Chapter

5 SUPPLY
Getting Focused
Skim this chapter to predict what you will be learning.
• Read the lesson titles and subheadings.
• Look at the illustrations and read the captions.
• Examine the charts and graphs.
• Review the vocabulary words and terms.
In Chapter 4, you learned how the demands of consumers
shape a market economy. In this chapter, you will learn
how the supply of goods and services affects a market
economy. Think about what you already know about the
supply of goods and services. For example, what seems to
happen when stores have more goods than they can sell?
What seems to happen when the supply of a product is
very low? Discuss your experiences with a partner.

Hundreds of thousands
of products are
supplied daily from
businesses in the
United States.
LESSON
1 Defining Supply
Thinking on Your Own
Economists often give an everyday term, like supply, a special
meaning. Make a T-chart in your notebook for the word supply.
On one side of the chart, write an everyday definition of the word.
Look up the word in a dictionary if you need to. As you read, find
an economist’s definition of the word. Copy it on the other side of
the chart. Then, as you read about the law of supply in this
lesson, draw a graph in your notebook that shows how it works.

n a market economy, the word market

I refers to exchanges between buyers
and sellers. Chapter 4 focused on the
focus your reading

What is the law of supply?

questions faced by buyers in the market. How does the profit motive affect
Those questions deal with demand. supply?
Sellers also face questions: how much to What is the difference between a
sell and at what price? These questions change in the quantity supplied
and a change in market supply?
are related to supply.
vocabulary
The Law of Supply law of supply supply curve
According to the law of supply, if all
profit motive market supply
other things are equal, the higher the
supply schedule
price of a product or service, the more of
it suppliers will offer for sale. As the price
falls, so will the quantity supplied.
The law of supply is based on the profit motive—the desire
of individuals and businesses to make money. Therefore, the
relationship between the price of a good
recall or service and the quantity supplied is a
positive one. That is, if one variable
Demand in economics means (price) rises, the other variable (the
the amount of goods and
services consumers are quantity supplied) also rises. If the price
willing to buy at various goes down, the quantity supplied goes
prices at a particular time.
down as well.
Supply means the amount of
goods and services producers One way to show the relationship
are willing to sell at various
prices at a particular time.
between price and the quantity supplied
is by examining a supply schedule.

S u p p ly 63
 Supply Schedule Figure 5.1A A supply schedule is a
list that shows the
SUPPLY OF COMPACT DISCS quantities supplied of a
product at various prices
SUPPLY SCHEDULE during a particular time
period. Figure 5.1A
Quantity
shows the supply for
Price Supplied
CDs at several different
$30 8
prices. At $30, suppliers
25 7
20 6
will provide eight CDs;
15 4 at $20, six will be offered;
10 2 and at $5, they do not
5 0 provide any CDs.
Figure 5.1B is another
way to look at the
information in a supply schedule. Each point on the graph
shows the quantity supplied at a particular price. The line
formed by connecting the points is called a supply curve. Notice
that unlike a demand curve, it slopes upward. An upward slope
shows a positive relationship—as one variable increases, the
other also increases. A downward curve shows a negative
relationship—as one variable increases, the other decreases.

Supply Schedule Figure 5.1B

SUPPLY CURVE
$30

Decrease in
25

quantity supplied
20
PRICE

a
15

Increase in
10

quantity supplied
5

0 1 2 3 4 5 6 7 8

QUANTITY

64 C h a p te r 5
 Analyzing Market Supply
A supply curve begins with the preferences of individual sellers.
The points along the curve show the sellers’ willingness to
provide a good or service at a particular price. Sellers can be
individuals or companies.
Economists add up all of these
stop and think
individual supply curves to
determine market supply. The How does Figure 5.2
market supply is the total illustrate the law of supply?
Explain your answer in a
output of all of the individual sentence or two.
companies within a market.

