<<

. 6
( 33)



>>

stry in the 1980s, the de can be applied to income, the quantity of a product
e the microcomputer indu
lik gh
as it best to charge a hi supplied by a firm, or to demand.
n is doubly difficult. W
sio a
mber of disks or charge
ice and sell a smaller nu
pr pro-
volume? One software
wer price and aim for
lo t-
market for its new accoun
Demand Elasticity
cer decided to [test] the
du on
ices. The firm, Noumen
g program at different pr
in the
in increments of $20 all In the case of demand, you will consider
rporation, raised prices
Co ax-
that total revenue was m whether a given change in price will cause a
y up to $210. They found
wa t,
a result of this experimen
ized at a price of $90. As relatively larger, a relatively smaller, or a proportional
im tuit
se and market the In
ey decided to adverti change in quantity demanded. Consumers are
th the
9.95, much lower than
counting program at $8 sensitive to prices and that is why the Noumenon
Ac
are programs.
prices of competing softw Corporation conducted so many experiments to
rley Mings,
dy of Economics, by Tu find the best price for its accounting software. An
”Adapted from The Stu in Publishing
Dushk
understanding of demand elasticity”the extent to
which a change in price causes a change in the

CHAPTER 4: DEMAND 101
Long ago, the Akan people of West Africa could
not mine salt and always needed to trade for it.
TRADING GOLD FOR SALT Gold, however, was much easier to come by. The
people who lived in the desert of North Africa could
What determines how much demand there will easily mine salt, but not gold. These mutual differ-
be for a good or service? The scarcity of the good ences led to the establishment of long-distance
or service plays an important role. trade routes that connected very different cultures.
If you could choose between a pile of salt and a Trade centers, such as Djenne and Timbuktu on the
pile of gold, you would probably choose the gold. Niger River, flourished, as a demand for goods was
After all, you know that you can always buy a con- satisfied.
tainer of salt for about forty-five cents at the local ”Adapted from Smithsonian In Your Classroom
supermarket. But what if you could not easily get
salt?
Critical Thinking
Throughout history, salt has been very difficult
to obtain in many parts of the world. Salt was used 1. Analyzing Information How did the Akan
in food as a preservative and for flavor. People people meet their demand for salt?
feared a lack of salt as we fear a shortage of fuel oil
2. Drawing Conclusions Suppose the Akan
today.
found a method to produce all the salt they
needed. What changes in trade do you
think might occur? Explain your reasoning.



quantity demanded”will help analyze these issues. amount they purchase. When prices are consider-
The demand for most products is such that con- ably higher in the winter, however, consumers nor-
sumers do care about changes in prices”and the mally buy fewer fresh vegetables and use canned
concept of elasticity tells us just how sensitive con- products instead.
sumers are to these changes.
Inelastic Demand
Elastic Demand For other products, demand may be largely
Economists say that demand is elastic when a inelastic, which means that a given change in price
given change in price causes a relatively larger causes a relatively smaller change in the quantity
change in quantity demanded. To illustrate, look at demanded. We can see the case of inelastic demand
how price and quantity demanded change between in Panel B of Figure 4.5. In this case, the one-third
points a and b on the demand curve in Panel A of drop in price from point a′ to b′ only causes quan-
tity demanded to increase by 25 percent, or from
Figure 4.5.
As we move from point a to point b, we see that two to two and one-half units.
price declines by one-third, or from $3 to $2. At This is typical of the demand elasticity for a
the same time, the quantity demanded doubles product like table salt. A lower or higher price for
from two to four units. Because the percentage table salt does not bring about much change in the
change in quantity demanded was relatively larger quantity purchased. If the price was cut in half, the
than the percentage change in price, demand quantity demanded would not increase by much
between those two points is elastic. because people can consume only so much salt.
This type of elasticity is typical of the demand Or, if the price doubled, we would expect con-
for products like green beans, corn, tomatoes, or sumers to demand about the same amount because
other fresh garden vegetables. Because prices are the portion of a person™s budget that is spent on
lower in the summer, consumers increase the salt is so small.

102 UNIT 2 MICROECONOMICS
Unit Elastic Demand The Total Expenditures Test
Sometimes demand for a product or service To estimate elasticity, it is useful to look at
falls midway between elastic and inelastic. When the impact of a price change on total expen-
this happens, demand is unit elastic, meaning that ditures, or the amount that consumers spend on a
a given change in price causes a proportional product at a particular price. This is sometimes
change in quantity demanded. In other words, called the total expenditures test.
when demand is unit elastic, the percent change in
quantity roughly equals the percent change in
Determining Total Expenditures
price. For example, a five percent drop in price
would cause a five percent increase in quantity Total expenditures are found by multiplying the
demanded. Unit elastic demand is illustrated in price of a product by the quantity demanded for any
Panel C of Figure 4.5. point along the demand curve. To illustrate, the total




ECONOMICS
Figure 4.5
AT A GLANCE
AT A GLANCE

The Total Expenditures Test for Demand Elasticity
A Elastic Demand B Inelastic Demand
$4 $4
D
D a a™
Expenditure = $6 Expenditure = $6
3 3
b b™
Price




Price




2 Expenditure = $5
2
D
1 1
Expenditure = $8 D

1 2 3 4 5 1 2 3 4 5
0 0
Quantity Quantity


C Unit Elastic Demand D Determining Elasticity
$4
D Movement of
a™™ Expenditure = $6
3 Type of Change Change in Price and
Elasticity in Price Expenditure Expenditure
b™™ Expenditure = $6
Price




2
Elastic Opposite
1 D
Unit Elastic no change
1 2 3 4 5
0
Inelastic Same
Quantity



Using Graphs The key to determining elasticity is to examine how expenditures change when the price
changes. If they move in opposite directions, then demand is elastic. If they move in the same direction,
then demand is inelastic. If there is no change in expenditures, then demand is unit elastic. Why is an
understanding of elasticity important for business?


