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Supply Section 1
SUPPLY Supply - The amount of goods
produced at different prices
Law of SUPPLY:The higher the price, the
greater the quantity supplied
Quantity Supplied – the term used to describe how much of a good is offered for sale at a specific price
SUPPLY EXPLAINS THE BEHAVIOR OF SELLERS or PRODUCERS IN A MARKET
When looking at supply, we are concerned with OUTPUT (how much you can produce)
IT HAS NOTHING TO DO WITH YOU!!!
P
PRICE
QUANTITY
When price goes up,
quantity supplied by firms
goes up
Q
When price goes __________
quantity supplied by firms goes__________
PDOWN
DOWNQ
Supply or Quantity Supplied?
Quantity supplied the number of goods offered for sale at a specific price
Eg.: at $14.99 Disney is willing and able to supply 10,000 Hannah Montana CDs per day (QUANTITY SUPPLIED)
The SUPPLY for Hannah Montana CDs is how many CDs Disney would make to sell at different prices.
SUPPLY HAS NOTHING TO DO WITH BUYERS!!!!!!
The DEMAND is how many Hannah Montana CDs deranged tween fans will buy at various different prices!
DEMAND DOES NOT AFFECT SUPPLY! PRICE DOES!
SUPPLY SCHEDULESUPPLY SCHEDULE
a table that lists the quantity of a good a seller will supply at each priceIt shows the relationship between price and quantity supplied
Price Quantity
$1.00
1.50
2.00
2.50
3.00
PIZZA(week)
5
4321
Individual:
****** all things constant
1 2 3 4 5
IndividualSupply Curve
Price Quantity
$1.00
1.50
2.00
2.50
3.00
PIZZA(week)
543
21
P
Q
$3.00
2.50
2.00
1.50
1.00
0
S
Price Quantity
$1.00 100
1.50 200
2.00 300
2.50 400
3.00 500
PIZZA(week)
P
QMarket
Supply Curve
$3.00
2.50
2.00
1.50
1.00
0
100 200 300 400 500
S
Elasticity of Supply
Elasticity of Supply – A measure of the way suppliers respond to a change in price
Elastic > 1
Inelastic < 1
Unitary Elastic = 1
Elasticity of Supply and Time
Short term Example 1 Orange growers – can’t just grow more oranges (that takes years) inelastic
Example 2 Hair Cuts – salon can stay open later or hire more people
elastic
Chapter 5, Section 2
Costs of Production
Law of Supply
The Law of Supply states that producers will offer more goods as prices go up and fewer goods as prices go down. But, suppliers must decide how much to produce. Entrepreneurs consider marginal benefits and costs when deciding how much to produce.
Labor & Output
The relationship between labor and output is how many workers get hired and how much gets produced.
Marginal Product of Labor: The change in output from hiring one additional unit of labor.
Marginal Product of LaborLabor (# of workers)
Output (beanbags per
hour)
Marginal Product of Labor
0 0 --
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
Increasing Marginal Returns
A level of production in which the marginal product of labor increases as the number of workers increases.
Specialization leads to more production.
Labor (# of
workers)
Output (beanbag
s per hour)
Marginal product of labor
0 0 --
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
Diminishing Marginal Returns
A level of production in which the marginal product of labor decreases as the number of workers increases.
The benefits of specialization are still increasing total output but at a decreasing rate.
Labor (# of
workers)
Output (beanbag
s per hour)
Marginal product of labor
0 0 --
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
Negative Marginal Returns
This situation occurs when adding an additional worker decreases total output.
Example: Too many workers can get in each other’s way and slow everything down.
Firms rarely let this happen.
Labor (# of
workers)
Output (beanbag
s per hour)
Marginal product of labor
0 0 --
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
Production Costs
Paying workers and purchasing capital are all costs of producing goods.
Two categories:
Fixed costs
Variable costs
Fixed Costs
A Fixed Cost is a cost that does not change no matter how much of a good is produced.