Supply Schedule Figure 5.2

A CHANGE IN SUPPLY

QUANTITY SUPPLIED

Price Old (SS) New (S S )

$30 13 20
25 11 18
20 9 16
15 6 13
10 3 9
5 0 3
$30

S S

Decrease in supply
25

b b
20
PRICE

a a
15

Increase in supply
10
5

S S

0 3 6 9 11 13 16 18 20

QUANTITY

S u p p ly 65
 Just as graphs show changes in the quantity supplied at
various prices, they can also show changes in the market
supply. The two supply curves in Figure 5.2, on page 65, show
changes in the supply of CDs. Notice that when the supply
curve shifts to the right, it is showing an increase in supply.
When the curve shifts to the left, it is showing a decrease in
supply, indicating that fewer CDs will be sold at the same
set of prices.

Putting It All Together

Make a Venn diagram to compare a supply curve with a demand
curve. Then write a paragraph comparing and contrasting a
supply curve to a demand curve. Be sure to explain how the two
are similar as well how they differ from each other.

reading for understanding

What does the report suggest about

the way shoemakers in the 1870s
increased the quantity supplied?
Was their response long-term or
short-term? How did you decide?
“Wonderful Progress
Primary Source

Explain why the market supply of

Has Been Made” shoes in the U.S. decreased during the
An 1870s look at the effect the U.S. Civil War Civil War. Why did it increase in the
1870s, after the Union was restored?
(1861–1865) had on the shoe industry:

“ The shoe business is in a most thriving

condition. The war reduced a part of the country to bare feet, and as the existing
shoe factories had during the war only been able to supply the northern states, the
extension of their market makes them very busy.
“Wonderful progress has been made in the shoe business within a few years. A
machine is had for everything, and girls to tend machines, and men to finish when
the machines stop. There is a machine to roll the leather, which was formerly
hammered; a machine to split the leather, which was done slowly by hand in other
times; . . . machines to stitch the upper leathers or cloths, and bind the edges; and
finally, a more important machine that sews the upper to the sole; and then there
are machines for putting on the heels and forming them. By these means, from five
to ten times the work can be done by a given number of hands than could have been
accomplished twenty years ago under the old system.
”
“Report” in Mechanics Magazine and Register of Inventions and Improvements, 1876.
LESSON
2 Production and
Supply
Thinking on Your Own
Select three of the terms from the vocabulary list. Write them
in your notebook. Under each, write what you think the term
means. As you encounter the word when you read, correct or
add to your definition.

uppliers use the factors of

S production—natural resources;
labor; and capital resources, like tools and
focus your reading

What is the relationship

other technology—to produce a product among the factors of
production and the supply
or service. A change in the amount of any of a good or service?
one of these production resources can
What happens to the
affect supply in the long run. In the short marginal product at each
run, only a change in labor is likely to of the three stages of
production?
impact production.
At what point does adding
To understand why only labor can be resources have a negative
rather than a positive effect?
increased in the short run, think about a
company that produces the most popular
vocabulary
running shoe on the market. To keep up
with the demand, the company has to law of variable proportions

produce more shoes. The fastest way to production schedule

increase production is by hiring extra marginal product
workers. Building a new factory, stages of production
developing a new manufacturing process, diminishing returns
or adding machines requires more time
and expense.

The Law of Variable Proportions

The law of variable proportions states that in the short run,
output or supply will change as one resource is varied, even
though other resources do not change. This law highlights the
relationship between the input of a production resource and
the supply of a good or service.

S u p p ly 67
 Supply Schedule Figure 5.3

THE LAW OF VARIABLE PROPORTIONS

A THE PRODUCTION SCHEDULE

Number of Total Marginal Stages of

Workers Products Product* Production
0 0 0 Stage I
1 7 7
2 20 13
3 38 18
4 62 24
5 90 28
6 110 20 Stage II
7 129 19
8 138 9
9 144 6
10 148 4
11 145 -3 Stage III
12 135 -10

