A.S Describe the concept of supply

Supply The amount of good or service that a firm is willing to produce at various prices at a certain time The main factor that affects supply is price

Price or cost? What do you think the difference is between price and cost? Price= the amount of money producers receive when they sell a good or provide a service. Cost= the amount paid by the producer or seller in order to have the product ready for the market.

Types of Costs for a firm Accounting cost- Payment required in dollar terms (Rent, power, materials, advertising wages etc Opportunity cost- Sacrifice of the next best alternative when making a decision. Economic costs= Accounting costs + Opportunity costs

The Importance of price If you were a producer what would you do if there was a High Price for your product? Low Price for your product?

THE LAW OF SUPPLY As the price increases, the quantity supplied increases, vice versa ceteris paribus

Supply Schedule A supply schedule is a table that shows the quantity of a good or service an individual firm is willing and able to supply at a series of prices Mere’s Supply Schedule for chocolate Easter Eggs (weekly) Price ($)Quantity (Easter Eggs)

Supply Schedule Notes  Needs a title showing WHO? WHAT? WHEN?  Price is always in the left-hand column and is specified as dollars or cents and should be listed from lowest to highest  The right hand column is always quantity and should be specified in its units (litres tonnes easter eggs)

Supply Curve A supply curve is the graph drawn from the information in the supply schedule Mere’s Supply Schedule for chocolate Easter Eggs (weelky) Price ($)Quantity (Easter Eggs)

Supply Curve Notes  The graph needs a title showing WHO? WHAT? WHEN?  Price is always drawn on the vertical axis  Quantity is always drawn on the horizontal axis  Both axis’s and the curve must be labelled  Keep your scale even.  Do not take your line beyond the points you have plotted

Now try Yourself From the information provided on the schedule construct a supply curve. (Remember TALL) Freds Supply Schedule for Stereos PriceQuantity

Answer Freds Supply Schedule for Stereos (monthly) Price ($)Quantity (Stereos)

Profit Most producers supply goods in order to make a profit The reward earned by the owner of a business once costs have been taken into account. Profit = Revenue - Cost

Costs of production = The amount paid by the producer to get the product ready to sell Revenue is how much income the firm earns, usually from selling its product or service Revenue=Price x Quantity

Breakeven Price The price that businesses must at least receive for their product so as they don’t incur a loss. Any price obtained above breakeven price is profit to the firm. Breakeven Price= Cost of production Level of output

A Change in the Price A change in the price causes a movement along the supply curve  E.g. Show the effect of an increase in the price from $3 to $5 on the graph below. Fully label any changes Fully label means (D) Dotted lines (A)Arrows x2 (L) Labels – P and P1, Q and Q1

A Change in the Price – Explained At $3 a meter the timber yard was willing and able to sell meters of pine framing timber. When the price increased to $5, the quantity supplied rose to meters They are willing and able to sell more at the higher price because it is more profitable This change in price resulted in a movement along the supply curve from P and Q to P1 and Q1

Flow On Effects An increase in quantity supplied resulting from an increase in price is likely to mean that a firm will, need to hire more staff and purchase more resources in order to meet production needs. As employment increases, households have more income to spend on goods and services, so businesses enjoy a greater demand for their products and increase their income Through increasing resources such as raw materials, its likely the profits of the suppliers of those raw materials will increase.

The impact and implications of changes in supply

A decrease in supply will mean that producers will have to find alternatives to produce. This may mean some of the resources will no longer be used. E.g. if due to increased costs of production (the price of rimu wood increases) a building business decided to no longer make Rimu T&G floor boards. A machine they used to do the grooves is now useless. They also make the machine operator redundant.

An increase in supply will mean that more resources will need to be found, this may include hiring and training new workers.

Profit Firms are in business to make a profit. Profit = Revenue –Costs Profit Margin = Difference between Revenue and Cost Many implications of changes in supply or quantity supplied will relate to profitability It may mean that a business becomes relatively more or relatively less profitable If the price increases, quantity supplied increases, revenue (price x quantity) increases: this should increase profits. The profit margin will get bigger. If costs increase, supply will decrease, as the product is less profitable and the profit margin decreases.

