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Chapter 5

Chapter 5. 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

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Page 1: Chapter 5. 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

Chapter 5

Page 2: Chapter 5. 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

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.

Page 3: Chapter 5. 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

Law of Supply

Principle that suppliers will normally offer more for sale at high prices and less for

sale at lower prices.PR

ICE

QS

Page 4: Chapter 5. 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

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.

Price Quantity Supplied

$1 10

$2 20

$3 30

$4 40

$5 50

Mrs. Amerson’s Supply Schedule forHandmade Christmas Ornaments

Page 5: Chapter 5. 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

Individual Supply Curve

• Graphic illustration of the supply schedule.

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

Page 6: Chapter 5. 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

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.

Page 7: Chapter 5. 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

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.

QS

ΔQS

Page 8: Chapter 5. 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

Change in Quantity Supplied

• Illustrated by movement along the supply curve.

A

B

Page 9: Chapter 5. 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

Change in Supply• A change in

supply: • Increase- supply

curve shifts to the right

• Decrease- supply curve shifts to the left

• Page 117

Page 10: Chapter 5. 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

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

might increase. (labor, packaging, raw materials)

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

Page 11: Chapter 5. 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

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.

Page 12: Chapter 5. 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

3. Technology• New

technology tends to shift the supply curve to the right.

• Can decrease supply if it fails.

Page 13: Chapter 5. 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

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.

Page 14: Chapter 5. 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

5.Expectations• Expectations

about future prices affect the supply curve.

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

Page 15: Chapter 5. 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

6.Government Regulations

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

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

Page 16: Chapter 5. 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

7. Number of Sellers• Change in the

number of suppliers causes market supply curve to shift

• More enter the market- shifts to the right.

Page 17: Chapter 5. 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

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.

Page 18: Chapter 5. 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

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.

Page 19: Chapter 5. 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

3 elasticities• Elastic - Change in price causes larger

change in quantity supplied.

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

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

%ΔP > %Δ QS = inelastic supply

%ΔP < %Δ QS = elastic supply

%ΔP = %Δ QS = unit elastic supply

Page 20: Chapter 5. 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

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

Page 21: Chapter 5. 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

Economic Products with an ELASTIC SUPPLY

Page 22: Chapter 5. 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

Economic Products with an INELASTIC SUPPLY

Page 23: Chapter 5. 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

Theory of Production

• Theory dealing with the relationship between the factors of production and the output of goods and services.

Page 24: Chapter 5. 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

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

Page 25: Chapter 5. 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

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…

Page 26: Chapter 5. 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

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

Page 27: Chapter 5. 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
Page 28: Chapter 5. 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

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

Page 29: Chapter 5. 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
Page 30: Chapter 5. 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

Marginal Product • The extra output or change in total

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

Page 31: Chapter 5. 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

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.

Page 32: Chapter 5. 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

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

Page 33: Chapter 5. 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

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

Page 34: Chapter 5. 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

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.

Page 35: Chapter 5. 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

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

Page 36: Chapter 5. 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

Measure of Revenue

Businesses use two key measures of revenue to find the amount of output that will produce the greatest profits:

• Total revenue• Marginal revenue

Page 37: Chapter 5. 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

Measure of Revenue

• 1. Total revenue: Number of units sold multiplied by the average price per unit

$10 X 50 sold = $500

Page 38: Chapter 5. 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

Measures 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

Page 39: Chapter 5. 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

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.

Page 40: Chapter 5. 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

Break-Even Point• Total output or total product the

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

FC + VC = TC

Total Cost = Total Revenue = Break Even Point

Page 41: Chapter 5. 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

Profit-maximizing quantity of output

• Reached when marginal cost and marginal revenue are equal.