ECONOMICS TOPIC 3 LESSON 4
Fundementals of Supply
How do we affect the economy?
The Effect of Price on Supply
Just as the relationship between price and demand is governed by basic economic law, supply and price are directly linked. We will now explore the ways in which changes in price affect supply.
Suppliers Follow the Law of Supply
Supply is the amount of a good or service that is available.
According to the law of supply, producers offer more of a good or service as its price increases and less as its price falls.
Economists use the term quantity supplied to describe how much of a good or service a producer is willing and able to sell at a specific price.
The Effect of Price on Production
If a firm is already earning a profit by selling a good or service, then an increase in the price—ceteris paribus—will increase the firm’s profits. The promise of higher revenues generated by each sale encourages the firm to produce more.
The price of a good determines how much of that good a supplier will provide. Contrast How is the law of supply different from the law of demand?
The Effect of Price on Number of Suppliers
One of the benefits of the economic system of the United States, with its emphasis on free markets, is that markets are open to new suppliers. Entrepreneurs can enter growing markets to respond to these trends as long as they can assemble the needed factors of production and are willing to take the risk.
Generate Explanations Which factor causes firms to increase production when the price of a good or service goes up?
Understanding Supply Schedules
Similar to a demand schedule, a supply schedule shows the relationship between price and quantity supplied for a specific good or service, or how much of a good or service a supplier will offer at various prices.
Changes in the Quantity Supplied
Economists use the word supply to refer to the relationship between price and quantity supplied, as shown in the supply schedule.
This schedule shows how many slices one pizzeria owner will supply at different prices. Analyze Charts What would you expect from this pizzeria if prices rose to $7 a slice?
All Suppliers and the Market Supply Schedule
All of the supply schedules of individual firms in a market can be added up to create a market supply schedule. A market supply schedule shows the relationship between prices and the total quantity supplied by all firms in a particular market.
The Supply Graph
When we graph the data points in the supply schedule, we create a supply graph—also known as a supply curve. A supply curve is a graphic representation of a supply schedule. A supply curve is very similar to a demand curve, except that the horizontal axis now measures the quantity of the good supplied, not the quantity demanded.
Analyze Graphs a. How much pizza will the individual pizzeria supply per day at $3 a slice? b. How much pizza will the market supply each day at $4 a slice?
Check Understanding Which variables does a supply schedule show?
Elasticity of Supply
measures how firms will respond to changes in the price of a good or service.
Elasticity of Supply Over a Short Time
An orange grove is one example of a business that has difficulty adjusting to a change in price in the short term. Orange trees take several years to mature and grow fruit. If the price of oranges goes up, an orange grower can buy and plant more trees, but he will have to wait several years for this investment to pay off.
Elasticity of Supply Over a Longer Time
Like demand, supply becomes more elastic over time. The orange grower could not increase his output much when the price of oranges rose, but he can plant more trees to increase his supply over time. After several years, he will be able to sell more oranges at the higher price.
Apply Concepts How is a business that is highly elastic respond to a drop in prices?
Compare and Contrast Which of the following explains why firms differ in elasticity of supply in the short term?
How do we affect the economy?