CHAPTER 4: DEMAND 103
expenditure under point a in Panel A of Figure 4.5 is between the change in price and total expenditures
$6, which is determined by multiplying two units for the elastic demand curve is described as
times the price of $3. Likewise, the total expenditure “inverse.” In other words, when the price goes
under point b in Panel A is $8, or $2 times four down, total expenditures go up.
units. By observing the change in total expenditures The demand curve in Panel B is inelastic. In this
when the price changes, we can test for elasticity. case, when the price drops by $1, the increase in
the quantity demanded is so small that total expen-
ditures fall below $6. For inelastic demand, total
Three Results expenditures decline when the price declines.
The relationship between changing prices and Finally, the demand curve in Panel C is unit elastic.
total expenditures is summarized in Figure 4.5. For This time, total expenditures remain unchanged
each of the demand curves, the impact on total when the price decreases from $3 to $2.
expenditures for a decrease in price from $3 to $2 The relationship between the change in price
is shown. In each case, the change in expenditures and the change in total expenditures is shown in
depends on the elasticity of the demand curve. Panel D of Figure 4.5. As you can see, if the change
The demand curve in Panel A is elastic. When in price and expenditures move in opposite direc-
the price drops by $1 per unit, the increase in the tions, demand is elastic. If they move in the same
quantity demanded is large enough to raise total direction, demand is inelastic. If there is no change
expenditures from $6 to $8. The relationship in expenditure, demand is unit elastic.




Revolution Amazon. In 1994, Bezos
decided to stake a
claim on the unknown
in E-Commerce frontier of Internet
retail. He quit his job
Innovations in shopping are nothing new. The growth of on Wall Street and
the department store at the turn of the century answered moved to Seattle. He
the needs of the growing number of urban consumers. rented a garage and
Meanwhile, generations of Americans, especially those in borrowed money to
start a business where
remote farming communities, depended upon catalog shop-
people could make their
ping through Montgomery Ward and Sears & Roebuck to
book purchases over
get the latest in fashion, housewares, appliances, and even
the Internet. Amazon
home-building kits. The shopping centers of the mid-
Jeff Bezos, founder of
debuted on the World
twentieth century were replaced by gigantic shopping Amazon.com
Wide Web in July 1995.
malls. In the 1990s, new technologies provided convenience
and ease of use for customers. Home shopping”catalog, TV, Unique Appeal to Customers What are the rea-
and Internet”has grown into a multibillion dollar business. sons for Amazon™s success? An important factor is that
Amazon provides services that regular stores don™t.
Today, entrepreneurs such as Jeff Bezos of Amazon.com Inc.
People who search for a book at the Amazon site often
are transforming our shopping habits.
find a description accompanied by excerpts from
Birth of an Internet Company Just as Sears and reviews”not only from print sources but from cus-
Montgomery Ward reached customers through their cat- tomers. Authors, too, are invited to comment on their
alogs, today™s entrepreneurs do the same online. Few, own works. And Amazon asks customers which kinds of
however, have been as successful as Jeff Bezos with books they like. When books in the same category or by

104 UNIT 2 MICROECONOMICS
Finally, and even though all the price changes This might actually work in the case of table salt,
discussed above were decreases, the results would or even medical services, because the demand for
be the same if prices had gone up instead of down. both products is generally inelastic. But, what if you
If the price rises from $2 to $3 in Panel A, spending sell a product that has an elastic demand? If you raise
falls from $8 to $6. Prices and expenditures still the price of your product, your total revenues”which
move in opposite directions, as shown in the table. is the same thing as consumer expenditures”will go
down instead of up. This outcome is exactly the
opposite of what you intend!
Elasticity and Profits This is exactly why the Noumenon Corporation
All of this discussion about elasticity may seem in the cover story experimented with so many differ-
technical and somewhat unnecessary, but knowledge ent prices when they introduced their accounting
of demand elasticity is extremely important to busi- software program. By discovering the elastic nature
nesses. Suppose, for example, that you are in busi- of demand for their new product, they were able to
ness and that you want to do something that will increase their total revenues by charging a relatively
raise your profits. Of course you could try to cut low price rather than a much higher one. This exam-
costs, or you could even try to advertise in order to ple illustrates that demand elas-
increase the number of units sold. You might, how- ticity is more important
ever, be tempted to raise the price of your product in than most people
order to increase total revenue from sales. realize.
Did You Know?
Internet Shopping According
to research analysts, two billion orders
were placed over the Internet in 1999,
generating $95 billion in revenue.
Researchers estimate e-commerce rev-
the same author appear, the company
enue will top $1.1 trillion globally
Amazon™s Strategy
sends E-mail inviting people to buy them.
by 2002 (up from $15 billion
Growth and Development Bezos has in 1997).
• Make it easy for
even bigger plans for the future. He wants
visitors to find
Amazon to serve as the gateway for more what they want.
products. Among its innovations, Amazon
• Encourage visitor
added auctions in March 1999. The com-
participation.
pany retooled its warehouses to offer
more varied selection and faster service. • Win repeat
Amazon™s Sales
customers.
Bezos believes Amazon is successful
because it values its customers. “The
Internet is this big, huge hurricane,”
$1,000,000,000
Bezos notes. “The only constant in that
storm is the customers.” Today Amazon
$800,000,000
serves more than 4.5 million customers in
160 countries. Although buying books
$600,000,000
over the Internet accounts for 3 percent
of books sold, Amazon claims 85 percent
$400,000,000
of online book sales. In June 1998, the
company began selling music selections. $200,000,000
Within four months, Amazon became the
leading online music retailer, with sales $0
of $14.4 million. As use of the Web grows, 1996 1997 1998 1999
15.7 million 67 million 540 million 1.4 billion
so too does the future of Amazon.

CHAPTER 4: DEMAND 105
ECONOMICS
Figure 4.6
AT A GLANCE
AT A GLANCE

Estimating the Elasticity of Demand
Products
Determinants Fresh Gasoline
Services of
of elasticity tomatoes, from a
Table Gasoline in
medical
Yes (elastic) corn, or particular
salt Insulin Butter
general
doctors
No (inelastic) green beans station

Can purchase yes no yes no no no yes
be delayed?

