Definition: The various quantities of a good or service that producers are willing and able to sell at all prices at a particular time. SUPPLY

WHY DO PRODUCERS PRODUCE? Two Words. Profit Motive. **Remember the invisible hand? Demand drives Supply…

LAW OF SUPPLY As P ↑, Q S ↑ As P ↓, Q S ↓ Opposite of the law of demand Why? Example…

After School Tutoring How many 1 hr. sessions might you give if you were able to charge….. $5/hr? $7.50/hr? $10/hr? …$50/hr? As you are able to charge more, production becomes more valuable relative to other tasks. What is your opportunity cost of tutoring? PriceQuantity

THE LAW OF SUPPLY  Reasons for a Change in Quantity Supplied: (Always associated with a change in a product’s own price) 1.Assuming firms’ costs are constant, at higher prices, producers make more profits. - Economies of Scale – as businesses grow, production costs tend to shrink 2.When prices rise, firms substitute production of one good for another. -Aunt Jemima

SUPPLY SCHEDULE/CURVE Notice… opposite of Demand curve Upsloping Individual Supply vs. Market Supply

Change in quantity supplied (a movement along the curve) Change in Quantity Supplied: Movement along the Supply Curve Price (per unit) Quantity supplied (per unit of time) S0S0 $15 A 1,2502,300 B

SHIFTS IN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE  If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

Shift in Supply Price (per unit) Quantity supplied (per unit of time) S0S0 Shift in Supply (a shift of the curve) S1S1 $15 AB 1,2502,300

7 REASONS FOR A CHANGE IN SUPPLY 1. Change in the cost of inputs Land, labor, capital 2. Change in Productivity 3. Change in Technology Ask Henry Ford… 4. Change in Number of Sellers Duh.

7 REASONS FOR A CHANGE IN SUPPLY 5. Change in Taxes or Subsidies Excise tax 6. Change in Market Expectations Future prices/demand/conditions 7. Change in Government Regulation

ELASTICITY OF SUPPLY Elastic – easy/quick to produce – lower marginal cost for each additional unit produced Inelastic – harder/slower to produce – higher marginal cost for each additional unit produced Elasticity of supply increases as producers have more time to adjust to a price change Ex: 1979 Today

FACTORS AFFECTING ELASTICITY OF SUPPLY 1.Ease of Production easier = more elastic 2.Responsiveness to price change quicker adjustment = more elastic 3.Time more time to adjust = more elastic

ELASTIC –OR- INELASTIC?

ELASTICITY OF SUPPLY CHANGES OVER TIME Market Period – immediately after a change in price Perfectly inelastic supply Short Run – up to a few months after a change in price Inelastic or somewhat elastic supply Fixed plant size Long Run – many months/years after a price change Perfectly Elastic supply Adjustable plant size

P Q PRICE ELASTICITY OF SUPPLY The Market Period Perfectly inelastic supply D1D1 D2D2 SmSm Q0Q0 PmPm P0P0 Greatest Price Impact 6-17

PRICE ELASTICITY OF SUPPLY The Short Run Inelastic supply P Q D1D1 D2D2 SsSs Q0Q0 PsPs P0P0 QsQs Lower Price Impact 6-18 Fixed land. Some fixed capital. More labor? More fertilizer?

PRICE ELASTICITY OF SUPPLY The Long Run Elastic supply P Q D1D1 D2D2 SlSl Q0Q0 PlPl P0P0 QlQl Least Price Impact 6-19

Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns

PROFIT MAXIMIZATION Profit = Total Cost = Fixed Cost + Variable Cost Fixed vs. Variable… examples? Fixed – rent, loan payments, utilities Variable – labor, raw materials Firms want TR > TC… But how do they maximize this profit? MARGINAL ANALYSIS!!!! Total Revenue - Total Cost

PROFIT MAXIMIZATION Marginal Cost = ∆ Price of Inputs / ∆ Output MC = ∆ Variable Cost/ ∆ Quantity Marginal Revenue = Price Profit Maximization: As long as MR > MC, producers will continue to produce. Reach the point where MR = MC Production Function.notebook

TEST TOPICS Definition/Law of Supply Supply Curve Market Supply Change in Supply 7 factors Elasticity of Supply 3 factors 3 Stages of Production Profit Maximization MR = MC