Supply

Demand – Centers around the Consumers Supply – Focuses on the Producers

What’s the definition of demand? Review What’s the definition of demand?

SUPPLY - Definition Quantity of a good or service a producer is WILLING and ABLE to make available for sale at different prices

Individual Supply Qty of a good or service that 1 business will make available at various prices

Market Supply- Total quantity of a good or service that all firms in a market will make available for sale at various prices

Goal for Producers = Maximize Profits (Quantity Sold X Price) – Costs of Production

Question You’re selling coffee You think you can sell it for $.25 a cup. Think of how much effort you’re going to put into your business What if you could sell it for $4.75 a cup? How much effort will you put into your business?

Law of Supply- The quantity of goods or services supplied will be greater at a higher price than at a lower price

Producers will supply for Products they can sell at prices Law of Supply Cont’d Producers will supply for Products they can sell at prices Producers will supply for Products they can sell at prices

Supply Curve Direct Relationship Price Supply Quantity

Change in Quantity Supplied Caused by an increase or decrease in price Causes a movement ALONG the supply line Price Point A Point B Quantity Supplied

Change in Supply Implies a change in the # of units supplied at every price Causes a shift on the ENTIRE supply line Price Qty Supplied

Determinants of Supply Reasons for a Change in Supply Non-price (having nothing to do with the price they charge) reasons that + or – a business’ willingness or ability to produce

Technological Advances- Allows companies to produce G & S faster, cheaper & better Increases productivity & efficiency Examples?

What are the 5 Factors of Production? Review Question What are the 5 Factors of Production?

Change in Cost of Production- Input (Factor) Costs If the cost of a factor of production goes up, producers may not be able to afford to produce as much as they used to Cheaper? They can produce more

Volunteer an example of a factor of production & tell us what company would be affected by an increase or decrease in the price of that factor of production

What happened to the market supply of coffee in the last ten years?

What happened to the market supply of doughnuts in the last 8 years?

Changes in # of Sellers Businesses entering & leaving the market changes the market supply for G & S

Producer Expectations for the Future If producers believe that they will be able to charge higher prices in the near future, they will increase supply now to prepare. The opposite is true. Think of 3 examples

+ or - Taxes & Subsidies Increases in tax rates placed upon businesses & individuals often lead to businesses to lower their production. Opposite is true Gov’t subsidies (financial assistance) has the opposite effect (encourages production). Ex. Agricultural products

Change in Price of Related Goods If businesses find that they can charge high prices for producing other G & S, this encourages them to shift production away from the original G & S and more towards the G & S they can charge higher prices for

Weather/Natural Disasters Natural disasters or bad weather will decrease supply Good weather could increase supply of agricultural products

Change in Supply S2 Price S Decrease: Left S1 Increase: Right Quantity

Price Elasticity of Supply Measure in the responsiveness of the quantity supplied to changes in the product’s price Equation % change in QS %change in price

Remember Q Over P

Elastic Supply Change in prices will result in a significant change in Quantity Supplied It’s supply elastic if price elasticity of supply equation is greater than one

Elastic Supply Cont’d Elastic Supply products are usually products that can be made Quickly Inexpensively Using a few, readily available resources Example: Angels 2014 World Series Championship Souvenirs

Elastic Supply Cont’d Price Qty Supplied

Inelastic Supply A change in price will result in a minimal change in Quantity Supplied Price inelastic if calculated value of price elasticity of supply is less than one

Inelastic Supply Cont’d A product has an inelastic supply if productions requires a great deal of *Time *Money *Resources that are not readily available Examples: Gold, Fine Art, Space Shuttles

Inelastic Supply Cont’d Price Qty Supplied

Perfect Inelastic Supply Exists when producers, regardless of price, cannot increase the quantity supplied Example: U2 Concert at Staples Center

Perfect Inelastic Supply Cont’d Price Qty Supplied

Unitary Supply Elasticity % change in the quantity supplied = % change in price

Producer Surplus Amount that sellers might be willing to sell the G or S for but don’t have to because it’s less than the market price Area to the left of the supply line and underneath price

Measuring Production

Output = Products or services produced Key Terms Output = Products or services produced Input = Resources used to produce the products or services

All units of a product produced in a given period of time Total Product All units of a product produced in a given period of time

Average Product Number of units of output produced per unit of input

Average Product Cont’d Equation Units of output Units of input

Average Product Cont’d Example: Total Output Last Year:124,727 Products Input: 88 Workers that work 5 days a week 50 Weeks a Year

Marginal Product Amount that total product increases or decreases as result of adding one additional unit of an input Decisions are based on dollar value of additional output compared to cost of additional input

Marginal Product Equation Marginal Product = Change in output Change in input

Marginal Product Cont’d Example: 90 Workers produced 510 Lamps/Day 91 Workers produced 515 Lamps/Day 515-510 91-90 Change in Output Change in Input

Diminishing Marginal Returns/Product Occurs when units of input are added and the MARGINAL PRODUCT DECREASES. If even more units of input are added, there will be a point where TOTAL PRODUCT will actually DECREASE (negative returns)

1st - Increasing Returns 2nd – Diminishing Returns 3 Stages to Production 1st - Increasing Returns 2nd – Diminishing Returns 3rd – Negative Returns