Chapter 5: Supply

Chapter 5: Supply KEY CONCEPT WHY THE CONCEPT MATTERS Supply is the willingness and ability of producers to offer goods and services for sale. WHY THE CONCEPT MATTERS Most people are producers. Doing household chores, working at a job, providing rides to others are ways of producing goods and services. Participating on a team is a way of supplying skills, knowledge, and support to one’s school. Producers incur costs and receive rewards for the work they do.

What Is Supply?

The Law of Supply KEY CONCEPTS Supply—willingness and ability of producers to offer goods, services Anyone who provides goods or services is a producer Law of supply: producers willing to sell more of product at higher than at lower price

Supply Schedules KEY CONCEPTS Supply schedule shows amount of product individual willing, able to offer at each price Market supply schedule shows amount of product all producers willing, able to offer at each price

The Law of Supply EXAMPLE: Price and Supply Smiths sell tomatoes at farmers’ market willing to offer 24 pounds at standard price of $1 per pound willing to offer 50 pounds at $2 per pound willing to offer 10 pounds at 50 cents per pounds not willing to supply any tomatoes below 50 cents

Supply Curves KEY CONCEPTS Supply curve shows data from supply schedule in graph form Market supply curve shows data from market supply schedule

Supply Curves EXAMPLE: Market Supply Curve Market supply curve differs in scope from individual supply curve both constructed same way Supply curves for all types of producers follow law of supply will provide more at higher prices although costs more to produce more reason: higher prices signal potential for higher profits

Reviewing Key Concepts Explain the differences between the terms in each of these pairs: supply and law of supply supply schedule and supply curve market supply schedule and market supply curve

What Are the Costs of Production?

Labor Affects Production KEY CONCEPTS Marginal product—change in total output caused by adding one worker Specialization—having a worker focus on one aspect of production

Labor Affects Production EXAMPLE: Marginal Product Schedule Marginal product schedule—relation between labor, marginal product Increasing returns—new workers cause marginal product increase Diminishing returns—total output grows at decreasing rate Negative returns—output decreases through crowding, disorganization

Production Costs KEY CONCEPTS Fixed costs—expenses owners incur no matter how much they produce Variable costs—expenses that vary as level of output changes Total cost—the sum of fixed and variable costs Marginal cost—additional cost of making one more unit of the product

Production Costs EXAMPLE: Fixed and Variable Costs Fixed costs: mortgage, insurance, manager salaries, machinery Variable costs: workers’ wages, electricity, materials, shipping

Production Costs EXAMPLE: Production Costs Schedule Fixed costs remain the same no matter what total product amounts to Calculating marginal cost: divide change in total cost by change in total product Diminishing returns result in increase in marginal cost

Earning the Highest Profit KEY CONCEPTS Marginal revenue—money made from sale of each additional unit sold same as price Total revenue—income from selling a product Total revenue = P (price) x Q (quantity purchased at that price)

Earning the Highest Profit EXAMPLE: Production Costs and Revenues Schedule To make most profit, owner decides number workers hired, units made To decide, owner performs marginal analysis comparison of costs, benefits of adding a worker, making another unit Profit-maximizing output—level of production yielding highest profit

Reviewing Key Concepts Explain the differences between the terms in each of these pairs: marginal product and profit-maximizing output increasing returns and diminishing returns fixed cost and variable cost

What Factors Affect Supply?

Changes in Quantity Supplied KEY CONCEPTS Change in quantity supplied: rise or fall in amount offered for sale because of change in price Different points on supply curve show change in quantity supplied

Changes in Supply KEY CONCEPTS Change in supply —producers offer different amounts at every price As production costs rise, supply drops; as costs drop, supply rises Change in supply shifts the supply curve Six factors cause change in supply

What Is Elasticity of Supply?

Elasticity of Supply KEY CONCEPTS Elasticity of supply—measures producer response to price changes Elastic— price change leads to larger change in quantity supplied Inelastic— price change leads to smaller change in quantity supplied Unit elastic— price and quantity supplied change by same percentage

What Affects Elasticity of Supply? KEY CONCEPTS Main factor determining elasticity is ease of changing production given enough time, elasticity rises for most goods and services Industries that respond quickly to rising or falling prices: do not need much capital, skilled labor, hard-to-obtain resources