Chapter 5Supply

What is Supply?• The amount of a product that would

be offered for sale at all possible prices that could prevail in the market.

• The producer is receiving payments for his/her products. It should come as no surprise that more will be offered at high prices.

Law of Supply

Supply Schedule• Listing of various quantities of a

particular product supplied at all possible prices in the market.

• Different than DEMAND.

• In supply: prices and quantities move in the same direction, whereas in demand they varied inversely.

Individual Supply Curve

• Graphic illustration of the supply schedule.

• Results in an UPWARD sloping line (supply curve).

• All normal supply curves slope from the lower left hand side of the graph to the upper right hand corner of the graph. This is a positive slope and shows that if one value goes up, the other will go up as well.

Market Supply Curve• Supply curve that shows the

quantities offered at various prices by all firms that offer the product for sale in a given market.

Change in Quantity Supplied

• Quantity supplied- amount the producers bring to market at any given price.

• Change in quantity supplied- change in the amount offered for sale in response to a change in price.

Change in Quantity Supplied

• Illustrated by movement along the supply curve.

Change in Supply• A change in supply:

• Increase- supply curve shifts to the right

• Decrease- supply curve shifts to the left

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1. Costs of Inputs• If the cost of inputs decreases supply

might increase. (labor, packaging)

• And increase in the coast of inputs has the opposite effect and may decrease the supply.

2. Productivity• Motivated, incentivized workers

increase productivity the supply curve will shift to the right.

• Unmotivated, untrained or unhappy laborers produce less decreasing supply and shifting the curve to the left.

3. Technology• New technology tends to shift the

supply curve to the right.

• Can decrease supply if it fails.

4.Taxes and Subsidies• Taxes are costs- supply shifts to the

left

• Subsidy- government payment to encourage or protect a certain type of economic activity• Lower cost of productions and

encourages current producers to stay in the market and new producers to enter the market.

• Farmers.

5.Expectations• Expectations about future prices

affect the supply curve.

• Think price will go up- withhold some of the supply

6.Government Regulations

• New regulations can affect cost causing a change in supply.

• Ex. Air bags required in cars- cost more- less supply.

7. Number of Sellers• Change in the number of suppliers

causes market supply curve to shift

• More enter the market- shifts to the right.

Class/Homework

1. Explain how supply and demand are different.

2. Describe the difference between the supply schedule and the supply curve.

3. Describe 7 factors that can cause a change in supply.

Supply Elasticity• Measure of the way in which quantity

supplied responds to a change in price.

• If a small increase in price leads to a relatively larger increase in output, supply is elastic.

3 elasticities• Elasticity - Change in price causes

larger change in quantity supplied.

• Inelastic- change in price causes relatively smaller change in quantity supplied.

• Unit elasticty- change in price causes proportional change in quantity supplied.

Determinants of Supply Elasticity

• If a firm can adjust to new prices quickly, then supply is likely to be elastic.• Ex. Candy

• If the nature of production is such that adjustments take longer, supply is likely to be inelastic.• Ex. Shale oil

Theory of Production• Theory dealing with the relationship

between the factors of production and the output of goods and services.

Runs• Short run- period of production that

allows producers to change only the amount of the variable input called labor. • Ex. Ford Motor Co. hires 300 new

workers

• Long run- period of production long enough for producers to adjust the quantities of all their resources, including capital.• Ex. Ford Motor Co. builds a new

factory

Law of Variable Proportions

• In the short run, output will change as one input is varied while the others are held constant.

• Ex. Salt added to food- tastes better- more- better. More- too much…

The Production Function

• Law of Variable Proportions illustrated by using a production function. • Use a schedule• Or graph• # workers and # output

• Total Product: total output produced by a firm

3 Stages of Production

1. Increasing returns- great increases in production with each worker hired.

2. Diminishing returns- total production increases but at slower rate

3. Negative returns- total production decreases

Marginal Product • The extra output or change in total

product caused by the addition of one more unit of variable input.

Class/Homework

1. Describe the relationship on which the theory of production is based.

2. Identify what point will eventually be reached if companies continue to add workers. (page 124 will help).

3. Start making your note cards.

Measure of Cost• Fixed cost- the cost that a business

incurs even if the plant is idle and output is zero. • Also called OVERHEAD- usually

machines, capital and goods• Ex. Salaries to executives, interest

charges on bonds, rent, local and state property taxes. • Depreciation- gradual wear and tear on

capital goods over time and their use.

Measure of Cost• Variable cost- a cost that changes

when the business rate of operation or output changes.• Usually labor and new materials• Ex. Wage-earning workers, electric

power

Measure of Cost• Total cost- sum of fixed and variable

costs

• Marginal cost- the extra cost incurred when a business produces one additional unit of a product• Usually a change within variable costs

Applying Cost Principles

• 1. Self-service gas station:• Large fixed cost- lot, pumps, tanks• Relatively small variable costs- hourly

wage of employee, gas, electricity

Ratio of variable to fixed costs is low.Makes sense to keep longer hours.

Apply Cost Principles• 2. Internet Stores:

• Overhead, fixed costs, is low. • No rent or large stock. • E-commerce- electronic business or

exchange over the internet.

Easy and profitable to have business 24/7

Measure of Revenue• 1. Businesses use two key measures

of revenue to find the amount of output that will produce the greatest profits:

• Total revenue• Marginal revenue

Measure of Revenue• 2. Total revenue:

• Number of units sold multiplied by the average price per unit

Measure of Revenue• 3. Marginal revenue:

• Extra revenue associated with the production and sale of one additional unit of output.

• Dividing the change in total revenue by the marginal product

Marginal Analysis• A type of cost-benefit analysis

decision making that compares the extra benefits to the extra costs of an action when increasing and input.

Break-Even Point• Total output or total product the

business needs to sell in order to cover the total costs.

Profit-maximizing quantity of output

• Reached when marginal cost and marginal revenue are equal.

Class/Homework• 1. List four measures of cost.

• 2. Describe two measure of revenue.

• 3. How might overhead affect the price of a new car?