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Objectives:
Understand the difference between the supply schedule and the supply curve. Explain how market supply curves are obtained.
Specify the reasons for a change in supply.
Introduction
Supply - the amount of a product that would be offered for sale at all possible prices that could prevail in the market. Because the producer is receiving payment for the products, its no surprise that more will be offered at higher prices. Law of Supply - the principle that suppliers will normally offer more for sale at high prices and less at lower prices.
An Introduction to Supply
An individual supply curve shows how the quantity that a producer will make varies depending on the price that will prevail in the market. A market supply curve shows the quantities and prices that all producers will offer in the market for any given product or service.
When the supply data is graphed, it forms a supply curve with an upward slope.
Discussion Question
How do you explain that prices and quantities move in the same direction in a supply schedule? Producers will produce high quantities at the highest prices and low quantities at the lowest prices.
Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. If the price rises, the producer can step up production levels.
Discussion Question
What steps do you suppose a producer must go through in setting an introductory price for a product it brings to the market for the first time? Answers will vary but students may indicate that the producer must study the pricing system for similar products and risk that competing producers, in short order, will offer a like product at a lower price.
Change in Supply
A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.
Figure 5.3
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Discussion Question
Why does using new technology almost always increase supply?
It generally leads to greater efficiency, which lowers production costs, even though producers must initially train workers and adapt or create new production processes that accommodate the new technology.
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Elasticity of Supply
Supply is elastic when a small increase in price leads to a larger increase in output and supply.
Figure 5.4a
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Supply is unit elastic when change in price causes a proportional change in supply.
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If production is complex and requires much advance planning, the supply is inelastic.
Another factor is substitution: if substituting for a given product is easy, the supply is elastic; if it is difficult to substitute, the supply is inelastic.
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Discussion Question
What is the difference between demand elasticity and supply elasticity? Both measure the way quantity (whether bought or produced) adjusts to a change in price.
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