Chapter 5 - Supply

Law of Supply Suppliers (Producers) will offer more goods and services for sale at higher prices and less at low prices. Price and Quantity Supplied (Qs) have a direct relationship – both increase together

Graphing Supply Supply Schedule – Listing of various quantities of a particular product supplied at all possible prices in the market. Supply Curve - Graph that illustrates the various quantities of a product offered at various prices - always slopes upward. Market Supply Curve – Same as Supply Curve but this applies to all suppliers (producers) in a given market

5 P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

35 P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

S P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Plot the Points Connect the Points GRAPHING SUPPLY

The Effects on Supply Determinants are factors that can effect suppliers in a particular market in both a positive and negative fashion. We express this on a graph by showing a shift of the entire curve. An increase in Supply shifts the curve to the right A decrease in Supply shifts the curve to the left

List of Supply Determinants Cost of Inputs (Labor, Natural Resources, Capital Goods) Worker performance (Productivity) Number of Sellers Technology & Innovation Taxes & Subsidies Government Regulation Future Expectations

S P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN If Supply increases, what happens to our curve? GRAPHING SUPPLY

S P Q o $ Price of Corn Quantity of Corn $ PQSQS CORN S’ Increase in Supply Increase in Quantity Supplied GRAPHING SUPPLY

Movement Along the Curve As was just demonstrated, a price change has a different effect on Supply than a determinant would. Price changes do not shift the curve but rather move along it from point to point. Determinants = Change in Supply Price changes = Change in Quantity Supplied

S P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN What if Supply Decreases? GRAPHING SUPPLY

S P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN S’ Decrease in Supply Decrease in Quantity Supplied GRAPHING SUPPLY

Quantity Supplied vs. Change in Supply Remember, a determinant change effects the entire curve. A price change simply moves along the curve. Anytime its says “change in quantity supplied”, understand this is a price change and will only move along the curve. When its says just “change in supply”, this is a determinant change and will move the entire curve.

Supply Elasticity Just as for Demand, Supply also has 3 different elasticity levels. Elastic – Production can easily increase due to a change in price (Candy, Toys, Textiles) Inelastic – Production stays roughly the same even though prices are increasing (Oil, Natural Gas) Unit elastic – Production increase is proportional to price change

The Theory of Production Section 2

Terminology Theory of Production – Relationship between Factors of Production and Output of goods & services Short run – Time period in which suppliers can only adjust labor Long run – Time period in which suppliers can adjust for all factors of production Input – Necessary resources for production Output – What is produced, TOTAL PRODUCT

Law of Variable Proportions At some point, additional inputs will not lead to greater output. Production Function – Shows specifically how output is affected by the addition of a single input – usually as a schedule or chart. (Page 124)

Stages of Production 3 Stages Stage I – Too many resources per worker, workers need to be added to achieve maximum output Stage II – Principle of diminishing returns, output starts to decrease as workers are added Stage III – Too many workers hired. Marginal product becomes negative as output decreases.

Cost, Revenue, & Profit Maximization Section 3

Measures of Cost Fixed Costs (Overhead) – Costs such as rent and interest. They do not change from month to month, or in some cases, year to year. Variable Costs – Costs that fluctuate based on output or production. Total Costs – Variable + Fixed Marginal Cost – Change in or extra cost incurred when a single unit of output is produced

E-Commerce Internet businesses help themselves by keeping fixed costs very low compared to that of a company who operates out of a physical location.

Measures of Revenue Total Revenue - # of units sold multiplied by the average price per unit. 7units X $15 = $105 in Total Revenue Marginal Revenue – Key factor in determining profitability. Represents the extra revenue gained by each additional input. $105 / 7units = $15 Marginal Revenue

Marginal Analysis Break Even Point – The total revenue necessary to pay for all costs associated with production. Profit Maximizing Quantity of Output – Achieved when marginal cost = marginal revenue. Other production combinations may yield equal revenues. They will not be as profitable however.