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SUPPLY

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 ↑

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SUPPLY

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  1. 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.

  2. Why do producers produce? Two Words. Profit Motive. **Remember the invisible hand? Demand drives Supply…

  3. Law of Supply • As P ↑, QS ↑ • As P ↓, QS ↓ • Opposite of the law of demand • Why? Example…

  4. Mr. Bull’s Soccer Lessons How 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?

  5. Supply Schedule/Curve • Notice… opposite of Demand curve • Upsloping • Individual Supply vs. Market Supply

  6. The Law of Supply • Reasons for a Change in Quantity Supplied: (Always associated with a change in a product’s own price) • 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.

  7. B Change in quantity supplied (a movement along the curve) A Change in Quantity Supplied: Movement along the Supply Curve S0 Price (per unit) $15 1,250 2,300 Quantity supplied (per unit of time)

  8. 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.

  9. S1 Price (per unit) A B Shift in Supply (a shift of the curve) Quantity supplied (per unit of time) Shift in Supply S0 $15 1,250 2,300

  10. 7 Reasons for a change in supply 1. 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.

  11. 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

  12. “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

  13. 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: 19792011

  14. Factors Affecting Elasticity of Supply • Ease of Production easier = more elastic • Responsiveness to price change quicker adjustment = more elastic • Time more time to adjust = more elastic

  15. 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

  16. Profit maximization Total Revenue - Total Cost • 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!!!!

  17. 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

  18. 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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