Supply

1. Chapter 5 Supply

2. What is Supply?

3. Supply • Supply- schedule of quantities that would be offered for sale at all possible prices that could prevail in the market. • Everyone who offers an economic product for sale is a supplier • Must decide how much to offer for sale at various prices • This decisions is made by what is best for the individual seller

4. Supply • Supply Schedule- tells the quantities offered at each and every possible market price • Supply Curve- (SS) slopes upward and to the right to reflect the tendency of suppliers to offer greater quantities for sale at higher prices

5. Law of Supply • The tendency of suppliers to offer more for sale at high prices than at low prices. • The law states that the quantity supplied or offered for sale, varies directly with its price. • Price is high= greater quantities for sale • Price is low= less quantities for sale

6. Change in Quantity Supplied • Quantity Supplied-The amount that producers bring to market at any one price • Change in the Quantity Supplied- change in the amount offered for sale in response to a change in price. • Represented as a movement along the supply curve

7. Change in Supply • Change in Supply- Producers offer different amounts of products for sale at all possible prices in the market • Represented by a shift in the supply curve • Right= increase • Left= decrease

8. Reasons for Changes in Supply • Cost of Inputs • if the costs of inputs goes up less of the product will be made, if the cost of inputs goes down then more of the product will be made • Productivity • If workers become more motivated or better skilled more of the product is produced during the production period • Technology • New technology tends push the supply curve to the right. New technology can decrease production costs and make work more efficient • Could go left if technology breaks down

9. Reasons for Changes in Supply • Number of sellers • Supply increases when more sellers enter the market, decreases when suppliers leave the market • Taxes and Subsidies • If taxes goes up then cost of production goes up and supplies go down (LEFT) • Subsidies- gov’t payments to individuals, businesses, or other groups to encourage or protect a certain type of economic activity- lower production costs and keep suppliers in the market

10. Expectations • If suppliers feel the price of product may go up in the future they may withhold supply from the market or if they feel the price will go down they may produce more and try to sell right away • Government Regulation • Increased or tighter government regulations restrict supply. • Increases the cost of inputs or adds new features • Relaxed gov’t regulations allows producers to lower the cost of production

11. Elasticity of Supply • Elastic- change in price causes a relatively large change in quantity supplied • Inelastic- change in price causes a relatively smaller change in quantity supplied • Unit Elastic- given change in the price cases a proportional change in quantity supplied • (pg 108)

12. Determinants of Supply Elasticity • Depend on the nature of production • Inelastic if a large amount of capital and technology is needed to increase production • Elastic if products can be made quickly without huge amounts of capital or skilled labor

13. Supply v. Demand • Elasticity for both supply and demand is a measure of responsiveness to change in price.

14. The Theory of Production

15. Theory of Production • Deals with the relationship between the factors of production and the output of goods and services • Output changes when inputs change

16. Theory continued • Short Run-allows only the amount of variable inputs to change; assumed to be LABOR • Long Run-allows for other inputs to change or vary including capital

17. Law of Variable Proportions • In SR output will change as one input is varied, other inputs held CONSTANT • Relationships between input of productive resources and output of final products • How does output change as……?

18. Production Function • A concept that relates changes in output to different amounts of a single input (variable input) while other inputs are held CONSTANT

19. Production Function • Illustrates Law of Variable Proportions • Schedule or graph • On a Graph • X-axis- variable input, the input that is changed by producer • Y-axis- Total Production, total output Pg 112 Raw Materials- unprocessed natural products used in production

20. Total Product –total output produced by firm • Eventually Total Product goes as a far as it can. • When adding more of something no longer increases the output.

21. Marginal Product • The extra output generated by adding one more unit of a variable input. • n=number of workers (variable input) • MPn= TPn-TPn-1

22. Stages of Production • I. Increasing Returns (IR) • Marginal product is increasing (1st 5 workers) • Production goes up as more workers are hired • Companies do not stay at this stage long

23. Stages of Production • II. Diminishing Returns (DR) • Total production keeps growing but at a slower rate • As more units of a certain variable input are added to a constant amount of other resources, total output keeps rising, but only at a diminishing rate.

24. Stages of Production • III. Negative Returns (NR) • As more units of a certain variable are added total output decreases

25. Supply and the Role of Cost

26. Measures of Cost • Fixed Cost • Variable Cost • Total Cost • Marginal Cost

27. Fixed Costs • Fixed Cost (Overhead) • Cost a business incurs even if the plant is idle and out put is zero • Includes salaries paid, charges on bonds, rent payments, and local and state property taxes • Depreciation- the gradual wear and tear on capital goods overtime and through use. • Machines and parts wear out and break. • Fixed costs do not change when output changes

28. Variable Costs • Costs that change when the business rate of operation or output changes • Labor, Raw Materials, Electricity, Freight Charges • These can be canceled or shut off when production is low or when there is no output

29. Total Cost Marginal Cost The extra cost incurs when a business produces one additional unit of production Increase in variable costs that stems from using additional factors of production • All the costs a business faces in the course of its operations. • Sum of the fixed and variable costs

30. Measures of Revenue • Total Revenue • Number of units sold multiplied by the average price per unit • Marginal Revenue • Extra revenue associated with the production and sale of one additional unit of output. • Change in total revenue/marginal product • Must useful measure of revenue both for businesses and economists • Businesses often find that marginal revenues start high and decrease as more and more units are produced

31. Marginal Analysis • A type of decision making that compares the extra benefits to the extra costs of an action • Break Even Point • Total output or total product the business needs to sell in order to cover its total cost • Profit Maximization Quantity of Output- • Reached when marginal cost and marginal revenue are equal.