* All figures in terms of output per day

B THE PRODUCTION FUNCTION

100 120 140
TOTAL PRODUCT

St ag e I St ag e I I St ag e I I I
80
60
40
20

0 1 2 3 4 5 6 7 8 9 10 11 12 13
VARIABLE INPUT: NUMBER OF WORKERS

68 C h a p te r 5
 To understand how more or less of a resource affects
output, think about a garden. When you add water (a
production resource) to the garden, the plants perk up. Water
keeps the plants healthy. Suppose every time you water the
garden, you increase the amount of water you add. At some
point, the soil becomes waterlogged and the plants die. As the
amount of input—in this case, water—varies, so does the
output—in this case, the crop.
Figure 5.3 shows how the law of variable proportions
works. The production schedule lists how the quantity
supplied changes as the number of workers is increased. The
first column lists the number of workers from zero to 12. The
second column shows the total number of goods produced by
the company. For example, with one worker, the company
produces only seven products each day. If a second worker is
added, the output increases to 20. Additional workers are able
to use resources more efficiently than a single worker can.
The third column in the table shows marginal product—the
extra output or change in the total product caused by adding a
worker. Notice that after six workers have been added, the rise
in the marginal product begins to slow. Although adding the
fifth worker increases the marginal product by 28, adding the
sixth worker increases it by just 20.
Why does adding a sixth worker increase the marginal
product less? The answer lies in the fact that only the number
of workers changes in the example. The size of the factory
does not change, nor does the number of machines the workers
use. At some point—in this case,
beginning with the addition of a stop and think
sixth worker—the factory becomes
What happens to both the
crowded, machines are product total and the
overworked, and the jobs workers marginal product after an
do become less important. You eleventh worker is added?
Before reading further, work
may have experienced the same with a partner to explain
thing if you have ever had too these two numbers. Write
your explanation in your
much help with a task. At some notebook. As you read, check
point, you and your helpers are to see if your explanation is
correct. Discuss your answer
just getting in one another’s way.
with a partner.

S u p p ly 69
 Stages of Production
Producers use marginal product to help them figure out when
extra helpers hinder rather than help the production process.
Notice that the fourth column in Figure 5.3, on page 68, shows
the three stages of production. Each is based on changes in
marginal product.
In the first stage, the supply increases as extra workers are
added. In this stage, adding more workers results in a more
efficient use of tools and other resources. As long as each new
worker contributes more to the total product than the worker
before, the total product rises at an increasingly faster rate.
Stage I is known as the stage of increasing returns, or gains,
on the company’s investment in the production process.
In Stage II, the total product keeps growing, but by smaller
and smaller amounts. This stage shows the principle of
diminishing returns. The amount of output is still growing but
not as quickly as it did in Stage I. Notice that the stage begins
when the marginal product has begun to decrease.
Stage III shows negative returns. It begins when so many
workers have been added that each extra worker results in a
decrease in total output. Most companies do not add workers
when the production schedule reaches Stage III. By the end of
Stage II, it is clear each new worker is contributing less to the
marginal product. The factory is becoming overcrowded and
the machines are so overused that they are beginning to break
down. Workers are now getting in one another’s way. Adding
workers only increases the problem.

Putting It All Together

You have been asked to hire workers for the project shown in
Figure 5.3. Based on the information in the table and the graph,
at what point should you stop hiring extra workers? In one or two
sentences, explain how your answer reflects the law of variable
proportions.

70 C h a p te r 5
LESSON
3 Changes in Supply
Thinking on Your Own
Find out what the word elastic means. With a partner, discuss
how the supply of any item that you buy might be elastic. Write
your answer in your notebook.

hanges in supply—decreases as well as increases—occur

C for a variety of reasons. One reason is a change in price.
According to the law of supply, suppliers will offer more for
sale at high prices and less at low prices. Supply changes for
other reasons as well.

focus your reading

Why Supply Rises
and Falls What factors affect supply?
A cold snap brings freezing temperatures
Name two items that are
to Florida and destroys the orange crop. elastic in supply.
The Great Plains suffers from a lack of Name two items that are
rain, which wipes out corn and wheat inelastic in supply.
crops. A war interferes with shipments of
vocabulary
rubber, oil, and other resources. These
dramatic changes in supply are the result productivity
of events beyond the control of any one tax
business. Most changes in supply are far subsidy
less dramatic. They are often the result of regulation
an increase in the costs of buying or elasticity of supply
renting the various factors of production.
Production costs affect supply. Any change in the cost of
producing a good or service will affect the quantity supplied. If
the cost of one or more of the factors of production decreases,
the quantity supplied is likely to increase. Sellers are now able
to offer more goods at the same set of prices. On the other
hand, if production costs rise, the quantity supplied is likely to
decrease. Sellers will now supply fewer products at the same
set of prices.
Productivity—the amount of output for each unit of
productive input—also affects production costs. Productivity

