Notes Chapter 5 Section 1 – What is Supply?
The Law of Supply
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Key Concepts
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Supply: the willingness and ability to produce and sell a product.
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Anyone who provides goods or services is a producer.
- Examples: manufacturers, farmers, retailers, utility companies, airlines, etc.
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Anyone who provides goods or services is a producer.
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The two key words in the definition of supply are willingness and ability.
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For example:
- A family owns a small farm where they grow fruits and vegetables.
- They sell their produce at a local farmers’ market.
- If the prices at the market are too low, the family may not be willing to take on the expense of growing and transporting their produce.
- Also, if the weather is bad and the crops are ruined, they will not be able to supply anything for the market.
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For example:
- Just like with demand, PRICE is a major factor that influences supply.
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Law of Supply: states that when prices decrease, quantity supplied decreases, and when prices increase, quantity supplied increases.
- Producers want to earn profit, so when the price of a good or service rises they are willing to supply more of it.
- When the price falls, they want to supply less of it.
- Price and quantity supplied have a DIRECT RELATIONSHIP.
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Supply: the willingness and ability to produce and sell a product.
As prices falls… …quantity supplied falls As prices rise… …quantity supplied rises
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What kind of relationship does demand have?
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INVERSE RELATIONSHIP
- As price goes up quantity demanded goes down.
- As price goes down quantity demanded goes up.
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INVERSE RELATIONSHIP
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Example Price and Supply
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Let’s go back to our farming example
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The farmers have a specialty product they are known for producing – Tomatoes
- They know the standard price for tomatoes is $1/pound.
- They decide they are willing and able to sell 24 pounds of Tomatoes.
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How much would they make?
- $24
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What if the standard price of tomatoes went up to $2/pound? – SHOW ARROWS
- The farmer may decide that prices is good and may be willing to offer 50 pounds of tomatoes instead.
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What if the standard price of tomatoes fell to $0.50/pound? – SHOW ARROWS
- The farmer may decide to supply only 10 pounds of tomatoes.
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The farmers have a specialty product they are known for producing – Tomatoes
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Let’s go back to our farming example
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Why do price and supply have a direct relationship?
- Producers will supply more of something if they can make more money by selling it at a higher price.
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Why do producers and consumers have different attitudes towards price?
- Producers want to make money by charging higher prices while consumers want to save money by paying lower prices.
Supply Schedules
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Supply Schedule: lists how much of a good or service an individual producer is willing and able to off for sale at each price.
- Example: Farmer’s Tomato Supply Schedule:
Price per pound ($) |
Quantity Supplied (in pounds) |
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How many pounds of tomatoes are farmers willing to produce at $1.75?
- 40
- This shows that quantity supplied depends on price.
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Market Supply Schedule: lists how much of a good or service all producers in a market are willing and able to offer for sale at each price.
- Instead of looking at just one farm and their willingness and ability to supply tomatoes a market supply schedule would look at something like the entire farmers’ market.
- It shows he quantity supplied by ALL of the producers who are willing and able to sell tomatoes.
Price per pound ($) |
Quantity Supplied (in pounds) |
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- Notice that this market supply schedule is similar to our individual demand schedule, BUT the quantities supplied are much larger.
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What is the quantity supplied at $1.25?
- 200 tomatoes
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How does the quantity supplied of tomatoes change when the price rises from $0.75/pound to $1.75/pound?
- It increases from 100 to 300
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Try this – Practice creating a supply schedule
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In your notebook solve the following problem:
- Imagine you own a health food store that sells several kinds of granola bars. Create a supply schedule showing how many bars you would be willing to sell each month at the prices of $1, $2, $3, $4, and $5. Use the table to help you.
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In your notebook solve the following problem:
Price ($) |
Quantity Supplied |
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Price ($) |
Quantity Supplied |
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- Supply schedules should reflect the law of supply by showing higher quantities supplied at higher prices and lower quantities supplied at lower prices.
Supply Curves
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Supply curve: shows the data from a supply schedule in graph form.
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How is a supply curve related to a supply schedule?
- A supply curve is the representation on a line graph of the information from the supply schedule.
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How is a supply curve related to a supply schedule?
Price per pound ($) |
Quantity Supplied (in pounds) |
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Individual Supply Curve - Tomatoes |
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Price per pound ($) |
$2.00 |
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$1.75 |
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$1.50 |
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$1.25 |
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$1.00 |
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$0.75 |
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$0.50 |
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0 |
10 |
20 |
30 |
40 |
50 |
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Quantity Supplied (in pounds) |
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What does the supply curve look like?
- It slopes upright / Increases.
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What do the points on the supply curve represent?
- The quantity supplied at each price.
- Market supply curve: shows the data from a market supply schedule in graph form.
Price per pound ($) |
Quantity Supplied (in pounds) |
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Tomato market Supply Curve |
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Price per pound ($) |
$2.00 |
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$1.75 |
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$1.50 |
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$1.25 |
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$1.00 |
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$0.75 |
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$0.50 |
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0 |
50 |
100 |
150 |
200 |
250 |
300 |
350 |
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Quantity Supplied (in pounds) |
Exit Ticket: Using the supply schedule you created for granola bars, create an individual demand schedule.
