Definition: The various quantities of a good or

service that producers are willing and able to sell at all prices at a particular time.

SUPPLY

WHY DO PRODUCERS PRODUCE?

Two Words.

Profit

Motive.

**Remember the invisible hand?

Demand drives Supply…

LAW OF SUPPLY

• As P ↑, QS ↑• As P ↓, QS ↓• Opposite of the law of

demand

• Why? Example…

Mr. Bull’s Soccer LessonsHow many lessons might I give if I was able to charge…..

$5/hr?

$15/hr?

$40/hr?

As I am able to charge more, production becomes more valuable relative to other tasks.

What is my opportunity cost of soccer lessons?

SUPPLY SCHEDULE/CURVE

• Notice… opposite of Demand curve

• Upsloping

• Individual Supply vs. Market Supply

THE LAW OF SUPPLY Reasons for a Change in Quantity

Supplied:(Always associated with a change in a product’s own price)

1. Assuming firms’ costs are constant, at higher prices, producers make more profits.

- Economies of Scale

2. When prices rise, firms substitute production of one good for another.

Change in quantity supplied (a movement along the curve)

Change in Quantity Supplied: Movement along the Supply Curve

Pric

e (p

er u

nit)

Quantity supplied (per unit of time)

S0

$15A

1,250 2,300

B

SHIFTS IN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE

If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

Shift in SupplyPr

ice

(per

uni

t)

Quantity supplied (per unit of time)

S0

Shift in Supply(a shift of the curve)

S1

$15A B

1,250 2,300

7 REASONS FOR A CHANGE IN SUPPLY1. Change in the cost of inputs

• Land, labor, capital

2. Change in Productivity

3. Change in Technology

• Ask Henry Ford…

4. Change in Number of Sellers

• Duh.

7 REASONS FOR A CHANGE IN SUPPLY

5. Change in Taxes or Subsidies

6. Change in Market Expectations

• Future prices/demand/conditions

7. Change in Government Regulation

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

-Ronald Reagan

ELASTICITY OF SUPPLY• Elastic – easy/quick to produce –

lower marginal cost for each additional unit produced

• Inelastic – harder/slower to produce – higher marginal cost for each additional unit produced

• Elasticity of supply increases as producers have more time to adjust to a price change

• Ex: 1979 2011

FACTORS AFFECTING ELASTICITY OF SUPPLY

1. Ease of Production

easier = more elastic

2. Responsiveness to price change

quicker adjustment = more elastic

3. Time

more time to adjust = more elastic

ELASTICITY CHANGES OVER TIME

• Market Period – immediately after a change in price

• Perfectly inelastic supply

• Short Run – up to a few months after a change in price

• Inelastic supply

• Long Run – many months/years after a price change

• Elastic supply

PROFIT MAXIMIZATION• Profit =

• Total Cost = Fixed Cost + Variable Cost

• Fixed vs. Variable… examples?

• Fixed – rent, loan payments, utilities

• Variable – labor, raw materials

• Firms want TR > TC…

• But how do they maximize this profit?

• MARGINAL ANALYSIS!!!!

Total Revenue - Total Cost

PROFIT MAXIMIZATION

• Marginal Cost = ∆ Price of Inputs / ∆ Output

MC = ∆ Variable Cost/ ∆ Quantity

• Marginal Revenue = Price

• Profit Maximization:

As long as MR > MC, producers will continue to produce.

Production Function.notebook

TEST TOPICS• Definition/Law of Supply

• Supply Curve

• Market Supply

• Change in Supply

• 7 factors

• Elasticity of Supply

• 3 factors

• 3 Stages of Production

• Profit Maximization

• MR = MC