Supply – Producer Side of economics

Supply Supply – the amount of goods available Law of Supply – the higher the price the larger the quantity produced As the price of a good rise existing firms will produce more to earn extra revenue New firms will enter the market to earn profit from higher prices - if the price falls, some firms will produce less and others will leave the market

Profit The search to make a profit drives the law of supply. Price goes up = a chance to make a profit Price goes down = supplier is discouraged from producing Quantity supplied- how much of a good is offered for sale at a specific price

Remember!!!! Law of demand = “consumer side of economics” Law of supply = “producer side of economics” Consumers want low prices and producers want high prices. The law of demand and the law of supply are competing forces in the market!

Elasticity of Supply Measurement of the way suppliers respond to a change in price Elastic- supply is very sensitive to price examples: electronics, furniture Inelastic- supply is not very sensitive to price example: airline ticket

Elasticity of Supply Type of Supply Meaning Example Related to Time Supply is very sensitive to price changes T-shirts Cookies Electronics Additional output is not much more costly to produce Unit(ary) Elastic Supply is moderately sensitive to price changes Fresh Fish Additional output has little or no cost Inelastic Supply is not very sensitive to price Gold Houses Airplane Tickets Additional output is much more costly to produce

Shifts in the Supply Curve A shift of the supply curve is the result of a change in the quantity supplied at every price, not to be confused with a movement along the supply curve, which is the result of a change in the price.

Costs of Inputs To produce goods firms must pay for inputs such as raw materials, labor, rent, equipment, taxes, etc. Higher input costs cause supplies to produce less at every price– lower margin of profit High input costs cause supply curves to shift to the left Lower input costs cause supplies to produce more at every price– larger margin of profit lower input costs cause supply curves to shift to the right

Government Policies Government policies can change the cost of producing a good, or they can change the amount of money the suppliers receive for selling their goods. As a result, the actions of the government can cause supply curves to shift. Government policies include: taxes, regulations and subsidies

Government Policies- Taxes Governments raise tax rates to pay for items like national defense, schools, roads and vital goods and services. Governments can also collect an excise tax: an extra tax on goods considered harmful or dangerous. Example: Cigarettes Colorado $5.65 ($3.50 + .84 excise CO + $1.01 Federal +.30 sales tax)

New York $14.95 ($3.50 + $1.01 excise federal + $11.45 excise and sales taxes) Because of the tax (think $11.95 in NY) producers receive less revenue from the selling price. Lower revenues = less profit higher taxes cause the supply curve to shift to the left

Government Policies -Regulations Regulations place restrictions on what how firms can produce. Regulations designed to make products safer. Example: Children’s Pajamas must be made from flame- resistant material. This costs more than cheaper material. Organic produce must be certified organic- pass a series of tests. This increases the cost.

Regulations that make goods safer increase the cost of producing them. supply curve shifts to the left

Government Policies- Subsidies A subsidy is a payment made by the government to support a particular activity or good. Example: Corn The federal government pays a subsidy payment to farmers to grow corn. This payment is in addition to the profit they receive for selling their corn. Subsidy increase the amount of money farmers receive for a bushel of corn at any given price Subsides increase the profit made on a particular good supply curve shifts to the right

Number of Firms If the number of firms that produce a good increases, supply will increase as well. Example: Gasoline (see graph) Only Foreign Foreign & Domestic curve will shift to the right

Technological Change Technology refers to the methods used to create goods and services from inputs. Technological progress- discovery of new production methods or new, less costly inputs enables firms to produced more goods. Technological progress causes a firms costs to decrease and production becomes more profitable. At any price the firm will want to produce more. curve shifts to the right