Price ($) |
Quantity Supplied |
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Price ($) |
$5 |
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$4 |
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$3 |
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$2 |
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$1 |
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0 |
10 |
20 |
30 |
40 |
50 |
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Quantity Supplied |
Notes Chapter 5 Section 2: What are the Costs of Production?
Labor Affects Production – Let’s look at why this is.
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Story
- Let’s say you own a company that makes custom blue jeans.
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You have 3 sewing machines and 3 workers.
- They are able to produces 12 pairs of jeans each day.
- What would hiring one more person do to production? – probably raise it.
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You still have 3 sewing machines, but now you have 4 workers.
- They are able to produce 19 pairs of jeans each day.
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What is the difference in output (how much is produced) with a 4th worker?
- 7 pairs
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(19 pairs – 12 pairs)
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This difference is called the marginal product
- Marginal Product: The change in total output brought about by adding one more worker.
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This difference is called the marginal product
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Let’s continue with our jean example.
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Because adding a 4th worker proved to be successful, you decide to add a 5th worker to see what happens to output.
- This turns out to be a great idea because the output has jumped from 19 to 29 – a marginal product of 10
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Because adding a 4th worker proved to be successful, you decide to add a 5th worker to see what happens to output.
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How is the output increasing so much? Remember you only have the 3 sewing machines, so not everyone can sew at the same time? (Hint: What do your workers need to do before they can start sewing?)
- Originally you had 3 workers and 3 sewing machines.
- These 3 workers had to cut cloth, sew the jeans, package the jeans, and keep the shop clean.
- The 4th employee helped with the other tasks (cutting, packaging, cleaning).
- The 5th employee allowed labor to be divided even more efficiently which caused the increase in marginal product.
- Having each worker focus on a particular facet of production is called specialization.
- Specialization: having a worker focus on a particular aspect of production.
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Does hiring more works always cause marginal product to increase?
- Not necessarily.
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What are some problems a business may face if it has too few or too many workers?
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Too few:
- Resources are not used to full capacity
- The company cannot produce as much as it wants
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Too many:
- Workers get in each other’s way
- Not enough work to keep all workers busy.
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Too few:
A Jean Marginal Product Schedule |
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Number of Workers |
Total Product |
Marginal Product |
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0 |
0 |
1 |
3 |
3 |
2 |
7 |
4 |
3 |
12 |
5 |
4 |
19 |
7 |
5 |
29 |
10 |
6 |
42 |
13 |
7 |
53 |
11 |
8 |
61 |
8 |
9 |
66 |
5 |
10 |
67 |
1 |
11 |
65 |
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What is this table telling us?
- Total product continues to increase, but at some point the marginal product begins to decrease.
At what number of workers is total product the highest?
- 10 (67 total pairs of jeans)
This is your business, how many workers would you ultimately hire based on this table? Why?
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Six workers would be the ideal number of workers to hire based on this table because you are creating a large number of total products, and your marginal product is also at its highest.
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This is probably because there are six tasks involved in creating the jeans: 3 people to sew, 1 person to cut, 1 person to package, 1 person to clean.
- Each person has a specialized task.
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This is probably because there are six tasks involved in creating the jeans: 3 people to sew, 1 person to cut, 1 person to package, 1 person to clean.
- However, this table does NOT account for profit level which ultimately would show you how many workers to hire.
- Increasing Returns: Occur when hiring new workers cause marginal product to increase.
- Diminishing Returns: Occur when hiring new workers causes marginal product to decrease.
Production Costs
- Remember that producers want to make a profit. Profit is the money the business gets for selling their products once the money it costs to make the products has been subtracted.
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Common business costs include:
- Fixed costs
- Variable costs
- Total costs
- Marginal costs
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Fixed Costs: Costs that business owners have no matter how much they produced.
- These occur whether a business produces nothing, a little, or a lot.
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In our jeans example, fixed costs include the mortgage on the factory, insurance, management salaries, the cost of machinery, and utilities.
- These costs are the same whether we are producing no jeans, 3 pairs, or 42 pairs of jeans per day.
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Variable Costs: Costs that depend on the level of production output.
- These are dependent on how much or little a company produces.
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In our jeans example, variable costs include wages, fabric, thread, zippers, buttons, and shipping costs.
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The more jeans the factory produces, the more out variable costs will increase.
- We will may need to hire new workers raising the cost of wages.
- We may producing more pairs of jeans so we need more supplies to make those jeans.
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The more jeans the factory produces, the more out variable costs will increase.
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How do changes in variable costs relate to the slope of the demand curve?
- Since variables costs increase as quantity supplied increases, a producer will only supply more product if he or she can charge a higher prices to cover the costs.
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Total Cost: The sum of fixed and variable costs (Fixed costs + Variable costs = total cost)
- Example: Complete the Jeans production chart.
Fixed Costs |
Variable Costs |
Total Cost |
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- Marginal Costs: The extra cost of producing one more unit.
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How do we calculate Marginal Costs?
