Supply

What is Supply? Supply-The amount of a product that

would be offered for sale at all possible prices that could prevail in the market

Do not forget, this is a behavior; not a number

Supply is showing what could possibly happen at various prices

The Law of Supply Because the producer is receiving

payment, it should be no surprise that more will be offered at high prices

The principle that suppliers will normally offer more for sale at high prices and less at lower prices

Individual Supply Schedule Supply Schedule a listing of the

various quantities of a particular product supplied at all possible prices in the market

Individual Supply Curve Supply Curve the graphical

representation of the supply schedule;

The Market Supply Schedule/Curve Refer to page 114, read about Individual

and Market Supply Curves and explain the difference between the two

Market Supply Curve-shows the quantities offered at various prices by all firms that offer the product for sale in a given market

What’s is the difference between a Demand Curve vs. Supply Curve??

Change in Quantity Supply vs. Change in Supply Think back to what we talked about with

demand, grab a partner and read about the difference between a change in quantity supplied and a change in supply.

Change in supply-a situation where suppliers offer different amounts of products for sale at all possible prices in the market

Factors Causing a change in Supply Cost of Inputs; labor or packaging Productivity; motivation, training, or satisfaction of the

job Technology; efficiency or factors of production Taxes and Subsidies-government payment to an

individual, business, or other group to encourage or protect a certain type of economic activity

Expectations Government Regulations; increased->restricts supply

(shifts to the left), decreased->lower production costs->increasing supply (shifts to the right)

Number of Sellers

Using the table, read pages 116-118 and provide explanations in the first column for each of the following topics. Show your understanding of each of these topics and how they effect the producers ability to supply products.

Elasticity of Supply Supply elasticity- a measure of the

way in which quantity supplied responds to a change in price

After you have drawn the graph representing all 3 types of elasticity of supply, in the box next to the graph explain the determinant of supply and how elasticity of supply is different than elasticity of demand.

Elasticity of Supply vs. Demand Number of substitutes has no bearing

on supply Considerations such as the ability to

delay the purchase or the portion of income consumed have no relevance

ONLY PRODUCTION CONSIDERATIONS DETERMINE SUPPLY ELASTICITY!!! (i.e. automobiles, dishwashing machines, ships vs. ice cream cones, kites, candy)

The Theory of Production The relationship between factors of

production (land, labor, capital, and entrepreneurs) and the output of goods and services

Deals with production in short and long run Short Run a period of production that allows

production to change only the amount of the variable input called labor

Long Run a period of production long enough for producers to adjust the quantities of all their resources, including capital

Law of Variable Proportions Says that in the short run, output will

change as one input is varied while the others are held constant.

Deals with the relationship between the input of productive resources and the output of final products.

Economists like to only gauge one factor at a time…Why is that?

Production Function Illustrates the Law of variable

Proportions Describes the relationship between

changes in output to different amounts of a single input while other inputs are held constant

Answer the following questions using Figure 5.5 of page 124 What is the one input that is changing

on the table? Explain in your own terms what the

second column is telling us. Explain in your own terms what the third

column is telling us. What’s the point…?

Three Stages of Production …To determine the optimal number of variable units to be used in

production therefore maximizing profits

Total product-total output produced by a firm

Marginal product- the extra output or change in total product caused by the addition of one more unit of variable input

Increasing returns (efficiency, balanced worker to resources ratio ->increased marginal products), diminishing returns (total output grows but at a slower rate-> decreasing marginal products, however still positive), and negative returns (marginal product becomes negative)

Based on the way marginal product changes as the variable input of labor is changed

Measures of Cost A business must analyze all the things that are a cost

to the business; land, labor, capital, and entrepreneurship

Total fixed cost/overhead-the cost that a business incurs even if the plant is idle and output is zero (i.e. salaries to executives, interest charges on bonds, rents payments on leased properties, and local and state property taxes)

Also includes depreciation which is the gradual wear and tear on capital goods over time an through use

Measures of Cost Variable cost-a cost that changes when the business rate

of operation or output changes; associated with labor and raw materials (other examples include electric power costs to run machines and freight charge to ship the final product)

Total cost- the sum of the fixed and variable costs; takes into account all the costs a business faces in the course of its operations

Marginal cost- the extra cost incurred when a business produces one additional unit of a product; per-unit increase in variable costs that stems from using additional factors of production (unit variable cost/marginal product)

Applying Cost Principles The cost and combination, or mix, of

inputs affects the way business produce Examples

Self-Service Gas Station Internet Stores (e-commerce-electronic

business or exchange conducted over the internet)

Measures of Revenue Marginal revenue-the extra revenue

associated with the production and sale of one additional unit of output (change in total revenue/marginal product)

Total revenue- the number of units sold multiplied by the average price per unit

Marginal Analysis Examining the cost and Benefits of

every single decision All businesses take this examination

step-by-step and find the exact point where your cost out-weighs your benefit; at that point they have gone too far.

All businesses and people desire for benefits to out-weigh your cost.

Marginal Analysis Comparing the costs and benefits of decisions that

are made in small, incremental steps Break-even point- the total output or total

product the business needs to sell in order to cover its total costs (How many workers must be hired to break even?)

Profit-maximizing quantity of output- reached when marginal cost and marginal revenue are equal; no other combination will be more profitable

As long as marginal cost < marginal revenue, the business will keep hiring workers