Supply. Review and Applying the Principles (KEY) Chapter 5

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1 Supply Review and Applying the Principles (KEY) Chapter 5 Review Questions (complete this on your own) Identify a good that has an upwardsloping supply curve and identify a good that has a vertical supply curve. (Do not use the examples from the book, come up with your own) ANSWERS WILL VARY Three months ago the price of a good was $4, and the quantity supplied was 2 units. Today the price is $6, and the quantity supplied is 4 units. Did the quantity supplied rise because the price increased, or did the price rise because the quantity supplied increased (Which is the cause and which is the effect)? THE PRICE IS THE CAUSE, AND THE RESPONSE IN QUANTITY SUPPLIED IS THE EFFECT Suppose three McDonald s restaurants operate in your town, and each pays its employees $6 per hour. If McDonald s started paying $9 per hour to its employees, would more, fewer or the same number of people want to work for McDonald s, according to the law of supply? Explain your answer in economic terms. HERE THE LAW OF SUPPLY IS APPLIED TO THE PRICE OF LABOR AT McDONALD S. IF IT RISES FROM $6 TO $9 PER HOUR, THE LAW OF SUPPLY PREDICTS THAT MORE PEOPLE WILL WANT TO WORK AT McDONALD S Applying the Principles Supply (Chapter 5, Section 1) 76. The two conditions of supply are WILLINGNESS and ABILITY to produce and sell. 77. The law of supply says that as the price of a good increases, the quantity supplied of the good INCREASES. 78. The law of supply says that as the price of a good decreases, the quantity supplied of the good DECREASES. 79. According to the law of supply, price and quantity supplied move in the SAME direction. Supply Schedules and Supply Curves The law of supply can be represented in numbers using a supply schedule or it can be represented as a graph showing a supply curve.

2 Answer question 8 to illustrate the connection between a supply schedule and a supply curve. 8. Simon, an enthusiastic consumer of music downloads, has taken a keen interest in the industry. He has started his own company, Simon, Inc., which manufactures premium mp3 players. Use the supply shedule below to create asupply curve for Simon's company on the grid shown. Label the curve S 1. SUPPLY SCHEDULE FOR SIMON, INC. ($) (units) $1 2 $2 3 $3 4 $4 5 $5 6 $6 7 $7 8 Use the graph you created in question 8 to answer questions The supply curve shows that at a price of $3, Simon, Inc., will offer to sell 4 premium mp3 players, and at a price of $6, the company will offer to sell 7 premium mp3 players. 82. The company s selling behavior demonstrates the law of SUPPLY. 83. The change in production of Simon, Inc., at different prices is a change in QUANTITY SUPPLIED. All producers do not supply the same amount of a good. Some are willing and able to supply greater quantities than others are. Use the information in question 84 to compare the supply curves of two different companies for the same good. 84. Use the supply schedule below to create a supply curve for premium mp3 players for Carla, Inc. Draw the graph on the grid in question 8. Label the curve S 2. SUPPLY SCHEDULE FOR CARLA, INC. ($) Quantity supplied (units) $1 4 $2 5 $3 6 $4 7 $5 8 $6 9 $7 1,

3 To answer questions 85-89, use the graph in question 8, which now shows the supply curves for both Simon, Inc., and Carla, Inc. 85. The supply curve for Carla, Inc., (S 2 ) is to the RIGHT of the supply curve for Simon, Inc., (S 1 ). 86. For each of the listed prices, Carla, Inc., is willing and able to produce MORE premium mp3 players than Simon, Inc., is willing and able to produce. 87. At each of the possible quantities, Carla, Inc., is willing to accept a LOWER price than Simon, Inc., is willing to accept. 88. The supply curves you created on the grid in question 8 are FIRMS (INDIVIDUAL) supply curves. 89. Suppose Simon, Inc., and Carla, Inc., are the only suppliers of premium mp3 players. How would you create a market supply curve from the supply curves you drew on the grid in question 8? THE MARKET SUPPLY CURVE WOULD BE THE SUM OF THE TWO INDIVIDUAL SUPPLY CURVES. FOR EXAMPLE, THE MARKET SUPPLY CURVE WOULD CONTAIN THE POINT REPRESENTING A PRICE OF $1 AND A QUANTITY SUPPLIED OF 6 UNITS (2 UNITS FROM SIMON, INC + 4 UNITS FROM CARLA, INC) Vertical Supply Curves As shown in the figure to the right, a supply curve is vertical when the quantity supplied cannot increase regardless of the price. For instance, the number of tickets available for this season's Super Bowl is finite because the stadium has a fixed number of seats. A vertical supply curve illustrates that at any price, the quantity supplied remains the same. 9. List three other goods that would have vertical supply curves. ANSWERS WILL VARY S 1

4 Review Questions (complete this on your own) Identify what happens to a given supply curve as a result of each of the following Resources prices fall: SHIFTS TO THE RIGHT Technology advances: SHIFTS TO THE RIGHT In each of the following cases, identify whether the supply of the good is elastic, inelastic, or unit-elastic The price of books increases from 1% and the quantity supplied of books increases 14% ELASTIC What factor(s) cause(s) movement along a supply curve? PRICE IS THE FACTOR THAT CAUSES MOVEMENT ALONG A SUPPLY CURVE A quota is repealed: SHIFTS TO THE RIGHT A tax on the production of a good is repealed: SHIFTS TO THE RIGHT The price of bread increases 2% and the quantity supplied of bread increases 2%. UNIT-ELASTIC The price of telephones decrease 6% and the quantity supplied of telephones decreases 8%. ELASTIC Applying the Principles The Supply Curve Shifts (Chapter 5, Section 2) 91. If supply increases, the supply curve shifts RIGHT (right or left), meaning that sellers want to sell MORE (more or less) of a good at each and every price. 92. If supply decreases, the supply curve shifts LEFT (right or left), meaning that sellers want to sell LESS (more or less) of a good at each and every price. In questions 93-1, The factors that cause supply curves to shift are listed. For each factor, fill in the blanks to describe how the factor affects the supply of a good (whether the factor causes supply to rise or to fall). 93. Factor: Resource s If resources prices fall, supply RISES (rises of falls) and the supply curve shifts to the RIGHT (right or left). If resources prices rise, supply FALLS (rises or falls) and the supply curve shifts to the LEFT (right or left). 94. Factor: Technology Advancements in technology reduce per-unit costs. Supply RISES (rises or falls) and the supply curve shifts to the RIGHT (right or left).

