1. Understanding Supply What is the law of supply?
What are supply schedules and supply curves?
What is elasticity of supply?
What factors affect elasticity of supply?

2. The Law of Supply
Suppliers will offer more of a good at a higher price.
Price
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls

3. How Does the Law of Supply Work?
Quantity supplied - how much of a good is offered for sale at a specific price.
Higher prices = More revenue = More production
Rising prices = New firms = More supply

4. Price per slice of pizza
Supply Schedule
$.50
1,000
Price per slice of pizza
Slices supplied a week
Supply Schedule
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500

5. Output (slices per week)
Supply Curves
Supply Curve
Price (in dollars)
Output (slices per week)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
Graph of the quantity supplied of a good by a supplier at different prices.
Always downward sloping to the left, or upward to the right – opposite of demand.
Supply

6. Change in Quantity Supplied (QS)
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
A change in quantity supplied occurs only when there is a change in price. – ceteris paribus
Supply

7. Changes in Supply How do input costs affect supply?
How can the government affect the supply of a good?
What other factors can influence supply? 7

8. Output (slices per day)
Change in Supply (S)
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
A change in supply occurs when there is a change other than price. The entire curve shifts.
Shift to the Right=Increase in Supply
Shift to the Left=Decrease in Supply
Supply 8

9. What Causes a Change in Supply?
Costs of Inputs – Labor, Machinery, Raw Materials
As input costs increase, profitability decreases. Profit decrease = supply decrease.
Input costs can also decrease. Technology lowers costs and increases supply.
Ex. Automobiles 9

10. What Causes a Change in Supply?
Government’s Influence
Subsidies
A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.
Ex. Give every wheat farmer an additional .58 cents for production of wheat on a family owned farm.
Taxes
The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. Ex. Alcohol, Cigarettes, Tobacco, Prostitution, Gasoline, etc…
Regulation
Regulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. More regulation usually raises costs. 10

11. What Causes A Change in Supply?
The Global Economy
The supply of imported goods and services has an impact on the supply of the same goods and services here.
Government import restrictions will cause a decrease in the supply of restricted goods.
Future Expectations of Prices
Expectations of higher prices will reduce supply now and increase supply later.
Number of Suppliers
If more firms enter a market, the market supply of the good will rise.
Environmental Conditions
Natural Disasters, things that happen in the environment can affect supply of goods 11

12. How quantity supplied reacts to a change in price.
Elasticity of Supply
How quantity supplied reacts to a change in price.
Inelastic – minimal change (in quantity supplied)
Ex. Van Gough Painting, Orange Grower, Concert Tickets
Elastic – large change (in quantity supplied)
Ex. High End Denim

13. Factor that most affects Elasticity of Supply?
Time
Short run, supply is inelastic.
Firms cannot change their level of output – regardless of price.
Ex. Oranges
Long run, supply can become more elastic.

14. Other Factors Affecting Elasticity of Supply
Availability of Raw Materials – example: gold
Length and Complexity of Production – textiles vs. automobiles
Mobility of Factors - If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a product in demand, then it is elastic. If it is the opposite, then inelastic
Excess Capacity
Inventory

15. Costs of Production How do firms decide how much labor to hire?
What are production costs?
How do firms decide how much to produce?

16. A Firm’s Labor Decisions
The marginal product of labor is the change in output from hiring one additional unit of labor, or worker.
Marginal = Unit
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor — 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1

17. Labor (number of workers) Marginal Product of labor
Marginal Returns
Increasing, Diminishing, and Negative Marginal Returns
Labor (number of workers)
Marginal Product of labor
(beanbags per hour) 8 7 6 5 4 3 2 1 –1 –2 –3 1 2 3
Increasing marginal returns
Increasing marginal returns each worker increases output more than the previous worker.
Diminishing marginal returns output keeps growing but by smaller amounts. 4 5 6 7
Diminishing marginal returns
Negative marginal returns – output decreases. 8 9
Negative marginal returns

18. Production Costs A fixed cost - cost that does not change
Rent, taxes, some labor costs
Variable costs - costs that rise or fall depending on how much is produced.
Utilities, raw materials, some labor costs
Total cost = fixed + variable costs.
Marginal cost - cost of producing one more unit of a good.
Marginal revenue is the additional income from selling one more unit of a good.
Produce until MR = MC

19. Setting Output MR = MC Production Costs Total revenue
Profit (total revenue – total cost)
Marginal revenue (market price)
Marginal cost
Total cost (fixed cost + variable cost)
Variable cost
Fixed cost
Beanbags (per hour)
$ –36
–20 21 40 1 2 3 4 $0 24 48 72 96
$24 — $8 5
$36 44 51 56 8 12 15 20 36 57 72 84 93 5 6 7 8
120
144
168
192 24 9 12 15 63 99 27 36 48 98 92 79
216
240
264
288 24 19 30 37 36 9 10 11 12 82
106
136
173
118
142
172
209

20. Using MR and MC to maximize profit
Marginal revenue and marginal cost can be used to find the profit-maximizing output level
Logic behind MC and MR approach
An increase in output will always raise profit as long as marginal revenue is greater than marginal cost (MR > MC)
Converse of this statement is also true
An increase in output will lower profit whenever marginal revenue is less than marginal cost (MR < MC)
Guideline firm should use to find its profit-maximizing level of output
Firm should increase output whenever MR > MC, and decrease output when MR < MC