Chapter 5 Supply. Definition of Supply Supply – the willingness and ability of producers to offer...

Chapter 5 Supply

Definition of Supply

• Supply – the willingness and ability of producers to offer goods and services for sale.

Law of Supply

• Law of Supply – producers are willing to sell more of a good or service at a higher price.

• If the price of a product falls producers will want to supply less of it.

• This is a direct relationship.

Supply Schedule Shows the law of supply in chart form.

Price Per Pound of Tomatoes Quantity Supplied 2.00 50 1.75 40 1.50 30 1.25 20 1.00 10 .75 0

Individual Supply Schedule

Supply CurveShows the supply schedule in a graph form.

Factors Affecting Supply

• Input costs – the price of the resources used to make products

• Labor Productivity – the amount of goods and services that a person can produce in a given time.

• Technology – new discoveries in the production process means new manufacturing techniques.

• Government Action (excise tax) – a tax on the production or sale of a specific good or service.

• Producer Expectations – the expectation of a products price rising or falling will affect how much that producer is willing to produce.

• Number of Producers – an increase in the number of producers of a certain product will increase demand.

Costs of Production

• At my pizzeria I charge 12.00 for a large pizza.

• It cost me (overhead, fixed + variable costs) 4.00 to make a large pizza.

• What is my overhead?

Production Cost Schedules

• Remember schedules in economics are charts.

• Product Cost Schedule will show you the relationship between labor and production.

Terms to Know

• Marginal Product – the change in total product that results from hiring one more worker.

• Specialization – each worker being hired focuses on a particular part of production

• Diminishing returns – each new worker can actually cause a decrease in marginal product

Product Schedule for making PizzaNumber of workers Total Product Marginal Product

0 0 0

1 3 3

2 7 4

3 12 5

4 19 7

5 23 4

6 21 -2

As an owner what are your costs?

• Fixed costs – examples include mortgage, insurance, utilities

• Variable costs – wages, more material or overhead if production goes up

• Total costs – the sum of fixed and variable costs

Terms to Know

• Marginal Costs – additional costs of producing one more item

• Marginal Cost is calculated by dividing the change in total cost by the change in total product.

Production Costs Schedule

# of Workers

Total Product

Fixed Costs Variable Costs

Total Costs Marginal Costs

0 0 40 0 40 ---

1 3 40 30 70 10

2 7 40 62 102 8

3 12 40 97 137 7

4 19 40 132 172 5

5 23 40 172 212 10

6 21 40 211 251 ---

How do we earn the highest profit

• Since we can stand to lose money by producing at a rate that is not efficient, we have to calculate how much profit we can make before we start to produce

Simple Math!!!

• Marginal revenue – the money made from the sale of each additional unit of output. Basically the price of an item.

• Total revenue – a company’s income from selling its products. Total Revenue = P x Q

• P = price / Q = quantity sold • Calculate by multiplying total product by marginal revenue

Simple Math!!!

• Calculating profit – total revenue minus total cost

• Profit = total revenue – total cost

Production Costs and Revenue Schedule

# of workers

Total Product

Total Costs

Marginal Costs

Marginal Revenue

Total Revenue

Profit

0 0 40 ---- ---- 0 -40

1 3 70 10 12 36 -34

2 7 102 8 12 84 -18

3 12 137 7 12 144 7

4 19 172 5 12 228 56

5 23 212 10 12 276 64

6 21 251 ---- 12 252 1

$$$$$$$$$$$$$$$

• Profit Maximizing Output – level of production at which business realizes the greatest amount of profit.

• Marginal Revenue = Marginal Costs

• This is where you want to be and stay!!!!!!!!!

Elasticity of Supply

• Elasticity of supply – a measure of how responsive producers are to price change.

• If a change in price leads to a change in quantity supplied, the supply is elastic.

• If a change in price leads to a very small change in quantity supplied, the supply is inelastic.

Examples

Factors of Elasticity

• The ability of a company to change production to respond to price changes.

• Given enough time most companies will make their supply more elastic by expanding or downsizing.