5 95. Factor: Taxes Higher taxes make production more expensive so supply FALLS (rises or falls) and the supply curve shifts to the LEFT (right or left). Lower taxes shift the supply curve to the RIGHT (right or left). 96. Factor: Subsidies Subsidies make production less expensive so supply RISES (rises or falls) and the supply curve shifts to the RIGHT (right or left). If a subsidy is removed, the supply curve shifts to the LEFT (right or left). 97. Factor: Quotas Quotas DECREASE (increase or decrease) supply and shift the supply curve to the LEFT (right or left). If a quota is eliminated, the supply curve shifts to the RIGHT (right or left). 98. Factor: Number of Sellers If the number of sellers increases, supply RISES (rises of falls) and the supply curve shifts to the RIGHT (right or left). If the number of sellers decrease, supply FALLS (rises or falls) and the supply curve shifts to the LEFT (right or left). 99. Factor: Future If sellers expect the price of a good to rise in the future, they may withhold the good from the market and wait to get the higher price. In this case, supply FALLS (rises or falls) and the supply curve shifts to the LEFT (right or left). If sellers expect the price of a good to fall in the future, they may supply more of the good now to get the higher price. In this case, supply RISES (rises or falls) and the supply curve shifts to the RIGHT (right or left). 1. Factor: Weather Bad weather can reduce the supply of agricultural goods and the supply curve shifts to the LEFT (right or left). Good weather can increase the supply of agricultural goods and the supply curve shifts to the RIGHT (right or left). Supply is not the same as quantity supplied. Answer questions on the lines provided. 11. What will cause a change in the supply of a good? RESOURCE PRICES TECHNOLOGY TAXES SUBSIDIES QUOTAS NUMBER OF SELLERS FUTURE PRICE WEATHER 12. What will cause a change in the quantity supplied of a good? A CHANGE IN THE PRICE 13. How is a change in supply represented on a graph? THE ENTIRE CURVE SHIFTS TO THE RIGHT OR LEFT 14. How is a change in quantity supplied represented on a graph? MOVEMENT ALONG THE CURVE

6 In questions , fill in the blanks to describe how each event will affect the country's total supply of corn and then graph the result. 15. The U.S. government increases the subsidy for corn production. Will the supply of corn increase, decrease, or stay the same? INCREASE In which direction will the supply curve shift? RIGHT Which of the eight factors causes the shift? SUBSIDIES 16. A major drought destroys crops in America's heartland. Which of the eight factors causes the shift? WEATHER 17. The price of fuel used in farm machinery increases to a new high. Which of the eight factors causes the shift? RESOURCE PRICES 18. The U.S. government places a quota on all imported farm products. Which of the eight factors causes the shift? QUOTAS 19. A newly developed seed increases the corn yield. Will the supply of corn increase, decrease, or stay the same? INCREASE In which direction will the supply curve shift? RIGHT Which of the eight factors causes the shift? TECHNOLOGY 11. As property values rise, many farm fields are turned into housing developments and shopping malls. Which of the eight factors causes the shift? NUMBER OF SELLERS

7 111. The U.S. government gives farmers a tax cut by allowing them to deduct most expenses. Will the supply of corn increase, decrease, or stay the same? INCREASE In which direction will the supply curve shift? RIGHT Which of the eight factors causes the shift? TAXES 112. Corn prices are expected to rise next month as more ethanol refineries start production. Which of the eight factors causes the shift? FUTURE PRICE 113. Chocolate-covered corn on a stick becomes a new fad at state fairs. Will the supply of corn increase, decrease, or stay the same? STAY THE SAME In which direction will the supply curve shift? SUPPLY WILL NOT CHANGE Which of the eight factors causes the shift? PREFERENCES (DEMAND, NOT SUPPLY) Elasticity of Supply Elasticity of supply is a measure of how much the quantity supplied of a good rises or falls owing to a change in the price of the good When quantity supplied changes by a larger percentage than price, supply is ELASTIC When quantity supplied changes by a smaller percentage than price, supply is INELASTIC When quantity supplied changes by the same percentage as price, supply is UNIT-ELASTIC. Elasticity Versus Inelasticity In each of the cases described in questions , identify whether the supply of the good is elastic, inelastic, or unit-elastic. ELASTICITY = % Change in % Change in 117. UNIT-ELASTIC The price of textbooks increases by 2 percent, and the quantity supplied of textbooks rises 2 percent INELASTIC The price of jeans increases by 5 percent, and the quantity supplied of jeans increases by 3 percent ELASTIC The price of televisions increases by 15 percent, and the quantity supplied of televisions increases by 25 percent.

8 In questions 12 and 121, use your understanding of elasticity of supply to decide whether the graph shows a good with elastic supply or a good with inelastic supply. 12. INELASTIC 121. ELASTIC