S u p p ly 71
 increases if the same quantity of input (work,
stop and think
for example) produces more output (quantity
Work with a partner to name supplied). When Henry Ford and his engineers
at least five ways a company reorganized the way cars were made in the early
can improve the productivity
of its workers. How does
1900s, workers were able to turn out more cars
each of your answers (output) in the same amount of time (input).
increase output without Productivity decreases if the same quantity of
increasing input?
input produces less output. If the company
shown in Figure 5.3 hires an eleventh worker,
the result will be a decrease in productivity.
Government plays a role in the rise and fall of supply.
Governments at all levels can change supply. Taxes are a good
example. A tax is a required payment made by an individual or
business to support government programs and services.
Businesses view taxes as costs. If a tax goes up, the cost of
producing a good or service is also likely to rise.
On the other hand, a subsidy is a government payment to
an individual or business to encourage or protect a particular
economic activity. In the 1860s, for example, the United States
government gave subsidies to companies willing to help build
railroads that would stretch across the United States and link
states along the Atlantic Coast with those that bordered the
Pacific Ocean.
The government can also cause a change in supply by issuing
regulations. A regulation is a rule that controls or directs a
U.S. government
business or industry in order to protect consumers or the nation
subsidies were as a whole. In 1906, for example, Congress passed the Pure
given to railroad
developers who Food and Drug Act. It created an agency that tested all foods
built the
transcontinental
and medicines. It also required that patients have a prescription
railroad. from a physician before buying certain
drugs. Producers also had to put warning
labels on habit-forming drugs.
The law had a variety of effects. It
increased the demand for physicians.
People had to see a doctor in order to
buy certain medicines. The law also made
many foods and drugs safer but more
expensive. Why did prices tend to rise?
 The new regulations required companies to add steps to their
production process, which in turn increased costs. In general,
increased or tighter government regulations tend to limit
supply by raising costs. Relaxed or looser regulations lower
the cost of production and increase supply.
Opinions—particularly opinions about the future price of a
product—can also affect supply. If producers think the price of
their product will go up in a few months or even a year, they
may withhold some of the supply. If they expect lower prices
in the future, they may try to produce and sell as much as
possible immediately.
The factors described so far affect individual supply curves
as well as the market supply or total supply within a market.
The number of sellers in the market affects only market supply.
As more companies enter a market, the
supply increases. If some sellers leave the
market, fewer products are offered for sale at
all prices. Therefore, the supply decreases.

Supply Elasticity
According to the law of supply, the quantity
supplied changes in the same direction as a
change in price. If the price rises, the quantity
supplied rises. How much will the quantity
supplied rise or fall in response to a change in Customer
opinion often
price? The answer depends on how quickly producers are able plays a key role
in supplying
to respond to the change. Economists refer to the speed with products to the
which producers respond to price changes as elasticity. The marketplace.

elasticity of supply is measured by how quickly the quantity

supplied changes as a result of a change in price.
A painting is unique. It is a one-of-a-kind piece of work.
The quantity supplied is inelastic.
recall Therefore, the supply curve for an
original painting is vertical. (See
Inelasticity in economics Figure 5.4, on page 74.) No matter how
means that a change in price
does not cause much of a
high the price rises, the quantity supplied
change in the quantity remains the same. On the other hand,
demanded. Earth’s supply of sand is almost limitless.

S u p p ly 73
 Elasticity and Supply Figure 5.4

Perfectly
inelastic
supply

150
PRICE (in dollars)
Perfectly
elastic
supply
100
50

0 2 4 6 8 10 12

QUANTITY (per year)

It is also easy to mine. So the quantity supplied can change

quickly in response to changes in price. The supply of sand is
elastic, and its supply curve is therefore nearly horizontal.
Supply elasticity is based solely on production capabilities.
If a company can respond quickly to a change in price, then
supply is considered elastic. If a company needs time to react
to a change in price, the supply is likely to be inelastic.

Putting It All Together

How will each of the following factors affect the market supply of
pineapples?

