Chapter 5 Supply

Law of Supply Because the producer is receiving payment more will be offered at higher prices. Suppliers will normally offer more for sale at high prices and less at lower prices.

The Supply Schedule The only real difference between a supply schedule and a demand schedule is that prices and quantities now move in the same direction for supply can also be illustrated graphically as an upward-sloping line

Change in Quantity Supplied Suppliers have some control over the price Ultimately the final interaction between supply and demand determines the price. Again if the price changes then it is a movement along the supply curve.

Change in Supply Appears as a SHIFT in the Supply curve. Decrease in Supply – Shift to the Left Increase in Supply – Shift to the Right

Cost of Inputs A change in the cost of inputs can cause a change in supply If the price of the inputs drops, producers are willing to produce more at each price

Productivity If workers work more efficiently, productivity should increase The result is more is produced at every price supply shifts right if workers are unmotivated, untrained, or unhappy, productivity could decrease Supply shifts left

Technology New technology tends to shift the supply curve to the right New Technology can affect supply by lowering the cost of production or by increasing productivity

Taxes and Subsidies Firms view taxes as costs If the producer’s inventory is taxed or if fees are paid the cost of production goes up. Taxes shift supply left

Taxes and Subsidies A subsidy is a government payment to encourage or protect a certain type of economic activity Subsidies lower the cost of production Subsidies shift supply right

Expectations Expectations about the future price can affect the supply curve If producers think the price of their product will go up, they may withhold some of the supply If producers may expect lower prices they may try to produce and sell as much as possible right away

Government Regulations When the government establishes new regulations, the cost of production can be affected Increased government regulations restrict supply supply curve to shifts to the left Relaxed regulations allow producers to lower the cost of production Shift to the right

Elasticity of Supply If a small increase in price leads to a large increase in output, supply is elastic. If the quantity supplied changes very little, supply is inelastic

Determinants of Supply Elasticity If a firm can adjust to new prices quickly, then supply is likely to be elastic. If adjustments take longer, then supply is likely to be inelastic.

Theory of production The relationship between the factors of production and the output of goods and services. Short run vs Long run Some things take longer to change and can only be changed in the long run.

Short run vs Long run Short run – only the variable inputs can be changed Long run – any input, fixed or variable, can be changed hiring 300 extra workers is a short-run adjustment building a new factory, this is a long-run adjustment

Stage 1 - Increasing With only a couple of workers not all resources are used Some machines are idle Each extra worker adds more than the previous

Stage 1 - Increasing Workers begin to specialize and work as a unit This stage is characterized by increasing marginal returns

Stage 2 - Decreasing Eventually the plant is at full employment All resources are maximized Adding more workers still increases production But each work adds less than the previous This is called decreasing marginal production

Stage 3 - Negative Finally there are just too many workers They get in the way and slow down production Each worker actually subtracts from total production This is call negative marginal product