Law of Supply

Supply supply--amount of goods/services that producers

are willing and able to offer for sale at various possible prices

Quantity supplied—amount of goods/services that a producer is willing to sell at each particular price.

What is the difference between supply and quantity supplied?

What is the difference between supply and demand? (think about the relationship between price and quantity)

Supply

Law of Supply Law of supply-- higher the price consumers

are willing and able to pay, the more the sellers are willing to produce. Visa versa.

Why do you think this is true?

Law of Supply 1. profit motives

profit—the amount of money left after a producer has paid all their costs

a business makes a profit when revenues (amt. coming in) are greater than the money going out

costs of production—the outgoing costs wages, salaries, rent, interest on loans, utilities, raw

materials to make a profit producers must provide the goods/services

that people want, at a price consumers are willing and able to pay

Law of Supply profits and markets

High demand for a good leads to increased production and higher profits

Higher profits in this market lead other producers to enter markets

Lower demand leads to decrease in production and lower profits

Lower profits in this market lead other producers to leave the market

Curves & Schedules supply curve-a graphic representation of the

amount of units a seller will make available at all possible prices. direct relationship between price and quantity supplied

upward sloping curve

supply schedule-a numerical representation of the amount of units a seller will make available at all possible prices displaying the relationship between the price of a good/service and the quantity that producers will supply

Changes in Quantity Supplied any movement along the supply curve.

shifts result from change in price only

Changes in Supply:Determinants of Supply

supply curve move left (not up) and right (not down) as supply is increased or decreased

Changes in Supply:Determinants of Supply change in resource prices (raw materials, electricity, wages) change in technology government tools

tax-required payment of money to the gov’t (materials, property, and profits)

subsidies-payments to private businesses from gov’t (usually agriculture)

regulation-rules about how companies conduct business (pollution, discrimination, worker’s rights)

change in prices of related goods (ag products) change in producer expectations (sell high, hold low) change in total number of suppliers (competition)

Elasticity of Supply the degree to which price changes affect the

quantity supplied; can be elastic or inelastic Elastic Supply—when a small change in price

causes a major change in the quantity supplied. elastic supply if products can be made:

quickly inexpensively using a few readily available resources

examples: sports team souvenirs Christmas toys fad items

Elasticity of Supply Inelastic Supply—when a change in the goods

price has little impact on the quantity supplied. inelastic supply if products requires a great deal of:

time money resources that are not readily available

examples: gold fine art rare and precious items

Critical Thinking Critical thinking question: You are an alchemist in

the Middle Ages trying to convert base metals to gold. What would be the economic consequences if you succeed and your methods become widely known?

the supply of gold would skyrocket and destroy its value as a precious metal. This is a shift in the supply curve, not a change in quantity supplied.

Productivity the level of output that results from a given

level of input Total Product (output)—all the product a

company makes in a given period of time, with a given amount of input

Marginal Product—the change in output generated by adding one more unit of input

the value of workers output marginal means additional, or last worker hired

Productivity: Law of Diminishing Returns

Law of Diminishing Returns-production principle that states when one factor of production is increased while the others are held constant, a point will be reached where each additional input will result in smaller and smaller outputs, or diminishing returns. law applies to all factors of production when they are

added to a fixed amount of other resources. This must be kept in mind when searching for the right combination of land, labor and capital.

Productivity: Law of Diminishing Returns example: factory making whiffle ball bats. 10,000

sq. ft. w/ 10 machines. Add 10 more machines. Add 10 more machines. With each new machine added the productivity percentage decreases because of overcrowding. Eventually production will come to halt if machines are continued to be added. Similar to Law of Diminishing Marginal Utility. law of diminishing returns begins to set in when total

production begins to increase at a decreasing rate. We will practice examples of this in a bit.

Productivity: Law of Diminishing Returns

Increasing Marginal Returns as the number of workers increases, the total output rises

at a steep rate

Diminishing Marginal Returns when output begins to increase at a diminishing rate

Negative Marginal Returns workers (machines) getting in each others way, making

each other frustrated and lowering morale leads to a drop in the total product in production curve

Productivity: Costs of Productions directly affects the amount of profit their business makes the ingoing portion of profit Fixed Costs (overhead) --a cost of doing business that

remains more or less constant regardless of volume of business Rent, interest on loans, insurance, taxes, salaries, routine wear

and tear Variable Costs- costs that increase as output increases

Wages, raw materials, and any resource or capital Total Costs—the sum of a companies fixed and total costs

at 0 output a companies total cost is equal to their output Marginal Costs—the additional cost of producing one more

unit of output

Productivity:Economies of Scale Economies of Scale-increased productivity while reducing costs…goal of a business Division of Labor (Specialization)

breaking down total production process into a series of simpler tasks Advantages:

workers need only be trained for one operation or process (reduces cost) increases productivity (efficient)

Disadvantages: boring fill-ins when absent

Quantity Discounts-more resources obtained at lower cost (Bulk purchase) Specialized Machinery-necessary for large-scale production (auto industrial

automation) Easier Credit-less risk to lending institutions

easier to get credit w/ good collateral & credit get lower interest loans (prime rate)

Research, Development, By-Products-can afford to hire scientists, build labs, and conduct research.

by products are when meat packing places produce glue, fertilizers, soap, meat, dog food, ect.