• a tax on fruits and vegetables

• a storm that destroys part of the crop
• the invention of a machine that speeds up the process of
harvesting the pineapple crop
• more growers in the pineapple market
• a popular diet that requires a glass of pineapple juice with
every meal
How elastic is the supply of pineapples? Be sure to give
reasons for each of your answers.

74 C h a p te r 5
Policy That Rewards
Productivity
reg Blonder, a partner

G in an investment firm,
expressed his opinions
on how government
can help increase productivity
in BusinessWeek. He writes:
Real wealth emerges only when we discover GOVERNMENT SUBSIDIES do not always benefit the
consumer.
ways to produce something vital for less. That
means, for example, selling higher-
performance computers, which once cost institute genuine productivity-enhancing
$3,000, for $300. Or it could entail using half incentives? . . .
as much coal to refine the same ton of steel.
. . . Instead of taxing the increased
Such transformations work almost profitability that often flows from better
magically as they free scarce resources and productivity, we would be reinforcing
raise the average standard of living. . . . success—giving creative innovators a double
Unfortunately, most of America’s current boost of profits, plus subsidy. Companies that
governmental incentives don’t encourage boost productivity significantly could grow
wealth creation. They confuse spending money faster. . . . Overall, real wealth would expand,
with creating value. Not all jobs are equally and our society would become more vibrant.
“Policy That Rewards Productivity” by Greg Blonder.
productive, and not all subsidies are equally BusinessWeek, May 31, 2005.
vital. . . .
. . . A crop subsidy keeps the family farm reading for understanding
alive, but reduces the incentive to raise the
yield per acre, thus increasing the price of food How does the writer seem to define the word
for everyone. . . . A mortgage deduction productivity?
encourages home ownership, but does nothing A policy is a course of action to achieve a
to make housing more affordable or reduce long-term goal. What is the writer’s goal?
onerous real-estate fees. What actions does he believe will result in
achieving that goal?
These kinds of subsidies only encourage Why does the writer believe that improving
what I call “phantom productivity.” the productivity of individual businesses
benefits the nation as a whole?
But what if the government were to

S u p p ly 75
 Chapter Summary
• According to the law of supply, if all other things are
equal, as the price of a product or service rises, so will
the quantity supplied. The lower the price, the lower the
supply.
• The profit motive—the desire of individuals and
businesses to make money—is demonstrated in the law
of supply.
• A supply schedule shows the relationship between price
and the quantity supplied.
• Economists add up all of these individual supply curves
to determine market supply.
• The law of variable proportions highlights the
relationship between the input of a factor of production
and the supply of a good or service.
• A production schedule shows how the quantity supplied
changes as the number of workers increases.
• Each of the three stages of production is based on a
change in marginal product, including diminishing
returns.
• Productivity increases if the same quantity of input
produces more output, and decreases if the same
quantity of input produces less output.
• The government affects supply through taxes, subsidies,
and regulations.
• Economists measure the elasticity of supply by how
quickly producers can respond to a change in price.

Chapter Review
1 Explain the connections between price, quantity supplied, and
market supply.

2 Draw a diagram showing the relationship between supply

elasticity and the production process.

76 C h a p te r 5
Skill Builder
Make Comparisons
This chapter focuses on supply. Chapter 4 examined demand.
Both affect the price of a good or service. Comparing the two
can help you understand the effects of each. When you make a
comparison, you look for similarities and differences between
two or more individuals, groups, ideas, events, or objects.
In comparing and contrasting ideas, you should
• identify the point of comparison.
• pay attention to words that signal a comparison or
contrast. Among these words are like, unlike, similar, and
different.
• use economic laws, like the law of demand, and what
you know about history and human behavior to identify
possible consequences.
• analyze each consequence by considering how likely it is
to occur.
One way to make comparisons is by studying the diagrams
you created as you read the two chapters. What similarities do
you notice between the two ideas? What differences seem most
striking?

Use your diagrams to answer the following questions.

1 How is the law of supply similar to the law of demand? What

is the most important difference between the two?

2 How is the law of diminishing marginal utility similar to the

principle of diminishing returns? What is the main difference?

3 Both the quantities supplied and demanded are affected by

factors other than price. How do those factors differ? In what
ways are they alike?

4 How does elasticity affect both market supply and demand?

What is the most striking difference between the way it
affects each?

S u p p ly 77