Are adequate
substitutes yes no yes no no no yes
available?
Does purchase
use a large no no yes yes yes no no
portion of
income?
Type of Elastic Inelastic Elastic Inelastic Inelastic Inelastic Elastic
elasticity



Using Tables The elasticity of demand can usually be estimated by examining the answers to three key
questions. All three answers do not have to be the same in order to determine elasticity, and in some
cases the answer to a single question is so important that it alone might dominate the answers to the
other two. If you applied the three questions to a luxury product, what would be the elasticity
of demand for that product?



Determinants of Demand Elasticity also tends to be inelastic because the product is
addictive. As a result, a sharp increase in price will
What makes the demand for a specific good lower the quantity purchased by consumers, but not
elastic or inelastic? To find out, we can ask by very much. The change in quantity demanded is
three questions about the product. The answers also likely to be relatively small for these products
will give us a reasonably good idea as to the prod- when their prices go down instead of up.
uct™s demand elasticity. If the product were corn, tomatoes, or gasoline
from a particular station, however, people might
react differently to price changes. If the prices of
Can the Purchase Be Delayed? these products increase, consumers could delay
buying any of these items without suffering any
A consumer™s need for a product is sometimes
great inconvenience. Being able to delay or post-
urgent and cannot be put off. Whenever this hap-
pone the purchase of a product, then, is a charac-
pens, demand tends to be inelastic, meaning that
teristic of elastic demand.
the quantity of the product demanded is not espe-
Figure 4.6 summarizes some of these observa-
cially sensitive to changes in price.
tions. Note that if the answer is yes to the question
For example, persons with diabetes need insulin
“Can the purchase be delayed?” then the demand
to control the disorder. An increase in its price is not
for the product is likely to be elastic. If the answer
likely to make diabetes sufferers delay buying and
is no, then demand is likely to be inelastic.
using the product. Likewise, the demand for tobacco

106 UNIT 2 MICROECONOMICS
Are Adequate Substitutes Available? gas at another station. If we ask about the demand
for gasoline in general, however, demand is much
If adequate substitutes are available, consumers
more inelastic because there are few adequate sub-
can switch back and forth between a product and
stitutes for gasoline.
its substitute to take advantage of the best price. If
the price of beef and butter goes up, buyers can
switch to chicken and margarine. With enough sub-
Does the Purchase Use a Large Portion of
stitutes, even small changes in the price of a prod-
Income?
uct will cause people to switch, making the demand
for the product elastic. The fewer substitutes avail- The third determinant is the amount of income
able for a product, the more inelastic the demand. required to make the purchase. Whenever the
Sometimes the consumer only needs to have a answer to the question “Does the purchase use a
single adequate substitute in order to make the large portion of income?” is yes, then demand
demand for the product elastic. Historically, for tends to be elastic. Demand tends to be inelastic
example, there were few adequate substitutes for a whenever the answer to this question is no.
letter sent through the post office. As technology Finally, you may have noticed that for any given
has progressed, FAX machines allow messages to be product, the answer is not necessarily yes or no. For
transmitted over phone lines, and, perhaps most example, some products such as salt or insulin may
significantly, the personal computer has helped be easy to classify, but we have to use our judgment
make electronic mail (E-mail) popular. As a result, on others. For example, the demand for medical
it is extremely difficult for the U.S. Postal Service services tends to be inelastic even though these
to increase its total revenues by significantly raising services require a large portion of income. As far as
the price of a first-class letter. most people are concerned, the lack of adequate
Also, note that the availability of substitutes also substitutes and the reluctance to put off seeing a
depends on the extent of the market. For example, doctor when they are sick are more important than
the demand for gasoline from a particular station the relatively large portion of income that medical
tends to be elastic because the consumer can buy services consume.




Checking for Understanding Applying Economic Concepts
1. Main Idea What luxuries do you think would 6. Elasticity of Demand Why are airlines reluc-
have a higher price elasticity than others? tant to offer reduced round-trip airfares dur-
Give three examples and explain why you ing holidays such as Christmas, Easter, and
think they would have an exceptionally high Thanksgiving? Refer to the three determi-
elasticity. nants of demand elasticity in your answer.

2. Key Terms Define elasticity, demand elasticity,
elastic, inelastic, unit elastic.

3. Describe the three determinants of demand 7. Understanding Cause and Effect A ham-
elasticity. burger stand raised the price of its hamburg-
ers from $2.00 to $2.50. As a result, its sales
4. Explain why the demand for insulin is
of hamburgers fell from 200 per day to 180
inelastic.
per day. Was the demand for its hamburgers
elastic or inelastic? How can you tell?
5. Explain why an item that has many close sub-
stitutes tends to have an elastic demand. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



CHAPTER 4: DEMAND 107
Understanding Cause and Effect
Understanding cause and effect involves considering why an event occurred.
A cause is the action or situation that produces an event. What happens as a
result of a cause is an effect.


Practicing the Skill
Analyze the statements below. Then, on a separate
piece of paper, list the causes and effects found in each
statement.
1. Historically, prices have shown their greatest
fluctuations in times of war.
2. The government also is confronted with scarcity, and
must make choices.
3. Because of scarcity, people, businesses, and the
government must all make trade-offs in choosing the
products they want the most.
4. When a choice is made, an opportunity cost is paid.
5. It is impossible for us to produce all the products we
would like to have because the factors of production
exist in limited quantities.
One of the key factors that determines
6. Because consumers don™t always want the same things,
demand is people™s tastes.
items that are popular now may not sell in the future.
7. If income increases, people can afford to buy more
Learning the Skill products.
To identify cause-and-effect relationships, follow 8. If the price of butter goes up, more people would buy
these steps: margarine instead.
• Identify two or more events or developments.
• Decide whether one event caused the other. Look
for clue words such as because, led to, brought about,
produced, as a result of, so that, since, and therefore.
In your local newspaper, read an article describing
• Look for logical relationships between events, such a current event. Determine at least one cause and
as “She overslept, and then she missed her bus.” one effect of that event. Show the cause-and-
effect relationship in a diagram like the one here.
• Identify the outcomes of events. Remember that
some effects have more than one cause, and some
Effect
Cause
causes lead to more than one effect. Also, an
effect can become the cause of yet another effect.
Practice and assess key social studies skills with the
Glencoe Skillbuilder Interactive Workbook, Level 2.
108 UNIT 2 MICROECONOMICS
Section 1 buy at each and every price. It is represented as a
shift of the demand curve to the right or left.
What Is Demand? (pages 89“93) • A change in consumer incomes, tastes and expecta-
tions, and the price of related goods causes a change
• Microeconomics is the area of economic study that
in demand.
deals with individual units in an economy, such as

