Supply

Oct 14th, 2013

Demand – Centers around the Consumers

Supply – Focuses on the Producers

Review

•What’s the definition of demand?

SUPPLY - Definition

• Quantity of a good or service a producer is WILLING and ABLE to make available for sale at different prices

Individual Supply

•Qty of a good or service that 1 business will make available at various prices

Market Supply-Total quantity of a good or service that all firms in a market will make

available for sale at various prices

•Goal for Producers = Maximize Profits

Profit =

(Quantity Sold X Price) – Costs of Production

Question

• You’re selling coffee

• You think you can sell it for $.25 a cup. Think of how much effort you’re going to put into your business

• What if you could sell it for $4.75 a cup? How much effort will you put into your business?

Law of Supply-The quantity of goods or services supplied will be greater at a higher price

than at a lower price

Law of Supply Cont’d

Producers will supply for

Products they can sell at prices

Producers will supply for

Products they can sell at prices

Supply Curve Direct Relationship

Price

Quantity

Supply

Change in Quantity Supplied• Caused by an increase or decrease in

price

• Causes a movement ALONG the supply line

Price

Quantity Supplied

Point A Point B

Change in Supply

• Implies a change in the # of units supplied at every price

• Causes a shift on the ENTIRE supply line

Price

Qty Supplied

Determinants of Supply

• Reasons for a Change in Supply

• Non-price (having nothing to do with the price they charge) reasons that + or – a business’ willingness or ability to produce

Technological Advances-• Allows companies to produce G

& S faster, cheaper & better

• Increases productivity & efficiency

• Examples?

Review Question

• What are the 5 Factors of Production?

Change in Cost of Production- Input (Factor) Costs

If the cost of a factor of production goes up, producers may not be able to afford to produce as much as they used to

Cheaper? They can produce more

• Volunteer an example of a factor of production & tell us what company would be affected by an increase or decrease in the price of that factor of production

What happened to the market supply of coffee in

the last ten years?

What happened to the market supply of doughnuts

in the last 8 years?

Changes in # of Sellers•Businesses entering & leaving the market changes the market supply for G & S

Producer Expectations for the Future

If producers believe that they will be able to charge higher prices in the near future, they will increase supply now to prepare. The opposite is true. Think of 3 examples

+ or - Taxes & Subsidies• Increases in tax rates placed upon

businesses & individuals often lead to businesses to lower their production. Opposite is true

• Gov’t subsidies (financial assistance) has the opposite effect (encourages production). Ex. Agricultural products

Change in Price of Related Goods

• If businesses find that they can charge high prices for producing other G & S, this encourages them to shift production away from the original G & S and more towards the G & S they can charge higher prices for

Weather/Natural Disasters

Natural disasters Natural disasters or bad weatherbad weather will decrease supplydecrease supply

Good weatherGood weather could increase supplyincrease supply of agricultural products

Change in Supply

Price

Quantity

Increase: Right

Decrease: Left

S

S1

S2

Price Elasticity of Supply• Measure in the

responsiveness of the quantity supplied to changes in the product’s price

• Equation • % change in QS • %change in price

Remember

•Q

•Over

•P

Elastic Supply• Change in prices will result

in a significant change in Quantity Supplied

• It’s supply elastic if price elasticity of supply equation is greater than one

Elastic Supply Cont’d• Elastic Supply products are usually

products that can be made QuicklyInexpensivelyUsing a few, readily available

resourcesExample: Angels 2014 World Series

Championship Souvenirs

Elastic Supply Cont’d

Price

Qty Supplied

Inelastic Supply• A change in price will result in a

minimal change in Quantity Supplied

• Price inelastic if calculated value of price elasticity of supply is less than one

Inelastic Supply Cont’d• A product has an inelastic supply if

productions requires a great deal of *Time *Money

*Resources that are not readily available

Examples: Gold, Fine Art, Space Shuttles

Inelastic Supply Cont’d

Price

Qty Supplied

Perfect Inelastic Supply• Exists when producers,

regardless of price, cannot increase the quantity supplied

• Example: U2 Concert at Staples Center

Perfect Inelastic Supply Cont’d

Price

Qty Supplied

Unitary Supply Elasticity

% change in the quantity supplied

=

% change in price

Producer Surplus

• Amount that sellers might be willing to sell the G or S for but don’t have to because it’s less than the market price

• Area to the left of the supply line and underneath price

Measuring Production

Key Terms

• Output = Products or services produced

• Input = Resources used to produce the products or services

Total Product

All units of a product produced in a given

period of time

Average Product•Number of units of output produced per unit of input

Average Product Cont’d

Equation

• Units of output

• Units of input

Average Product Cont’d• Example:

Total Output Last Year:124,727 ProductsInput: 88 Workers that work

5 days a week 50 Weeks a Year

Marginal Product• Amount that total product

increases or decreases as result of adding one additional unit of an input

• Decisions are based on dollar value of additional output compared to cost of additional input

Marginal Product Equation

•Marginal Product = Change in output

•Change in input

Marginal Product Cont’d• Example:

90 Workers produced 510 Lamps/Day91 Workers produced 515 Lamps/Day

515-510

91-90

Change in Output

Change in Input

Diminishing Marginal Returns/Product

• Occurs when units of input are added and the MARGINAL PRODUCT DECREASES.

• If even more units of input are added, there will be a point where TOTAL PRODUCT will actually DECREASE (negative returns)

3 Stages to Production

•1st - Increasing Returns

•2nd – Diminishing Returns

•3rd – Negative Returns