Supply. Economics Chapter 5 Outline

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1 Supply Economics Chapter 5 Outline Section 1 I. What Is Supply? Supply refers to the willingness and of sellers to produce and offer to sell as a good. II. III. IV. What Does the Law of Supply Say? The law of supply says that as the price of a good, the quantity supplied of the good, and as price of a good decreases, the quantity supplied of the good decreases. and quantity supplied move in the same direction, or have a(n) relationship. Quantity refers to the number of units of a good produced and offered for sale at a specific price. The Law of Supply in Numbers and Pictures A supply is a numerical chart showing the law of supply. A supply is a graphical representation of the law of supply. A Vertical Supply Curve The law of supply does not hold for goods that can no longer be produced. The supply curve for this type of good is. What two examples did the book use to explain this concept? The does not hold when there is no time to produce more of a good. The supply curve for this type of good is vertical. V. A Firm s Supply Curve and a Market Supply Curve A(n) supply curve is the supply curve for a particular firm. A(n) supply curve is the sum of all firm s supply curves. Review Questions 1. Identify a good that has an upward-sloping 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) 2. 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)? 3. 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.

2 Applying the Principles Supply (Chapter 5, Section 1) 1. The two conditions of supply are and to produce and sell. 2. The law of supply says that as the price of a good increases, the quantity supplied of the good. 3. The law of supply says that as the price of a good decreases, the quantity supplied of the good. 4. According to the law of supply, price and quantity supplied move in the 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. Answer question 8 to illustrate the connection between a supply schedule and a supply curve. 5. 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 premium mp3 players, and at a price of $6, the company will offer to sell premium mp3 players. 7. The company s selling behavior demonstrates the law of. 8. The change in production of Simon, Inc., at different prices is a change in.

3 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 9 to compare the supply curves of two different companies for the same good. 9. 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 5. 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, To answer questions 1-14, use the graph in question 8, which now shows the supply curves for both Simon, Inc., and Carla, Inc. 1. The supply curve for Carla, Inc., (S 2) is to the of the supply curve for Simon, Inc., (). 11. For each of the listed prices, Carla, Inc., is willing and able to produce (more or less) premium mp3 players than Simon, Inc., is willing and able to produce. 12. At each of the possible quantities, Carla, Inc., is willing to accept a (higher or lower) price than Simon, Inc., is willing to accept. 13. The supply curves you created on the grid in question 5 are supply curves. 14. 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 5? 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. 15. List three other goods that would have vertical supply curves. S 1

4 Section 2 I. When Supply Changes, the Curve Shifts A rightward shift means that supply has. A leftward shift means that supply has. II. What Factors Cause Demand Curves to Shift? Resource s o A decrease in a resource price increases supply. The supply curve shifts to the. o An increase in a resource price decreases supply. The supply curve shifts to the. Technology o is the body of skills and knowledge concerning the use of resources in production. o The ability to produce more output with a fixed amount of resources is a(n). o is the average cost of a good. o An advancement in technology increases supply. The supply curve shifts to the right. Taxes o An increase in decreases supply. The supply curve shifts to the left. o If a tax is, the supply curve will shift back to the right. Subsidies o Financial made by for certain actions o An increase in increases supply. The supply curve shifts to the right. o If a subsidy is, the supply curve will shift back to the left. Quotas o A legal limit on the number of units of a foreign-produced good (or import) that can enter a country is a(n). o A quota supply. The supply curve shifts to the left. o If a(n) is eliminated, the supply curve will shift back to the right. Number of Sellers o An increase in the number of sellers increases supply, and the supply curve shifts to the right. o A decrease in the number of sellers decreases supply, and the supply curve shifts to the left. Future o It is difficult for producers to keep their goods out of the market and wait for prices to rise if the goods are (eggs, fruits, vegetables, etc.) because they will go bad, or spoil, before the price increase. Weather (in some cases) o Bad weather may decrease the supply of some products. Unusually good weather can increase supply. o Bad weather, such as hurricanes, can also affect the supply of products. III. What Factor Causes a Change in? The only factor that can cause a change in the quantity supplied of a good is a change in the of the good. A change in supplied is shown as a movement along a given supply curve.