households, business firms, labor unions, and workers. Related goods include substitutes and complements.
A substitute is a product that is interchangeable in
• You express demand for a product when you are
use with another product. A complement is a prod-
both willing and able to purchase it.
uct that is used in conjunction with another product.
• Demand can be summarized in a demand schedule,
• The market demand curve
which shows the various quantities that would be
changes whenever
purchased at all possible prices that might prevail in
consumers enter or
the market.
leave the market, or
• Demand can also be shown graphically as a down-
whenever an individ-
ward sloping demand curve.
ual™s demand curve
• The Law of Demand refers to the inverse relation- changes.
ship between price and quantity demanded.
• Individual demand curves for a particular product
Section 3
can be added up to get the market demand curve.
• Marginal utility is the
Elasticity of Demand (pages 101“107)
amount of satisfaction

an individual receives Elasticity is a general measure of responsiveness that
from consuming one relates changes of a dependent variable such as quan-
additional unit of a par- tity to changes in an independent variable such as
ticular good or service. price.
• •
Diminishing marginal Demand elasticity relates changes in the quantity
utility means that with each demanded to changes in price.
succeeding unit, satisfaction decreases.
• If a change in price causes a relatively larger change
in the quantity demanded, demand is elastic.
• If a change in price causes a relatively smaller change
Section 2 in the quantity demanded, demand is inelastic.
• When demand is elastic, it stretches as price changes.
Factors Affecting Demand (pages 95“99) Inelastic demand means that price changes have little
impact on quantity demanded.
• Demand can change in two ways”a change in quan-

tity demanded or a change in demand. Demand is unit elastic if a change in price causes a
proportional change in quantity demanded.
• A change in quantity demanded means people buy

a different quantity of a product if that product™s The total expenditures test can be used to estimate
price changes, appearing as a movement along the demand elasticity.
demand curve.
• Demand elasticity is influenced by the ability to post-
• A change in demand means that people have pone a purchase, by the substitutes available, and by
changed their minds about the amount they would the proportion of income required for the purchase.


CHAPTER 4: DEMAND 109
Reviewing the Facts
Section 1 (pages 89“93)
1. Describe a demand schedule and a demand curve.
Self-Check Quiz Visit the Economics: Principles
How are they alike?
and Practices Web site at epp.glencoe.com and
click on Chapter 4”Self-Check Quizzes to prepare 2. Explain how the principle of diminishing marginal
for the chapter test. utility is related to the downward-sloping demand
curve.

Identifying Key Terms Section 2 (pages 95“99)
On a separate sheet of paper, match the letter of the term best 3. Describe the difference between the income effect
described by each statement below. and the substitution effect.
a. demand schedule 4. Identify the five factors that can cause a change in
b. demand market demand.
c. microeconomics
d. change in demand Section 3 (pages 101“107)
e. demand curve
5. Describe the difference between elastic demand and
f. change in quantity demanded
inelastic demand.
g. Law of Demand
6. Explain how the total expenditures test can be used
h. elastic demand
to determine demand elasticity.
1. the desire, ability, and willingness to buy a product
2. a movement along the demand curve showing that
a different quantity is purchased in response to a
Thinking Critically
change in price
3. a statement that more will be demanded at lower 1. Making Generalizations Do you think the Law of
prices and less at higher prices Demand accurately reflects most people™s behavior
regarding certain purchases? Explain.
4. a listing in a table that shows the quantity demanded
at all possible prices in the market at a given time 2. Drawing Conclusions What would normally hap-
pen to a product™s market demand curve in a grow-
5. a principle illustrating that consumers demand dif-
ing and prosperous community if consumer tastes,
ferent amounts at every price, causing the demand
expectations, and the prices of related products
curve to shift to the left or the right
remained unchanged? Create a web like the one
6. the field of economics that deals with behavior and
below to explain your answer.
decision making by individuals and firms
7. a principle illustrating that a relatively small change No change in
No change in
price of related
in price causes a relatively large change in the quan- consumer tastes
products
tity demanded
8. a graph that shows the quantity demanded at all Effect on Product A
possible prices in the market at a given time



110 UNIT 2 MICROECONOMICS
Applying Economic Concepts Technology Skill
1. Demand Why do you think a knowledge of Using the Internet Use a search engine to find the
demand would be useful to an individual like your- Web site for the U.S. Department of Commerce. Select
self? To a businessperson like Keith Clinkscales the option “Economics and Statistics Administration.”
(cover story, page 89)? Next select “STAT-USA.” Then click on “State of
the Nation.” From the options on the screen, select
2. Demand How do you think the market demand
“Manufacturing and Trade, Inventories and Sales.”
curve for pizza would be affected by (1) an increase
Locate the information on “Apparel and accessory
in everyone™s pay, (2) a successful pizza advertising
stores,” and answer the questions that follow.
campaign, (3) a decrease in the price of hamburgers,
and (4) new people moving into the community? 1. How many months does the data cover?
Explain your answers. 2. Compare the monthly data on inventory. Is the
3. Demand Elasticity How would you, as a business inventory increasing, decreasing, or about the
owner, use your knowledge of demand elasticity to same? Then, compare the data on sales.
determine the price of your product? 3. Are there any sharp fluctuations in inventory or
sales from one month to the next? If so, what
might have caused these changes?
Math Practice 4. Do you think demand for apparel increases or
Mindy is trying to estimate the elasticity of demand decreases according to the season or time of year?
for a product she wants to sell at a craft fair. She has How do you think this change in demand relates to
been told that she can expect to sell 10 items if she inventory and sales?
charges a price of $10, six items if she charges a price
of $20, and 18 items at a price of $5.
1. Make a demand schedule to show the quantities
demanded at each price. Understanding Cause and Effect Draw the
two demand curves below on separate sheets
2. Use the information in the demand schedule to
of paper. Then, show how the rise in the cost
create a demand curve and to graph the results. of razor blade handles affects the demand
curve for its complementary and its substitute
3. At which price would the total expenditures by
products.
consumers be greatest for the product? At what
price would expenditures be the smallest?
D D
Sharp increase in the
price of double-edged
Thinking Like an Economist razor blade handles
Price




