Supply

1. What is supply? What is the law of supply?2. What is the difference between supply and

quantity supplied?3. What is the difference between individual and

market supply?4. What is a supply curve? How is it made?

ScenarioBetty works at her parents’ bakery. Every Saturday morning, she goes to work with her parents at 3 A.M. and helps them prepare strudel, bread, rolls, desserts, and cookies.

Her parents told her that weekends require a larger inventory of their baked goods. They explained that the Saturday Market, which is just a block away,

brings more people to the store. Opening the store an hour before the market opens allows them to sell large quantities of baked goods. Throughout the day they are also able to serve many more customers. Their product line is larger than during the week, and it is priced higher. Because they can charge a higher price, they are able to make higher profits on weekends than the rest of the week.

Why would the bakery charge higher prices on Saturday than the rest of the week? What would you to do to encourage some of the Saturday customers to come back during the week?

A few basics…

• Supply—the various quantities of a good (or service) a firm is willing and able to produce/supply to the market for sale at all prices, during a particular time period, ceteris paribus– Presented as a schedule or a curve (supply curve)

• Quantity supplied—the amount of goods or services sellers offer for sale at one time at a specific price.

The law of supply

The law of supply: there is a positive causal relationship between quantity supplied and price of a good over time, ceteris paribus– As price increases, so

does the quantity supplied– This makes sense to us:

producers will spend more on making a product if they expect to make more money on it

• Sellers have a profit incentive to charge higher prices.

• At a higher price, suppliers devote more resources to a product, which results in a greater quantity supplied.

Some quick points:

The law of supply causes producers to react in predictable ways to a change in price of a g/s

As producers supply more at higher prices (increase), and less at lower prices (decrease), the quantity supplied “moves along the supply curve.”

•This is called the change in quantity supplied•It is only caused by a change in price

How to show a change in quantity supplied

• Use a supply schedule (table of data)

• Then, graph the supply curve!

• Remember, this graph would be used for a change in price only.

P Qs

• Any change in Qs will be along the curve, not a new one.

Individual/Market Supply Curves• Individual supply

curve—supply data for a single producer

• Market supply curve—sum of all individual supply curves in a market

Gut check!What is supply?Amount of a g/s producers are willing & able to offer for sale at all prices in a given period.

What is quantity supplied?Amount of g/s producers are willing & able to offer for sale at a specific price.

What is the relationship between quantity supplied and price in a market?As price increases, quantity supplied increases (direct relationship)

How do we show this relationship?Using a supply curve (shows how price influences Qs)

What is total revenue?

• Businesses care about elasticity of demand—it helps them figure out their total revenue, and whether demand for a product is elastic or inelastic

• Total revenue—total amount of a company's sales and other sources of income. – does not include earnings or profits, which take

expenses into account. – high total revenue is desirable for any company.

How do you calculate total revenue?

• It’s simple!

# of units soldX price of unit

revenue

or

TR=P x Q

• Practice 1: Backyard BBQ Co. sold 4,088 grills at a price of $89 each. What was their total revenue?

• Practice 2: Alex’s Lemonade sold 1,250 glasses of original lemonade at $1.50 a glass. They sold 1,300 glasses of pink lemonade at $1.75 a glass. What was their total revenue?

What does total revenue look like on a graph?

• The demand schedule can help you make a demand curve, then you point out areas of elasticity.

Price Qd TR Elasticity

What does total revenue look like on a graph?

• Multiply the Qd by the price in the demand curve to create a TR graph