Supply Chapter 5

Supply Supply is the amount of a product that would be offered for sale at all possible prices in the market. The Law of Supply states that suppliers will normally offer more for sale at high prices and less at lower prices.

Supply Curve A supply curve illustrates how the quantity that a producer will make varies depending on the price that will prevail in the market.

Market Supply Curve Illustrates the quantities and prices that all producers will offer in the market for any given product or service.

Supply Schedule and curves Economists analyze supply by listing quantities and prices in a supply schedule, or table.

Change in quantity supplied A change in quantity supplied is the change in the amount offered for sale in response to a change in price. Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. If the price rises, the producer can step up production levels.

A change in quantity supplied is a movement ALONG the supply curve

Change in supply A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.

Factors that can cause a change in supply The cost of inputs Example: For the supply of Pencils, if the cost of erasers increased.

Productivity Levels

Taxes

Level of Subsidies A subsidy is the amount of help a company is given to help increase production, and thus supply.

Expectations A company would not plan much supply of a product if expectations would not be good. Sometimes, they get it wrong.

The Video Game Crash of 1983

Elasticity of Supply

Basic Elasticity of Supply Rules Supply is elastic when a small increase in price leads to a larger increase in output-and supply. Supply is inelastic when a small increase in price causes little change in supply. Supply is unit elastic when a change in price causes a proportional change in supply. Basic Elasticity of Supply Rules

perfectly inelastic supply look like? What do perfectly elastic and perfectly inelastic supply look like?

They are the same as elastic and inelastic demand They are the same as elastic and inelastic demand. . . . . . . . . . .only they are labeled as supply curves

Determinants of Supply Elasticity Related to how quickly a producer can act when the change in price occurs. If adjusting production can be done quickly, the supply is elastic. If production is complex and requires much advance planning, the supply is inelastic.

The Substitution effect If substituting for a given product is easy, the supply is elastic. If substitution for a product is difficult to substitute, the supply is inelastic.

Measures of Cost Chapter 5, Section 3

Fixed Costs Costs that a business has even if it has no output. Examples include: Management Salaries Rent Taxes Depreciation on capital goods

Variable costs Variable costs are those that change when the rate of operation or production changes. Examples include Hourly Labor Raw materials Freight Charges Electricity

Total Cost The sum of all fixed costs and variable costs. Fixed Costs (FC) + Variable Costs (VC) = Total Costs (TC) (FC) + (VC) = TC

Marginal Fixed Cost The extra (variable) costs incurred when a business produces one additional unit of a product. (Needing to hire an extra person to carry out production needed would be an example, or the extra energy cost incurred.)

Measures of Revenue Total revenue is the number of units sold multiplied by the average price per unit. Profit (P) = Total Revenue (TR) minus – Total Cost (TC) P = (TR)-(TC)

Marginal Revenue Marginal revenue is the extra revenue connected with producing and selling additional unit(s) of output.

Marginal Analysis Marginal Analysis- Comparing the extra benefits to the extra costs of a particular decision. To maximize profit, business must produce where marginal revenue equal marginal cost MR=MC

Workers Total Product Marginal Product Total Fixed Costs Total Variable Costs Total Costs Marginal Costs Total Revenue Marginal Revenue Profit $50.00 $0.00 NULL ($50.00) 1 7 $90.00 $140.00 $13.00 $105.00 $15.00 ($35.00) 2 20 13 $180.00 $230.00 $6.92 $300.00 $70.00 3 38 18 $270.00 $320.00 $5.00 $570.00 $250.00 4 62 24 $360.00 $410.00 $3.75 $930.00 $520.00 5 90 28 $450.00 $500.00 $3.21 $1,350.00 $850.00 6 110 $540.00 $590.00 $4.50 $1,650.00 $1,060.00 129 19 $630.00 $680.00 $4.74 $1,935.00 $1,255.00 8 138 9 $720.00 $770.00 $10.00 $2,070.00 $1,300.00 144 $810.00 $860.00 $2,160.00 10 148 $900.00 $950.00 $22.50 $2,220.00 $1,270.00 11 145 -3 $990.00 $1,040.00 $2,175.00 $1,135.00 12 135 -10 $1,080.00 $1,130.00 $2,025.00 $895.00 Profit = Total revenue - Total cost (P = TR-TC) Total revenue = Total Product x Marginal Revenue Total costs = Total Fixed Costs + Total Variable Costs Marginal Product is the change you have in your total product when you hire one additional worker

Break even point The total output or total product the business needs to sell in order to cover its total costs.

Supply-Side Economics School of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. Capital gains taxes are taxes on the sale of stocks Income tax is. . .well. . .do I have to explain this? Consumers will then benefit from a greater supply of goods and services at lower prices. Reagan-omics or Trickle-Down Economics Supply-Side Economics

Named after President Gerald Ford. . .err. . .Ronald Reagan Reganomics

Benefits of Supply-Side Economics Lower taxes Supply side economists argued that high marginal rates penalize work and investment by raising taxes on the additional income generated by additional effort--whether additional investment or extra hours and second jobs by workers. Lower taxes, by contrast, provide an incentive to earn more by allowing people to keep more of the additional money they earn. For a supply sider, lower taxes mean greater freedom--the freedom to earn more, to invest more and to prosper.

Expanded investment Supply side advocates claim that high marginal tax rates encourage individuals to shelter their money from taxes through tax-sheltered investments and other measures to avoid paying additional taxes. Cutting tax rates will give investors an incentive to take their money out of tax shelters and put it into activities that yield greater returns.

Economic growth Lower marginal rates, according to supply side economists, represent a strategy for long-run economic growth. If high marginal rates discourage additional work and tax avoidance activities, cutting marginal rates provides workers and business owners an incentive to work longer or at second jobs, earning additional income, which would be taxed at a lower rate. The increased work, coupled with expanded investment, adds up to greater economic output and a higher gross domestic product (GDP), the measure of a nation's total output.

Supply Side Graph

It’s bad. . . Tax cuts are a cruel mistress Direct stimuli are wishes Do rich people really want to spend more of the money they earn? Well, I mean, it is done by politicians, so. . .well, they want to get reelected Paul Tsongas’s “Panda” Wait, so, I make less money, and I have to pay. . .more? Could give tax cuts to everybody. . .but then that equals less government revenue It’s bad. . .