Principles of Supply Unit 2 Socioeconomics

Law of Supply Quantity Supplied is the amount of goods and services that producers are willing to sell at each price in a given time period. Law of supply states that producers supply more goods and services when they can sell them at a higher price and fewer goods when they must sell them at lower prices Primary motive is profit = price – production costs Profit motive directs use of resources and signals for other companies to enter or leave a market

Supply Curve As price increases, quantity supplied increases  upward slope

Elasticity of Supply Elastic supply exists when a small change in price causes a major change in quantity supplied Note: The curve is nearly horizontal Products can be made quickly, cheaply, and use few resources. Ex: shoe laces, pencils, printed materials, T-Shirts

Elasticity of Supply (Con’t) Inelastic Supply exists when a change in a good’s price has little impact on the quantity supplied Production requires time, money, and resources Ex: Gold/Diamonds, electronics, medications Note: The curve is nearly vertical

Elasticity of Supply (Con’t) Perfectly inelastic supply exists when producers cannot supply any more of a product, regardless of price. Occurs when some resource is strictly limited (time, space) Ex: Beachfront property, fine art

Determinants of Supply Non-price factors that shift the supply curve, instead of simply changing the quantity supplied along the original curve. Prices of Resources: When the price of a resource increase, it adds to the costs of production and lowers profits  supply curve shifts to the left (less supply)

Determinants of Supply 2. Government Tools: Taxes, Subsidies, and Regulations. Taxes: payments made to the government to fund public services  increase production costs  shifts supply curve left Subsidies: payments made by government to private businesses  lower costs  shifts supply curve right Regulations: government rules about how companies conduct business  increase costs  shifts supply curve left

Determinants of Supply 3. Technology – new technology makes production more efficient  cuts costs  increase supply (shift right) 4. Competition – more competition leads to increased supply as producers enter the market to get a share of the market’s demand. Supply decreases as demand drops and producers leave the market

Determinants of Supply 5. Prices of Related Goods: Substitute Goods and Complementary Goods - Price changes have the same effect on a good’s complements – the supply curve will shift in the same direction (price increase = supply increase for comp) - Price changes have opposite effect on a good’s substitutes – if the price of a good falls, it’s substitute will see an increase in supply. (price decrease = supply increase for sub)

Determinants of Supply 6. Producer Expectations – When producers expect the price of a good to increase or decrease, they may take proactive steps to increase or decrease supply of a product. - Halloween USA is only open for 2 months of the year  the rest of the year they store their product (decrease supply), and wait for the price/demand for their product to increase before releasing the product back on the market.

QUANTITY SUPPLIED v. SUPPLY Change in Quantity Supplied A movement along a Supply curve; caused only by a change in a good’s own-price. Change in Supply A shift in the entire Supply curve, either right or left, caused by a change in a non-price determinant of Supply.

CHANGE IN QUANTITY SUPPLIED Price Supply $2.00 $1.00 7 13 Quantity

CHANGE IN SUPPLY Price S1 S2 $2.00 7 15 Quantity

OUTPUT PROCESS INPUTS

PRODUCTIVITY Total Product All of the product a company makes in a given period of time – with a given amount of input. Increase volume Improve services Reduce costs Marginal Product Change in output generated by adding one more unit of input Formula: current total product minus previous total product = marginal product

PRODUCTIVITY 10 – 0 = 10 50 – 10 = 40 320 – 245 = 75 LABOR INPUT TOTAL PRODUCT MARGINAL PRODUCT 1 10 2 50 40 3 110 60 4 175 65 5 245 70 6 320 75 7 400 80 8 485 85 9 575 90 675 100 11 875 200 12 985 13 1,000 15 14 975 -25 925 -50 16 825 -100 10 – 0 = 10 50 – 10 = 40 320 – 245 = 75

LAW OF DIMINISHING RETURNS Describes the effect that varying the level of an input has on total and marginal product 3 stages of production that can be predicted by the law of diminishing return are Increasing marginal returns Diminishing marginal returns Negative marginal returns

LAW OF DIMINISHING RETURN INCREASING MARGINAL RETURNS An increase in the variable input results in an increase in the marginal product of the variable input DIMINISHING MARGINAL RETURNS as additional inputs are put into production, the additional returns will be in small increments NEGATIVE MARGINAL RETURNS Additional inputs result in lowers the level of output

PRODUCTIVITY LABOR INPUT TOTAL PRODUCT MARGINAL PRODUCT 1 10 2 50 40 3 1 10 2 50 40 3 110 60 4 175 65 5 245 70 6 320 75 7 400 80 8 485 85 9 575 90 675 100 11 875 200 12 985 13 1,000 15 14 975 -25 925 -50 16 825 -100

COSTS OF PRODUCTION Fixed costs Variable costs Total costs Marginal costs

FIXED COSTS Production costs that do not change as the level of output changes Rent Interest on loans Property insurance premiums Local and state taxes Salaries A/K/A overhead costs Depreciation – lessening in value on capital goods (equipment)

VARIABLE COSTS Costs that change as the level of output changes Raw materials Wages (part-time workers) Electricity

TOTAL COSTS MARGINAL COSTS The sum of the fixed and variable production costs fixed + variable = total Additional costs of producing one more unit of output Marginal costs rise and production rises Formula Additional cost / the number of additional units

+ = 215 / 85 = $2.53 - Marginal Costs TOTAL COST LABOR INPUT TOTAL PRODUCT MARGINAL PRODUCT FIXED COSTS VARIABLE COSTS TOTAL COSTS MARGINAL COSTS $3,400 $0 - 1 10 215 3,615 $21.50 2 50 40 430 3,830 5.38 3 110 60 645 4,045 3.58 4 175 65 860 4,260 3.31 5 245 70 1,075 4,475 3.07 6 320 75 1,290 4,690 2.87 7 400 80 1,505 4,905 2.69 8 485 85 1,720 5,120 2.53 9 575 90 1,935 5,335 2.39 675 100 2,150 5,550 2.15 11 875 200 2,365 5,765 1.08 12 985 2,580 5,980 1.95 13 1,000 15 2,795 6,195 14.33 14 975 -25 3,010 6,410 925 -50 3,225 6,625 16 828 -100 3,440 6,840 TOTAL COST + = Variable costs 1720 – 1505 = 215 Marginal Product = 85 215 / 85 = $2.53 - Marginal Costs