5 IV. Elasticity of Supply Elasticity of supply is the relationship between the percentage change in quantity supplied and the percentage change in. o supply exists when the percentage change in quantity supplied (the numerator) is greater than the percentage change in price (the denominator). o supply exists when the percentage change in quantity supplied (the numerator) is less than the percentage change in price (the denominator). o supply exists when the percentage change in quantity supplied (the numerator) is the same as the percentage change in price (the denominator). Review Questions 1. Identify what happens to a given supply curve as a result of each of the following Resource prices fall: Technology advances: A quota is repealed: A tax on the production of a good is repealed: 2. In each of the following cases, identify whether the supply of the good is elastic, inelastic or unit-elastic. The price of books increases 1% and the quantity supplied of books increases 14%. The price of bread increases 2% and the quantity supplied of bread increases 2%. The price of telephones decrease 6% and the quantity supplied of telephones decreases 8%. 3. What factors cause movement along a supply curve? ************************************************************************************************************

6 Applying the Principles The Supply Curve Shifts (Chapter 5, Section 2) 16. If supply increases, the supply curve shifts (right or left), meaning that sellers want to sell (more or less) of a good at each and every price. 17. If supply decreases, the supply curve shifts (right or left), meaning that sellers want to sell (more or less) of a good at each and every price. In questions 18-25, 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). 18. Factor: Resource s If resources prices fall, supply (rises of falls) and the supply curve shifts to the (right or left). If resources prices rise, supply (rises or falls) and the supply curve shifts to the (right or left). 19. Factor: Technology Advancements in technology reduce per-unit costs. Supply (rises or falls) and the supply curve shifts to the (right or left). 2. Factor: Taxes Higher taxes make production more expensive so supply (rises or falls) and the supply curve shifts to the (right or left). Lower taxes shift the supply curve to the (right or left). 21. Factor: Subsidies Subsidies make production less expensive so supply (rises or falls) and the supply curve shifts to the (right or left). If a subsidy is removed, the supply curve shifts to the (right or left). 22. Factor: Quotas Quotas (increase or decrease) supply and shift the supply curve to the (right or left). If a quota is eliminated, the supply curve shifts to the (right or left). 23. Factor: Number of Sellers If the number of sellers increases, supply (rises of falls) and the supply curve shifts to the (right or left). If the number of sellers decrease, supply (rises or falls) and the supply curve shifts to the (right or left). 24. 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 (rises or falls) and the supply curve shifts to the (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 or falls) and the supply curve shifts to the (right or left).

7 25. Factor: Weather Bad weather can reduce the supply of agricultural goods and the supply curve shifts to the (right or left). Good weather can increase the supply of agricultural goods and the supply curve shifts to the (right or left). Supply is not the same as quantity supplied. Answer questions on the lines provided. 26. What will cause a change in the supply of a good? 27. What will cause a change in the quantity supplied of a good? 28. How is a change in supply represented on a graph? 29. How is a change in quantity supplied represented on a graph? In questions 36-43, fill in the blanks to describe how each event will affect the country's total supply of corn and then graph the result. 3. The U.S. government increases the subsidy for corn production. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 31. A major drought destroys crops in America's heartland. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 32. The price of fuel used in farm machinery increases to a new high. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 33. The U.S. government places a quota on all imported farm products. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 34. A newly developed seed increases the corn yield. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift?

8 35. As property values rise, many farm fields are turned into housing developments and shopping malls. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 36. 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? Which of the eight factors causes the shift? 37. Corn prices are expected to rise next month as more ethanol refineries start production. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 38. Chocolate-covered corn on a stick becomes a new fad at state fairs. Will the supply of corn increase, decrease, or stay the same? Which of the eight factors causes the shift? 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. 39. When quantity supplied changes by a larger percentage than price, supply is. 4. When quantity supplied changes by a smaller percentage than price, supply is. 41. When quantity supplied changes by the same percentage as price, supply is. Elasticity Versus Inelasticity In each of the cases described in questions 48-5, identify whether the supply of the good is elastic, inelastic, or unit-elastic. ELASTICITY = % Change in % Change in 48. The price of textbooks increases by 2 percent, and the quantity supplied of textbooks rises 2 percent. 49. The price of jeans increases by 5 percent, and the quantity supplied of jeans increases by 3 percent. 5. The price of televisions increases by 15 percent, and the quantity supplied of televisions increases by 25 percent.

9 In questions 51 and 52, use your understanding of elasticity of supply to decide whether the graph shows a good with elastic supply or a good with inelastic supply Write your answers to questions 53 and 54 in the space provided. 53. The supply of some goods, such as houses, increases at a slow pace. Do you think the supply of houses is more elastic in the short run or in the long run? Explain. 54. Will the supply curve for most goods become more vertical or more horizontal as time passes? Explain.