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SUPPLY. Definition: The various quantities of a good or service that producers are willing and able to sell at all prices at a particular time. Why do producers produce?. Two Words. Profit Motive. **Remember the invisible hand?. Demand drives Supply…. Law of Supply. As P ↑, Q S ↑ - PowerPoint PPT Presentation
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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
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