CHAPTER 4
Supply
SECTION 1: Nature of Supply
SECTION 2: Changes in Supply
SECTION 3: Making Production Decisions
1
SECTION 1
Nature of Supply
Objectives:
 What is the difference between supply and
quantity supplied?
 What does the law of supply state?
 What do supply schedules and supply curves
illustrate?
 What is supply elasticity?
2
SECTION 1
Nature of Supply
Law of supply:
 More goods and services are supplied when
they can be sold at higher prices, and fewer
goods and services are supplied when they
must be sold at lower prices.
P
3
Qs
S
3.00
P
r
i
c
e
2.00
1.00
2000
4000
6000
8000
10000
Quantity
4
12000
14000
SECTION 1
Nature of Supply
Difference between supply and
quantity supplied:
 supply—quantity of goods and services that
producers are willing and able to offer at
various prices during a given time period
5
Difference between supply and
quantity supplied:
 quantity supplied—the amount of a good or
service that producers are willing to supply
at each particular price
 Only caused by a change in price!!
6
SECTION 1
Nature of Supply
What supply schedules illustrate:
 Supply schedule—the
quantity of a product
that a producer is
willing to supply at
various prices
7
Price
1.00
Quantity
Supplied
4,000
2.00
9,500
3.00
14,500
Graph of Supply Schedule
S
3.00
P
r What Supply Curves Illustrate:

Supply
curve
i
 graphs the data shown in supply schedules
c
e
2.00
1.00
2000
4000
6000
8000
10000
Quantity
8
12000
14000
Creating Supply Graphs
1. Draw the appropriate Supply Curve for
each Supply Schedule.
9
#1
Supply for gasoline in one week period.
Quantity in gallons
Price
Q-Supplied
4.00
50000 gal
3.95
45000 gal
3.90
40000 gal
3.85
35000 gal
3.80
30000 gal
3.75
25000 gal
10
#2
Supply for Pepsi sold at Quick Stop
in one day.
Quantity in cups of Pepsi.
Price
Q-Supplied
1.75
1.70
1.65
1.60
1.55
1.50
11
75
70
45
30
15
7
#3
Supply for music CDs in one year.
Price
Q-Supplied
$25.00
30000
$23.00
27000
$20.00
25000
$18.00
15000
$15.00
12000
$10.00
10000
12
SECTION 2
Changes in Supply
Objectives:
 What does it mean for a product’s supply to
shift?
 What determinants might cause a product’s
supply curve to shift?
 How does a tax differ from a subsidy?
13
SECTION 2
Changes in Supply
When a product’s supply shifts,
different quantities of products are
supplied at every possible price.
14
S1
P
r
i
c
e
S2
Quantity
15
SECTION 2
Changes in Supply
Determinants of product supply
shifts:






resource prices
technology
competition
prices of related goods
producer expectations
government tools
 Subsidies
 Taxes
 Regulations
16
SECTION 2
Changes in Supply
Difference between a tax and a
subsidy:
 tax—required payment to the government
 subsidy—payment to private businesses by
the government
17
Headlines:
 For each Headline:
1. Determine what direction the Supply Curve will
move.
2. Determine which determinant of Supply is
making the curve move.
3. Draw the graph.
18
Product: Hot Dogs
 Price of Beef Sky Rockets
Direction? ________________
Shift to the Left
Determinant? ________________
Resource Prices
Draw Graph:
19
S2
P
r
i
c
e
Quantity
20
S1
Product: Hershey Chocolate
 Halloween is Next Week!!!!
Shift?________
Det._________
Graph:
21
Product: Headphones
 iPods to go on Sale Tomorrow
Shift?________
Det._________
Graph:
22
Product: Televisions
 New Television Producer Hopes to Make
Splash With New Slim LCD T.V.
Shift?________
Det._________
Graph:
23
Product: Bananas
 To Keep Costs low, the Government Will
Give Subsidy to Banana Farmers Next Year
Shift?________
Det._________
Graph:
24
Product: Come up with your own
 Headline: Come up with your own.
 Trade with the person in-front of/behind you.
25
Nature of Supply
Supply elasticity indicates the extent
to which price changes affect the
quantity supplied.
26
Elastic Supply
S
Small
change in
Price
P2
P1
Q1
Q2
Large change in Qs
27
Inelastic Supply
S
P2
Big
Change
in Price
P1
Q1
Q2
Small Change in Qs
28
SECTION 3
Making Production Decisions
Objectives:
 Why do producers look at productivity when
making supply decisions?
 How do varying levels of input affect the
levels of output?
 How do changes in production costs affect
producers’ supply decisions?
29
SECTION 3
Making Production Decisions
Why producers look at productivity
when making supply decisions:
 to determine how efficiently their resources
are being used in production
 to maximize efficiency
 to increase profits
30
Law of Diminishing Returns
 Exp. Eff. of input on tot. and mar. prod.
 3 stages:
 Inc. Mar. Ret.
 Dim. Mar. Ret.
 Neg. Mar. Ret.
31
How to tell what stage you are in
 Find average produced by
each worker.
Change in output
Change in input
32
Labor
Input
0
Total Marginal
Product Product
0
0
1
10
10
2
25
15
3
30
5
4
27
-3
SECTION 3
Making Production Decisions
How varying levels of input affects
the levels of output:
 Adding levels of input increases productivity
up to a point and then eventually results in
decreased productivity and in negative
marginal product.
33
SECTION 3
Making Production Decisions
How changes in production costs
affect producers’ supply decisions:
 by determining the prices at which producers
supply quantities of goods or services
 by determining production goals
34
CHAPTER 4
Wrap-Up
1. Define the law of supply. Be sure to include how
the profit motive relates to this law.
2. What causes movement along a supply curve—in
other words, what prompts a change in the quantity
supplied? How does this movement differ from a
shift in supply?
3. What determinants can cause a shift in supply?
Give examples of at least three of these factors at
work for a company that manufactures televisions.
35
CHAPTER 4
Wrap-Up
4. In how many ways does new technology affect the
supply curve? Give at least one example for each
way you come up with.
5. Explain what happens in the three stages of
production described by the law of diminishing
returns.
6. Explain the difference among the following types
of costs: fixed, variable, total, marginal.
36