Do Now 1. A new video game system is released just before Christmas, and

everyone's "gotta have it." As parents race to the store to buy the system for their kids, the price throughout December holds steady at $349.99. What do you think will happen to the price in January? …February? …June?

2. Local stores sell a fleece jacket for about $50. Sales of the jacket are good, but not great. However, when consumers learn that Lebron James wears this jacket, sales increase. What do you think will happen to the price?

3. When a motorcycle manufacturer announces that it will no longer make its most popular model of bike, what do you think will happen to the price of the bike?

4. Mrs. Taylor sells chocolate molasses cookies. They are delicious, and she is the only one in town who makes them. However, when Ms. Brown moves to town, she begins to make cookies, without any difference in quality or beauty from Mrs. Taylor's cookies. What will likely happen to the price of Mrs. Taylor's cookies?

Supply

How do suppliers decide what goods and services to offer?

Law of Supply

• Supply: the amount of goods available

• Law of Supply: producers offer more of a good as its price increases, and less as its price falls

• Quantity supplied: the amount that a supplier is willing and able to supply at a specific price

• Supply is slightly more difficult to understand than demand, because most of us have little direct experience on the supply side of the market.

• Supply comes from a producer's desire to maximize profits. When the price of a product rises, the supplier has an incentive to increase production because he can justify higher costs to produce the product, which increases the potential to earn larger profits ($$$).

• Profit is the difference between revenues and costs. If the producer can raise the price and sell the same number of goods while holding costs constant, then profits increase.

Law of Supply

• The law of supply says that, other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa.

• This table lists the quantity supplied of rental videos for various prices. – At $5, the producer has

an incentive to supply 50 videos. If the price falls to $4 quantity supplied falls to 40, and so on. The figure titled "Supply Curve" plots this positive relationship between price and quantity supplied.

Price Quantity Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply Curve

• A supply curve is a graphical depiction of a supply schedule plotting price on the vertical axis and quantity supplied on the horizontal axis. The supply curve is upward-sloping, reflecting the law of supply

Supply Schedule• A Supply Schedule is a chart that shows how much of a

good a supplier will offer at various prices• Variables: factors that change

Price per slice of pizza

Slices supplied per day

$1.00 100

$2.00 150

$3.00 200

$4.00 250

$5.00 300

$6.00 350

Supply and Elasticity

• Elasticity of Supply: a measure of the way quantity supplied reacts to a change in price

How does the Law of Supply affect the quantity supplied?

Supply ElasticityLaw of Supply

Quantity supplieddeclines

Quantity supplied

rises

Supply inelasticin the

short term

Supply elasticIn long run