EquipmentBuilding/ rentRepairsProperty taxesSalaries
Variable Costs
A Variable Cost is a cost that rises or falls depending on how much is produced.
Raw materials
Labor
Electricity
Heating
Total Cost = Fixed Costs + Variable Costs
Beanbags (per hour)
Fixed Cost
Variable Cost
Total Cost (fixed cost +
variable cost)
Marginal Cost
Marginal Revenue (market price)
Total Revenue
Profit (total
revenue- total cost)
0 $36 $0 $36 -- $24 $0 $-36
1 36 8 44 $8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
12 36 173 209 37 24 288 79
Marginal Cost is the cost of producing one more unit of a good.
Beanbags (per hour)
Fixed Cost
Variable Cost
Total Cost (fixed cost +
variable cost)
Marginal Cost
Marginal Revenue (market price)
Total Revenue
Profit (total
revenue- total cost)
0 $36 $0 $36 -- $24 $0 $-36
1 36 8 44 $8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
12 36 173 209 37 24 288 79
Setting Output: A firm’s basic goal is to maximize profitsProfit = Total Revenue – Total Cost
Beanbags (per hour)
Fixed Cost
Variable Cost
Total Cost (fixed cost +
variable cost)
Marginal Cost
Marginal Revenue (market price)
Total Revenue
Profit (total
revenue- total cost)
0 $36 $0 $36 -- $24 $0 $-36
1 36 8 44 $8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
12 36 173 209 37 24 288 79
Responding to Price Changes: If the price of beanbags rose to $37 the firm would increase production to 12 beanbags.
Beanbags (per hour)
Fixed Cost
Variable Cost
Total Cost (fixed cost +
variable cost)
Marginal Cost
Marginal Revenue (market price)
Total Revenue
Profit (total
revenue- total cost)
0 $36 $0 $36 -- $24 $0 $-36
1 36 8 44 $8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
12 36 173 209 37 24 288 79
Shut down Decision
A firm is losing money when the market price is so low that the factory’s total revenue is lower than its total costs.When should the firm shut down???
If the total revenue is more than the variable costs, the factory should remain open.
Example: Total revenue of 5 bean bags $35 - Variable costs $27
= $8 to spend on fixed costsSo, the owner can put the $8 towards the fixed costs
that the owner would have to pay regardless.
CHAPTER 5, SECTION 3
Changes in Supply
Input Costs
Input Costs: Any change in the cost of an input used to produce a good.Raw material
Machinery
Labor
Effect of Rising Input Costs
The supply curve will shift to the left, indicating that the supply has decreased.
The rising cost of inputs effect the relationship between marginal revenue (price) and marginal cost.
Marginal cost should remain lower than the marginal revenue for the firm to stay in business.
If there is a rise in input cost, supply will go down.
TechnologyTechnology lowers input costs. Thus, technology increases supply.
As the result of technology, the supply curve shifts to the right.
Example: Robots replace workers.
Government Influence on Supply
The government can raise or lower the cost of producing goods in THREE ways:Subsidies
Taxes
Regulation
SubsidiesA subsidy is a government payment that supports a business or market.
It decreases production costs.
Therefore, supply increases and the supply curve shifts to the right.
Example: Milk
Excise Tax
An excise tax is a tax on the production or sale of a good.
It increases production costs.
Therefore, supply is decreased, and the supply curve shifts to the left.
Examples: Cigarettes, alcohol
Regulation
A regulation is a government intervention in a market that affects the price, quantity, or quality of a good.
It increases production costs.
It reduces supply, and the supply curve shifts to the left.
Examples: Cars/unleaded gasoline
Other Influences on Supply
Future ExpectationsExpectations of higher prices will reduce supply now and increase supply later
Expectations of lower prices will increase supply now and decrease supply later
Number of SuppliersIf more suppliers enter the market, the supply of goods will rise. The supply curve shifts to the right.
If some suppliers stop producing a good, the supply will decrease. The supply curve shifts to the left.