Price




Write a paragraph describing a business that you
might like to own and the major product that the
business would produce. Next, use the three determi- D D
nants of demand elasticity to predict the elasticity of
Quantity Quantity
demand for that product. Describe the pricing policy
Demand for double- Demand for
you would use to get consumers to maximize their edged razor blades electric razors
expenditures on that product.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

CHAPTER 4: DEMAND 111
About how many hours
do you spend studying
every night? How many hours
would you study if you were
paid $1 an hour? $10 an hour? If
you will study more for a higher
price, you are following the Law
of Supply. To learn more about
supply, view the Chapter 6 video
lesson:
What Is Supply?




Chapter Overview Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
click on Chapter 5”Chapter Overviews to preview
chapter information.


A firm™s willingness to supply products
depends on the price it can charge and
on its cost of production.
What Is Supply?
Main Idea quantity supplied, change in supply, subsidy, supply
For almost any good or service, the higher the price, elasticity
the larger the quantity that will be offered for sale.
Objectives
Reading Strategy
After studying this section, you will be able to:
Graphic Organizer As you read the section, complete
1. Understand the difference between the supply
a graphic organizer similar to the one below by
schedule and the supply curve.
describing how supply differs from demand.
2. Explain how market supply curves are derived.
3. Specify the reasons for a change in supply.
Supply Demand

Applying Economic Concepts
Differences
Supply The Law of Supply tells us that firms will
produce and offer for sale more of their product
at a high price than at a low price. On another level,
Key Terms think about your own labor. You are the supplier,
supply, Law of Supply, supply schedule, supply curve, and the higher the pay, the more work you are will-
market supply curve, quantity supplied, change in ing to supply.




T
he concept of supply is based on voluntary
Cover Stor y decisions made by producers, whether they
are proprietorships working out of home
offices or large corporations operating out of down-
Sell It on the Web town corporate headquarters. For example, a pro-
By now, just about ducer might decide to offer one amount for sale at
everyone has heard one price and a different quantity at another price.
the breathless pre- Supply, then, is defined as the amount of a product
diction about the that would be offered for sale at all possible prices
coming explosion in that could prevail in the market.
e-commerce. From Because the producer is receiving payment for his
the corner store to or her products, it should come as no surprise that
the corporate board- Online business grows. more will be offered at higher prices. This forms the
, entrepreneurs
room
basis for the Law of Supply, the principle that sup-
recognize that there™s
The debate is no longer
ey to be made online. pliers will normally offer more for sale at high prices
mon t
t your business online bu
t whether you should pu and less at lower prices.
abou
y to do it. . . .
about what is the best wa
erce solutions lets small
new group of e-comm
A
mmerce without getting
An Introduction to Supply
esses take a dip into e-co
busin
rnkey solutions offer sev-
er their heads. These tu
in ov
owledge of HTML is All suppliers of economic products must
advantages. . . . No kn
eral
e design is done using decide how much to offer for sale at various
ired, because all the sit
requ
authoring tools. . . . prices”a decision made according to what is best
y-made templates (and)
read
er 17, 1998 for the individual seller. What is best depends, in
”PC Magazine, Septemb


CHAPTER 5: SUPPLY 113
ECONOMICS be supplied at various prices, other things being
Figure 5.1
AT A GLANCE
AT A GLANCE equal. If you compare it to the demand schedule in
Panel A of Figure 4.1 on page 90 you will see that the
Supply of Compact Discs two are remarkably similar. The only real difference
between the two is that prices and quantities now
move in the same direction for supply”rather than
A Supply Schedule
in opposite directions as in the case of demand.
Quantity
Price Supplied
The Individual Supply Curve
$30 8
The data presented in the supply schedule can also
25 7 be illustrated graphically as the upward-sloping line
20 6 in Panel B of Figure 5.1. To draw it, we transfer each
of the price-quantity observations in the schedule
15 4
over to the graph, and then connect the points to
10 2
form the curve. The result is a supply curve, a graph
5 0
showing the various quantities supplied at each and
every price that might prevail in the market.
All normal supply curves slope from the lower
B Supply Curve left-hand corner of the graph to the upper right-
$30
hand corner. This is a positive slope and shows
Decrease in
25 that if one of the values goes up, the other will go
quantity supplied b
20 up too.
Price




a
While the supply schedule and curve in the figure
15
represent a single, hypothetical producer of compact
10 Increase in
digital discs, we should realize that supply is a very
quantity supplied
5
general concept. In fact, you are a supplier when you
look for a job and offer your services for sale. Your
0 2 4 6 7 8
economic product is your labor, and you would
Quantity
probably be willing to supply more labor for a high
wage than for a low one.
Using Tables and Graphs The supply curve
is drawn from the values on the schedule. The Market Supply Curve
How does the Law of Supply differ from
The supply schedule and curve in Figure 5.1 show
the Law of Demand?
the information for a single firm. Frequently, how-
ever, we are more interested in the market supply
curve, the supply curve that shows the quantities
offered at various prices by all firms that offer the
turn, upon the cost of producing the goods or serv-
product for sale in a given market.
ices. The concept of supply, like demand, can be
To obtain the data for the market supply curve,
illustrated in the form of a table or a graph.
add the number of CDs that individual firms would
produce at each and every price, and then plot them
The Supply Schedule on a separate graph. In Figure 5.2, point a on the
market supply curve represents six CDs”four from
The supply schedule is a listing of the various
the first firm and two from the second”that are
quantities of a particular product supplied at all
offered for sale at a price of $15. Correspondingly,
possible prices in the market. Panel A of Figure 5.1
point b on the curve represents a total of nine CDs
is a hypothetical supply schedule for compact dig-
offered for sale at a price of $20.
ital discs. It shows the quantities of CDs that will

