SUPPLY

1. SUPPLY

2. Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply • As price increases, supply increase (Suppliers will offer more of a good at a higher price). • As price falls, quantity or supply falls. • This is a direct relationship.

3. How Does the Law of Supply Work? • Quantity supplied= how much of a good is offered for sale at a specific price. • As the price of a good rises, existing firms (businesses) will produce more to earn additional revenue (cash). (ex. Flavor of Love, then I love NY…on MTV) • New firms will have an incentive to enter the market to earn a profit for themselves (ex. Real Chance of Love on VH1, Bad Girls Club on Oxygen).

4. How do we show supply? • Supply schedule- lists each quantity of a product that producers are willing to supply at various possible market prices. (at zero, not worth to produce any). • Supply curve- plots the information from a supply schedule. • Quantity varies directly with price.

5. How does a business decide how much to produce? Production Costs Paying workers & purchasing capital are all costs of producing goods. There are 2 categories for producer’s costs: • A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries, property taxes, $36/hr at Wendy’s (taxes, salaries) • Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs (changes with number of employees- less production, less workers).

6. Production 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 1 2 3 4 $36 36 36 36 36 $0 8 12 15 20 $36 44 48 51 56 — $8 4 3 5 $24 24 24 24 24 $0 24 48 72 96 $ –36 –20 0 21 40 5 6 7 8 36 36 36 36 27 36 48 63 63 72 84 99 7 9 12 15 24 24 24 24 120 144 168 192 57 72 84 93 9 10 11 12 36 36 36 36 82 106 136 173 118 142 172 209 19 24 30 37 24 24 24 24 216 240 264 288 98 98 92 79 Setting Output • Total Cost= Fixed Costs + Variable Costs • Marginal cost = the cost of producing one more unit of a good. • Marginal revenue = additional income from selling one more unit of a good. It is usually equal to price. • Total Revenue= Marginal Revenue (price) X # of bags • Profit= Total revenue- total cost • Level of Output= Firms determine the output level at which marginal revenue is equal to marginal cost.

7. Input Costs and Supply Input Costs go up= supply goes down ex. Fryer breaks & needs new part adds to cost of making fries As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply. Input costs can also decrease. New technology can greatly decrease costs and increase supply.

8. Non-Price Determinants of Supply: Factors that cause supply to change. Factor # 1 – Costs (Factors of Production) -Production cost rise = supply will decrease (Ex. Market New Homes - Lumber, minimum wage increase)

9. Factor # 2 - Change in Technology New Technology can reduce production costs= increase supply. • (Ex. Market Cars - Think of what the assembly line did to the supply of cars!!!!! Robotics?)

10. Factor 3 - Change in the Number of Sellers in the Market/ More Competition • More sellers in the market will usually increase supply, fewer sellers less supply. (ex. Energy Drinks in the last few years, Homes Builders in Atlanta, Hybrid Cars, etc.)

11. Factor # 4- New Opportunities • If prices for a related product rise, some producers will switch to the more profitable product. (Ex. Farmers switching from Wheat to Corn to take advantage of high corn prices/ Stop producing SUV’s & switch to Hybrid Cars)

12. Factor # 5 – Producer Expectations • If producers expect a change in price in the future they might adjust current production. • Ex. Colder than usual weather predicted this winter, sweater producers will increase supply.

13. Factor # 6 Government Tools • Taxes – higher taxes = higher production costs, less supply. • Subsidies – govt. payments to encourage production, more supply (Corn for ethanol, Photo-electric cells for Solar Energy) • Regulations – the govt. can regulate certain industries, regulations tend to increase production costs, thus decreasing supply. (Emission Standards for Cars, Fuel Efficiency standards, etc.)

14. Changes in SupplyImagine that you own a coffee plantation. A recent strike by coffee bean pickers has resulted in an increase in your costs of production, reducing your profit. How will this situation effect the amount of coffee that you supply at each price? The amount supplied will decrease

15. SUPPLY SHIFTSWhich way would the supply curve for coffee shift in the following scenarios? 1. This year’s coffee bean harvest is the largest to date. 2. Coffee bean pickers go on strike. 3. Congress approves a tax cut for small businesses. 4. Agricultural subsidies for coffee bean plantations decreased. 5. Congress passes a new law regulating how brewed coffee must be stored until it is served. 6. A new invention makes it easier and faster to harvest coffee beans. 7. Coffee shops increase in popularity and their numbers increase rapidly. 8. The price of herbal teas increases because of their popularity with college students. 9. Producers expect the popularity of coffee shops to continue to increase.

16. 1. This year’s coffee bean harvest is the largest to date. (right) 2. Coffee bean pickers go on strike. (left) 3. Congress approves a tax cut for small businesses. (right) 4. Agricultural subsidies for coffee bean plantations are decreased. (left) 5. Congress passes a new law regulating how brewed coffee must be stored until it is served. (left) 6. A new invention makes it easier and faster to harvest coffee beans. (right) 7. Coffee shops increase in popularity, and their numbers increase rapidly. (right) 8. The popularity of herbal teas increases with college students. (left) 9. Producers expect the popularity of coffee shops to continue to increase. (right)