Flow on effects Increase in SupplyDecrease in Supply May hire more workersMay need to lay off workers Resources may be used up faster may need to find another source May switch to producing a more profitable related good If profits increase, pay more tax to the government If profits decrease, pay less tax to the government Might invest in more capital equipment May need to sell off idle capital equipment Resource may be moved from producing a less profitable good to the more profitable good

Workbooks page

Exam Practice #1 Model Answer (A) the curve drawn and correctly labelled (TALL) (A) The price changes drawn using dotted lines, arrows and label’s

Exam Practice #1 Model Answer The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of ginger beer decreases from $9 to $7 per bottle Cameron's Supply of Ginger Beer decreases from 70bottles to 52 bottles. ACHIEVED

Merit The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of ginger beer decreases from $9 to $7 per bottle Cameron's Supply of Ginger Beer decreases from 70bottles to 52 bottles. This is because Ginger Beer becomes relatively less profitable when the price of ginger beer decreases.

Excellence The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of ginger beer decreases from $9 to $7 per bottle Cameron's Supply of Ginger Beer decreases from 70bottles to 52 bottles. When price falls Cameron's revenue will fall, which causes Cameron's profit margin to fall assuming costs stay the same. This makes Ginger Beer relatively less profitable, so he will supply less Ginger Beer. This may mean Cameron will switch to producing a different good such as fruit juice as it might be relatively more profitable. Cameron may also try to lower his costs by either laying off staff or using cheaper ingredients in his production of Ginger Beer

Practice Exam Question #2 (A) the curve drawn and correctly labelled (TALL) (A) The price changes drawn using dotted lines, arrows and label’s

Practice Exam Question #2 A The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of Skateboards increased from $30 to $50 the quantity supplied increased from 200 to 550 skateboards.

Practice Exam Question #2 M The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of Skateboards increased from $30 to $50 the quantity supplied increased from 200 to 550 skateboards. This is because Skateboards becomes relatively more profitable when the price of skateboards increase.

Practice Exam Question #2 E The law of supply states that as price increases the quantity supplied increases, vice versa, ceteris paribus As the price of Skateboards increased from $30 to $50 the quantity supplied increased from 200 to 550 skateboards. When price increases Sam's revenue will increases, which causes Sam's profit margin to increase assuming costs stay the same. This makes Skateboards relatively more profitable, so he will supply more Skateboards This may mean Sam may need to hire more staff so that he can produce more Skateboards. He may also need to work longer hours, or expand his business.

Example

Workbooks page 80-83

A Change in Price Under the law of supply, as the price of commodities increases, the quantity supplied increases, ceteris paribus The price change is the cause the change in quantity supplied is the result.

A Change in Price Why do you think as prices fall producers will supply less? Producers supply less as the price for a product decreases because they will choose to use their resources in another way – produce another related product that has a higher price. If a product can be sold at a higher price there is more of a likelihood of earning more profit. For example a sheep farmer moves towards beef farming as the price of sheep decreases but the price of beef is higher

A Change in Price There is a positive relationship between price and supply – this is why the supply curve is upwards sloping As shown by the graph an increase in price (300 to 500) will result in an increase in the quantity supplied ( 20 to 40 Stereos) it’s a movement along the curve P2 P1

Work Books

From the schedules below construct a market supply schedule and curve Supply Schedule of lollies for Broughton street Dairy PriceQuantity Supply Schedule of lollies for Sharps Dairy PriceQuantity Supply Schedule of lollies for Coonies Dairy PriceQuantity

Market Supply Market supply= total supply that all individual firms in the market are willing to produce at a range of prices at a particular point in time. (How much the whole market is willing to produce) Market supply is found by adding up horizontally all the individual producers supply curves and/or schedules

Market Supply example Supply Schedule for Tissues in Sniffsville Price $ per box Store A Quantity (boxes) Store B Quantity (boxes) Store C Quantity (boxes) Market Supply Quantity (boxes)