114 UNIT 2 MICROECONOMICS
ECONOMICS
Figure 5.2
AT A GLANCE
AT A GLANCE

Individual and Market Supply Curves
Firm A Firm B
$30 $30
25 25
20 20

+ =
Price




Price
15 15
10 10
Add the first . . . to the second
supply curve . . . supply curve . . .
5 5

0 2 4 6 7 8 0 1 234 5
Quantity Quantity

Market Quantity of CDs Supplied by:
S
$30 . . . to get the
Price Firm A + Firm B = Market
Market Supply Curve.
25
$30 8 5 13
b
20
25 7 4 11
Price




a
15 20 6 3 9
15 4 + 2 = 6
10
10 2 1 3
5
S 5 0 0 0

0 3 6 9 11 13
Quantity


Using Graphs The market supply curve, SS, is the sum of all individual supply curves in the market.
Using Graphs
Why are the supply curves upward sloping?



These changes illustrate a change in the quan-
Change in Quantity Supplied tity supplied which”like the case of demand”
shows as a movement along the supply curve.
The quantity supplied is the amount that pro-
Note that the change in quantity supplied can
ducers bring to market at any given price. A
be an increase or a decrease, depending on whether
change in quantity supplied is the change in amount
more or less of a product is offered. For example,
offered for sale in response to a change in price. In
the movement from a to b in Figure 5.1 shows
Figure 5.1, for example, four CDs are supplied when
an increase because the number of products
the price is $15. If the price increases to $20, six CDs
offered for sale goes from four to six when the
are supplied. If the price then changes to $25, seven
price goes up.
units are supplied.

CHAPTER 5: SUPPLY 115
price than before. Where 6 units were offered at a
Supply
price of $15, now there are 13. Where 11 were
offered at a price of $25, 18 are now offered, and so
on for every price shown in the schedule.
When both old and new quantities supplied are
plotted in the form of a graph, it appears as if the
supply curve has shifted to the right, showing an
increase in supply. For a decrease in supply to occur, less
would be offered for sale at each and every price,
and the supply curve would shift to the left.
Changes in supply, whether increases or
decreases, can occur for several reasons. As you
read, keep in mind that all but the last reason”the
number of sellers”affects both the individual and
the market supply curves.

Cost of Inputs
A change in the cost of inputs can cause a
change in supply. Supply might increase because of
a decrease in the cost of inputs, such as labor or
packaging. If the price of the inputs drops, produc-
ers are willing to produce more of a product at each
and every price, thereby shifting the supply curve
to the right.
The Effect of Price A delicatessen offers differ-
An increase in the cost of inputs has the opposite
ent kinds of cheeses at various prices. How does
effect. If labor or other costs rise, producers would
the price of a product affect the quantity offered
not be willing to produce as many units at each and
for sale?
every price. Instead, they would offer fewer products
for sale, and the supply curve would shift to the left.
In a competitive economy, producers usually
Productivity
react to changing prices in just this way. While the
interaction of supply and demand usually deter- When management motivates its workers, or if
mines the final price for the product, the producer workers decide to work more efficiently, productiv-
has the freedom to adjust production. Take oil as ity should increase. The result is that more CDs are
an example. If the price of oil falls, the producer produced at every price, which shifts the supply
may offer less for sale, or even leave the market
altogether if the price goes too low. If the price
rises, the oil producer may offer more units for sale
to take advantage of the better prices.

Change in Supply Economic Efficiency In 1814 Francis Lowell com-
Sometimes something happens to cause a bined all the stages of textile production”spinning,
change in supply, a situation where suppliers weaving, bleaching, dyeing, and printing”under
offer different amounts of products for sale at all one roof. His efficient mill launched the nation™s
Industrial Revolution, changing the system of man-
possible prices in the market. For example, the sup-
ufacturing from the home to the factory.
ply schedule in Figure 5.3 shows that producers are
now willing to offer more CDs for sale at every

116 UNIT 2 MICROECONOMICS
curve to the right. On the other hand, if workers producers to enter. When subsidies are repealed,
are unmotivated, untrained, or unhappy, produc- costs go up, producers leave the market, and the
tivity could decrease. The supply curve shifts to the supply curve shifts to the left.
left because fewer goods are brought to the market Historically, many farmers in the milk, corn,
at every possible price. wheat, and soybean industries received substantial
subsidies to support their income. While many
farmers would have gone out of business without
Technology these subsidies, the fact that they were paid
New technology tends to shift the supply curve ensured their ability to remain operational, and
to the right. The introduction of a new machine, the market supply curve shifted to the right.
chemical, or industrial process can
affect supply by lowering the cost of
production or by increasing produc-
ECONOMICS
tivity. For example, improvements
Figure 5.3
AT A GLANCE
in the fuel efficiency of aircraft
engines have lowered the cost of
A Change in Supply
providing passenger air service.
When production costs go down,
the producer is usually able to pro- Quantity Supplied
duce more goods and services at
Price Old (SS) New (S™S™)
each and every price in the market.
New technologies do not always $30 13 20
work as expected, of course.
25 11 18
Equipment can break down, or the
20 9 16
technology”or even replacement
15 6 13
parts”might be difficult to obtain.
This would shift the supply curve to 10 3 9
the left. These examples are excep- 5 0 3
tions, however. New technology far
more often increases supply.
S S˜
$30
Taxes and Subsidies 25
Firms view taxes as costs. If the Decrease in supply b b˜
20
producer™s inventory is taxed or if
fees are paid to receive a license to
Price




a a˜
15
produce, the cost of production goes Increase in supply
up. This causes the supply curve to 10
shift to the left. Or, if taxes go down
5
production costs go down, supply S S˜
then increases and the supply curve
shifts to the right. 0 3 6 9 11 13 16 18 20
A subsidy is a government pay- Quantity
ment to an individual, business, or
other group to encourage or protect a
certain type of economic activity. Using Tables and Graphs A change in supply means that
Subsidies lower the cost of produc- a different quantity is supplied at every price. What does a
tion, encouraging current producers shift of the supply curve to the right show?
to remain in the market and new