- Marginal Costs = Change in total cost ÷ Change in total product
Number of workers |
Total Product |
Fixed Costs |
Variable Costs |
Total Cost |
Marginal Cost |
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Earning the Highest Profit
- Marginal Revenue: The money made from the sale of each additional unit of output
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Total Revenue: the company’s income from selling its products.
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Formula –
- Total Revenue = Price x Quantity purchased at that price
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Formula –
- Profit-maximizing output: The level of production at which a business realizes the greatest amount of profit.
Chapter 5 Section 3 What Factors Affect Supply?
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Changes in Quantity Supplied
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Key Concepts
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Change in quantity supplied: A rise or fall in the amount producers offer for sale because of a change in price.
- For example: A change in the price of bicycles causes a change in the quantity supplied.
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Change in quantity supplied: A rise or fall in the amount producers offer for sale because of a change in price.
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Changes along the Supply Curve
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Each new point on the supply curve shows a change in quantity supplied.
- A change in quantity supplied does not change the supply curve itself.
- If you move right along a supply curve there is an increase in both price and quantity supplied.
- If you move left along a supply curve there is a decrease in both price an quantity supplied.
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Each new point on the supply curve shows a change in quantity supplied.
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Key Concepts
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Changes in Supply
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Key Concepts
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Change in supply: Occurs when a change in the marketplace prompts producers to sell different amounts at every price.
- This will shift the demand curve.
- When production costs increase, supply decreases, and the supply curve shifts to the left.
- When production costs decrease, supply increases, and the supply curve shifts to the right.
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There are 6 factors which shift the entire demand curve:
- Input Costs
- Labor Productivity
- Technology
- Government Action
- Producer Expectations
- Number of Producers
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Input Costs: The price of the resources used to make products.
- Affects supply directly
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Example: Willy Wonka makes a chocolate bar that contains peanuts. If the price of peanuts increase, then costs increase.
- He cannot afford to produce as many nutrition bars, and her supply curve will shift to the left.
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Labor Productivity: The amount of goods and services that a person can produce in a given time.
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Increasing productivity decreases the costs of production.
- This increases supply.
- Better-trained and more-skilled workers can usually produce more goods in less time, and therefore lower costs.
- Example: A business that provides word-processing services can produce more documents if its employees type quickly and have experience with word processing software.
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Increasing productivity decreases the costs of production.
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Technology: Applying scientific methods and innovations to production.
- Helps businesses to improve their productivity and increase supply.
- Technology helps make goods more efficiently.
- Example: Increased automation, including the use of robots, has led to increased supplies of automobiles.
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Government Action
- Government action can affect the costs of production both positively and negatively.
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Excise tax: A tax on the making or selling of certain goods or services.
- Often placed on items like alcohol and tobacco – things the government is trying to discourage people from using.
- These taxes increase a producers’ costs and decrease the supply.
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Subsidy: A government payment that partially covers the cost of an economic activity.
- Its purpose is to encourage or protect that activity.
- Example: Subsidies helped to double the supply of ethanol, a gasoline substitute made from corn.
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Regulation: a set of rules or laws designed to control business behavior.
- These can also affect supply.
- Example: Banning a certain pesticide might decrease the supply of the crops that depend on the pesticide.
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Producer Expectations: The amount of product producers are willing and able to supply may be influenced by whether they believe prices will go up or down.
- If producers expect the price of their product to rise or fall in the future, it may affect how much of that product they are willing and able to supply.
- Example: If a farmer expects the price of corn to be higher in the future, he or she may store some of the current crop, thereby decreasing supply.
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Number of Producers: A successful new product or service always brings out competitors who initially raise overall supply.
- An increase in the number of producers means increased competition.
- This will eventually drive less-efficient producers out of the market, decreasing supply.
- Competition has a major impact on supply as producers enter and leave the market all of the time.
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Change in supply: Occurs when a change in the marketplace prompts producers to sell different amounts at every price.
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Key Concepts
Chapter 5 Section 3 – What is Elasticity of Supply?
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Elasticity of supply
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Key concepts
- Elasticity of supply: a measure of how responsive producers are to price changes in the marketplace.
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Elastic Supply: If a change in price leads to a relatively LARGE change in quantity supplied supply is elastic.
- Example: If a 10% increase in price causes greater then a 10% change in quantity supplied, supply is elastic.
- Inelastic Supply: If a change in pries leads to a relatively smaller change in quantity supplied supply is inelastic.
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Key concepts
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What Affects Elasticity of Supply?
- The ease of changing production to respond to price change is the main factor in determining elasticity of supply.
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Example: Industries that are able to respond quickly to changes by increasing or decreasing production are those that don’t require a lot of capital, skilled labor, or hard to find resources.
- The quantity supplied of a dog-walking service can increase rapidly with the addition of more people to walk dogs.
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Example: Industries that take a great deal of time to shift the resources of production to respond to price changes.
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Automakers rely on large capital outlays or difficult to find resources.
- It might take such suppliers a considerable amount of time to respond to price changes.
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Automakers rely on large capital outlays or difficult to find resources.
- Given enough time, the elasticity of supply increases for most goods and services.