount

9 Name Per. Date: Directions: Using the supply schedule below, graph a supply curve for Famous Jake s Donuts in the blank graph provided and answer the related questions. Supply Schedule for Famous Jak s Donuts Price for One of Jake s Donuts The Amount (Quantity) of Donuts Supplied If the price for one donut is $1 5 = is the amount of donuts Jak s is able and willing to make. $2 10 $3 15 $4 20 $5 40 Supply Curve Famous Jake s Donuts Quantity Supplied The amount of donuts Jak s will supply.

10 Using the supply graph you have created and what you have learned, answer each of the questions below. 1. If the price for a Famous Jak s donut is $1.00, what would be the amount of donuts Jake s would be willing to supply or make? 2. What if the price for a donut is $3.00, how many would Jak s be willing to supply? 3. What if the price for a donut is $5.00, how many would Jak s be willing to supply? 4. As the price for a donut increases, what happens with the amount Jak s is willing to supply? 5. As the price for a donut decrease, what happens with the amount Jak s is willing to supply? 6. If the price for a donut was only 20 cents, how many do you think Jak s would be willing to supply?

11 Name Per. Date: Directions: Using the following supply schedule, create a supply curve graph. Make sure to label all parts of the graph and answer related questions. Supply Schedule for Little John s Burgers Price for One of Little John s Burgers The Amount (Quantity) of Burgers Supplied. $ 4 10 $ 6 15 $ 8 25 $ $ 12 40

12 Using the supply graph and what you have learned, answer each of the questions below 1. As the price of John s burgers increases, what happens with the supply? 2. What happens with the supply of burgers, if the price drops? 3. If there was an increase the production cost of making a burger, what would occur with the amount supplied? a. Would this change cause the supply curve to shift to the right or left? 4. What would happen to the supply of burgers in the city, if three more burger restaurants opened up by Little John s Burgers? a. Would this change cause the supply curve to shift to the left or right? 5. What if the government decided to place a high tax on all restaurants that serve burgers, what would happen with supply? a. Would this cause the supply curve to shift to the right or left? 6. What would occur with the supply of burgers, if Little John s bought some new technology that made his burgers cheaper and faster? a. Which way would the supply curve shift?

13 Name Per. Date: Supply Curve Shift Label the different parts of the supply curve below. Increase in supply Decrease in supply Quantity of Ipads Supplied Price of Ipads Complete the chart below using each one of these terms: Taxes Subsidies Decreases in the Cost of production Technology Line shifts to the right Decrease in competition Key Factors that Change Supply and Shift the Supply Curve Line Factors that cause an decrease Factors that cause an increase in in supply (line shifts to left) supply (4. ) Increase in the Cost of production Increase in competition 6.

14 Name Per. Date: 1.Supply is a. how much consumers are willing to buy. b. how much a producer (a business) is able and willing to make for sale to consumers. c. the goods that are left over after a sale. d. All of the above. 2.The law of supply says a. A producer (a business) will supply less as prices of a good increases. b. A producer will supply more as prices of a good decrease. c. A producer will supply more as prices of a good increase. d. None of the above. 3.For businesses, profit serves as a. a discouragement to supply more of a good. b. an incentive to supply more of a good. c. an encouragement to make less of a good when prices increase. d. None of the above. 4.Beside price, what is one of the most important factors that can affect supply? a. Cost of production b. Government c. Weather d. None of the above 5.When the cost of production increases for a good, it will lead to an a. increase in supply. b. increase in profit. c. decrease in supply d. none of the above. 6.If the government imposes a tax on a business, the business will most likely a. increase supply. b. refuse to pay the tax. c. decrease supply. d. do nothing with supply. 7.If the government provides a subsidy (a grant/free money) to a business, it will most likely a. increase supply. b. refuse the subsidy. c. decrease supply. d. do nothing with supply. 8.An increase in competition, will lead to a a. a decrease in supply. b. an increase in supply c. No change in supply d. All of the above.

15 Assessment 9.The cost of production, taxes, competition, subsidies, new technologies can cause a. the supply curve line to disappear. b. the supply curve line to shift to the right or left. c. no change in the supply curve line. d. All of the above. 10. The use of new technology by a business, will usually lead to a. a decrease in supply and shift the supply curve to the left. b. an increase in supply and shift the supply curve to the left. c. an increase in supply and shift the supply curve to the right. d. None of the above. Subsidy Incentive The Law of Supply Producers Supply Curve Shift Supply 11. something that motives or encourages. 12. when the price of a good or service rises, the producer will want to make or produce more of it. 13. extra money or a grant given to a business. 14. a business that makes a good or service. 15. when the supply curve line shifts to the right or left. 16. the amount a producer is able and willing to make. True and False 17. The greater opportunity to make profit, the more incentive a company has to figure out how to make more of something. 18. If the price for sale of a good falls or decreases then there is more of an incentive to make more of it. 19 When is cost less for business to make a good, it will increase supply. 20. The use of new technology will almost always increase the cost to make something.

to the right to create a supply curve graph. Make sure to label all parts of the graph.

16 Assessment Label the different parts of the supply curve below. Increase in supply Decrease in supply Quantity of Ipads Supplied Price of Ipads Use the supply schedule to the right to create a supply curve graph. Make sure to label all parts of the graph. Supply Schedule for Cindy s Farm Tomatoes Price for One The Amount Basket of (Quantity) of Tomatoes Baskets of Tomatoes Supplied. $ 4 10 $ 6 20 $ 8 60 $ 10 80

17 Answer Key 1. B 2. C 3. B 4. A 5. C 6. C 7. A 8.B 9. B 10. C 11. Incentive 12. The Law of Supply 13. Subsidy 14. Producer 15. Supply Curve Shift 16. Supply 17. True 18. False 19. True 20. False

Objective: What is the law of supply? What are supply schedules and supply curves? What is elasticity of supply?

Understanding Supply Objective: What is the law of supply? What are supply schedules and supply curves? What is elasticity of supply? *Be sure to leave a couple blank lines under each question and answer