CHAPTER 5: SUPPLY 117
Expectations government mandates new auto safety features
such as air bags or emission controls, cars cost more
Expectations about the future price of a product
to produce. Producers adjust to the higher produc-
can also affect the supply curve. If producers think
tion costs by producing fewer cars at each and
the price of their product will go up, they may
every price in the market.
withhold some of the supply. This causes supply
In general, increased”or tighter”government regu-
to decrease and the supply curve to shift to the
lations restrict supply, causing the supply curve to
left. On the other hand, producers may expect
shift to the left. Relaxed regulations allow producers
lower prices for their output in the future. In this
to lower the cost of production, which results in a
situation, they may try to produce and sell as
shift of the supply curve to the right.
much as possible right away, causing the supply
curve to shift to the right.
Number of Sellers
All of the factors you just read about can cause
Government Regulations
a change in an individual firm™s supply curve and,
When the government establishes new regula-
consequently, the market supply curve. It follows,
tions, the cost of production can be affected, caus-
therefore, that a change in the number of suppliers
ing a change in supply. For example, when the
causes the market supply curve to shift to the right
or left.
As more firms enter an industry, the supply curve
shifts to the right. In other words, the larger the
number of suppliers, the greater the market supply.
If some suppliers leave the market, fewer products
Real Estate Agent
are offered for sale at all possible prices. This causes
supply to decrease, shifting the curve to the left.
Real estate agents assist in
In the real world, sellers are entering the market
renting, selling, and buying
and leaving the market all the time. Some economic
property for clients. In
analysts believe that, at least initially, the develop-
return, they receive a per-
ment of the Internet will result in larger numbers
centage of the rent or sale
entering the market than in leaving. They point out
prices of the property.
that almost anyone with Internet experience and a
The Work
few thousand dollars can open up his or her own
Responsibilities include Internet store. Because of the ease of entry into these
obtaining listings”owner
new markets, being a seller is no longer just for the
agreements to place proper-
big firms.
ties for rent or sale”adver-
tising the property, and
showing the property to prospective renters and buyers.
Elasticity of Supply
Agents need to be familiar with fair-market values, zon-
ing laws, local land-use laws, housing and building codes, Just as demand has elasticity, there is elastic-
insurance coverage, mortgage and interest rates, and ity of supply. Supply elasticity is a measure
credit and loan policies. They may also need to know of the way in which quantity supplied responds to
about leasing practices, business trends, location needs,
a change in price. If a small increase in price leads
transportation, utilities, and labor supply. Agents often
to a relatively larger increase in output, supply is
work evenings and weekends because they must accom-
elastic. If the quantity supplied changes very little,
modate their schedule to that of the client.
supply is inelastic.
Qualifications What is the difference between supply elasticity
and demand elasticity? Actually, there is very little
Agents should have a high school education at the min-
difference. If quantities are being purchased, the
imum and possess a real estate license.

118 UNIT 2 MICROECONOMICS
ECONOMICS
Figure 5.4
AT A GLANCE
AT A GLANCE

Supply Elasticity
B Inelastic Supply
A Elastic Supply
S
S $2
$2




Price
Price




1
1
S S


0 1 2 3 4 5 6
0 1 2 3 4 5 6
Quantity
Quantity
C Unit Elastic Supply D Change in Supply Due to Change in Price
Type of Change in Quantity Supplied
S
$2 Elasticity Due to a Change in Price
Price




Elastic More than proportional
1
S
Unit Elastic Proportional

Inelastic Less than proportional
0 1 2 3 4 5 6
Quantity

Using Graphs The elasticity of supply, like the elasticity of demand, is a measure of responsiveness.
The key to elasticity is the way the dependent variable (quantity supplied) changes in response to a
change in the independent variable (price). What determines whether a business™s supply curve
is elastic or inelastic?



concept is demand elasticity. If quantities are being from $1 to $2, the quantity brought to market
brought to market for sale, the concept is supply goes up only 50 percent, or from two units to
elasticity. Keep in mind that elasticity is simply three units.
a measure of the way quantity adjusts to a change Panel C shows a unit elastic supply curve. A
in price. change in price causes a proportional change in the
quantity supplied. The price doubles from $1 to
$2, which causes the quantity brought to market
Three Elasticities also to double.
Examples of supply elasticity are illustrated in
Figure 5.4. The supply curve in Panel A is elastic
Determinants of Supply Elasticity
because the change in price causes a relatively
larger change in quantity supplied. Doubling the The elasticity of a business™s supply curve
price from $1 to $2 causes the quantity brought to depends on the nature of its production. If a firm
market to triple. can adjust to new prices quickly, then supply is likely
Panel B shows an inelastic supply curve. A to be elastic. If the nature of production is such that
change in price causes a relatively smaller change adjustments take longer, then supply is likely to be
in quantity supplied. When the price is doubled inelastic.

CHAPTER 5: SUPPLY 119
The supply curve for shale oil, for example, is
Supply and Demand
likely to be inelastic in the short run. No matter
what price is being offered, companies will find it
difficult to increase output because of the huge
amount of capital and technology needed before
production can be increased very much.
However, the supply curve is likely to be elastic
for kites, candy, and other products that can be
made quickly without huge amounts of capital and
skilled labor. If consumers are willing to pay twice
the price for any of these products, most producers
will be able to gear up quickly to significantly
increase production.
The elasticity of supply is different from the
elasticity of demand in several important respects.
First, the number of substitutes has no bearing on
the elasticity of supply. In addition, considera-
tions such as the ability to delay the purchase or
the portion of income consumed have no rele-
vance to supply elasticity even though they are
essential for demand elasticity. Instead, only pro-
duction considerations determine supply elastic-
ity. If a firm can react quickly to higher or lower
prices, then supply is likely to be elastic. If the
Elasticity Business owners need to be aware of firm takes longer to react to a change in prices,
the relationship between supply and demand. then supply is likely to be inelastic. For these rea-
What is the difference between supply elasticity
sons, there is no supply elasticity table equivalent
and demand elasticity?
to Figure 4.6 on page 106.




Checking for Understanding 5. List the factors that can cause a change in
1. Main Idea Using your notes from the graphic supply.
organizer activity on page 113, describe how
Applying Economic Concepts
supply is different from demand.
6. Supply Provide an example of an economic
2. Key Terms Define supply, Law of Supply, sup- good whose producer would increase the
ply schedule, supply curve, market supply quantity supplied if the price were to go up.
curve, quantity supplied, change in quantity
supplied, change in supply, subsidy, supply
elasticity.
3. Describe the difference between the supply 7. Understanding Cause and Effect According
schedule and the supply curve. to the Law of Supply, how does price affect
4. Describe how market supply curves are the quantity offered for sale?
obtained. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



120 UNIT 2 MICROECONOMICS
Sears was the largest JOHN
mail-order firm in the JOHNSON
world. In 1935, Sears In 1942,
opened its first retail
Enterprising John Johnson
store. Today, Sears, Roebuck and set off to
Entrepreneurs Company is one of the largest retail publish a
businesses in the world, employing magazine
There have been literally millions more than 300,000 people. called Negro
of American entrepreneurs. A few,
Digest. Most white maga-
however, are noteworthy for taking
zine sellers, doubting that there
modest business dreams to stunning
was a sufficient African American
heights. Three of the most impres-
readership, refused to carry it. So
sive are Richard Sears, Milton
Johnson convinced hundreds of
Hershey, and John Johnson.
acquaintances to ask for the maga-
zine at newsstands, and then to buy
RICHARD SEARS
all the copies once they came in.
In 1886, 23-year-old Richard Circulation soared. Johnson then
Sears was a railway station agent in persuaded the first lady, Eleanor
North Redwood, Minnesota. Sears Roosevelt, to write a piece called “If
had free time on his hands, so he I Were a Negro” for the magazine.
decided to make a little money on The publicity tripled circulation.
M I LT O N H E R S H E Y
the side. He bought a surplus ship- Johnson followed this success
ment of watches and started selling Milton Hershey started as a in 1945 by founding Ebony, a mag-
them to other station agents. poor farm boy, and received little azine aimed at African American
Encouraged by his education. He failed as a candy veterans of World War II. The
profits, Sears seller in Philadelphia, Denver, New magazine proved even more popu-
moved to York, Chicago, and New Orleans. lar than his first. A third maga-
Chicago, where At 30, he was flat broke and zine, Jet, was produced, and
he partnered shunned by his family. But one whereas there had been no
with Alvah C. more try at the candy business” national magazines for African
Roebuck, who this time making a caramel candy Americans before, there were now
could repair of his own recipe”made him a suc- three. And they were all a result of
watches. They cess. In fact, his “Hershey™s Crystal the hard work of just one enter-
founded Sears, A” made him a millionaire. In prising entrepreneur.
Roebuck and 1895, Hershey sold his caramel
Company in company and went into the choco-
1893, and published their first cat- late business. In just a few years,
Examining the Profile
alog a year later. Rural residents, the name Hershey became synony-
1. Making Generalizations Explain
who could “Shop at Sears and mous with chocolate. It still is, due
how persistence played a role in the
Save” by avoiding middlemen, to the dogged persistence of a man
success of each of these men.
loved the catalog, and the com- who failed for decades before he
pany prospered. Within a decade, 2. For Further Research Find out the
succeeded.
etymology of entrepreneur and explain
why the word is used as it is today.

CHAPTER 5: SUPPLY 121
The Theory of Production
Main Idea Key Terms
A change in the variable input called labor results in theory of production, short run, long run, Law of
a change in production. Variable Proportions, production function, raw mate-
rials, total product, marginal product, stages of pro-
Reading Strategy duction, diminishing returns
Graphic Organizer As you read about production,
Objectives
complete a graphic organizer similar to the one
below by listing what occurs during the three After studying this section, you will be able to:
stages of production. 1. Explain the theory of production.
2. Describe the three stages of production.
Stage I Stage II Stage III
Applying Economic Concepts
Diminishing Returns Has the quality of your work ever
declined because you worked too hard at something?
Sometimes you reach a stage where you still make
progress but at a diminished rate.




W
hether they are film producers of multi-
Cover Stor y million-dollar epics or small firms that
market a single product, suppliers face a
ess
The Effects Are Getting L
difficult task. Producing an economic good or serv-
ice requires a combination of land, labor, capital,
Special All the Time and entrepreneurs. The theory of production deals
s
clares that digital effect with the relationship between the factors of produc-
When George Lucas de vent
nce as profound as the ad tion and the output of goods and services.
are a technological adva
is exactly right. . . . The theory of production generally is based on the
of sound and color, he n
But is the revolutio short run, a period of production that allows produc-
already over? ers to change only the amount of the variable input
w
Mixed reaction to his ne called labor. This contrasts with the long run, a period
de I:
movie, Star Wars Episo of production long enough for producers to adjust
sug-
The Phantom Menace,
the quantities of all their resources, including capital.
in the
gest that it may be,
For example, Ford Motors hiring 300 extra workers
tions
same way that revolu
r and for one of its plants is a short-run adjustment. If Ford
ushered in by colo
but
sound were profound
New technology is builds a new factory, this is a long-run adjustment.
king. r all,
altering moviema brief affairs. . . . afte
and
en we go to the movies
none of us is amazed wh go
are we amazed when we
Law of Variable Proportions
hear an actor speak. Nor
lor images.
to the movies and see co is a
effects-driven movies, The Law of Variable Proportions states
What this creates, for
The more Lucas
diminishing returns. that, in the short run, output will change
scale of me,
ena, the smarter we beco as one input is varied while the others are held
achieves in the digital ar

<<

. 6
( 33)



>>