1. What is Supply?
Economics
Ch. 5 Section 1

2. Law of supply Supply is the amount of goods available
Means the higher the price, the larger the quantity produced
Develops from choices of both current and new producers.
The movement of individual firms changing their level of production and firms entering/exiting the market combine to create the law of supply.

3. An increase in price will increase a firm’s profit.
Even the promise of higher sales will encourage more production.
Profit drives supplier’s decision
If price falls, producer is discouraged from producing as much
Profits appeals to those in the market and those deciding to join the market.

4. Supply schedule Similar to demand schedule
Shows relationship between price and quantity supplied for a specific good.
Lists supply for a very specific set of conditions.
All other factors are assumed to remain constant.
A rise or fall in price of a good will cause the quantity supplied to change, but not schedule.
When an outside factor affects output a new supply schedule has to be produced.

5. Market supply schedule shows the relationship between prices and the total quantity supplied by all firms in a particular market.
When data points of a supply schedule are graphed it creates a supply curve or market curve.
Always rises from left to right

6. Elasticity of supply
Is a measure of the way suppliers respond to a change in price
Elastic: responsive to supply
Inelastic: unresponsive to supply

7. Costs of Production
Economics
Ch. 5 Section 2

8. Labor and Output
Business owners must always question how many workers to hire.
Must consider the # of workers that will affect total production
The more workers hired will increase output of product up to a point.
Increasing marginal returns: a level of production in which the marginal product of labor increases as the # of workers increase.

9. As more workers are hired the marginal product of labor is positive and promotes total output.
But product output will decrease the more workers are hired after a point.
Diminishing marginal returns: level of production in which the marginal product of labor decreases as the number of workers increases.
Reasons for the decrease in output have to do with the limited amount of capital.
Few companies hire more workers than necessary

10. Production Costs
Two factors have to be taken into consideration when producing goods
Fixed costs: cost that does not change, no matter how much of a good is produced.
Examples – rent, repairs, taxes, salaries
Variable costs: costs that rise or fall depending on the quantity produced
Examples – raw materials, cost of labor, electricity
To find the total cost of production add fixed and variable costs.

11. Setting Output
How to maximize profit is the goal behind all decisions.
Profits is the total revenue minus total cost.
Companies want to keep their marginal revenue (price) equal to or less than marginal cost.
If increase output they would get less profit.
If the product price increased then production of the product would also increase.

12. Shutdown decision Total revenue vs. Operating cost
Includes variable and fixed cost
Fixed costs still have to be paid, so sometimes it is better for a company to remain in business, even if profit is not what they are hoping for.

13. What Factors Affect Supply?
Economics
Ch. 5 Section 3

14. Input Cost
Any change in the cost of an input used to produce a good – such as raw materials, machinery, or labor – will affect supply.
A rise in the cost of an input will cause a fall in supply at all price levels because the good has become more expensive to produce.
A fall in the cost of an input will cause an increase in supply at all price levels.

15. Effect of Rising Costs
Suppliers set prices at levels that are equal to marginal cost (cost to make).
If inputs increase the marginal cost increases.
Marginal costs could increase higher than the price, so the business is not as profitable.
If business has no control over price, then production is cut and marginal cost until it equals the lower price.
Supply falls at each price, so the curve shifts to the left.

16. Technology Input costs may drop also.
New technology lowers production costs in many industries.
Robots have replaced workers so less money is spent on salary.
Lowers costs and increases supply at all price levels, curve shifts to the right.

17. Government’s Influence on Supply
Subsidies
Is a government payment that supports a business or market.
Reasons for using subsidies
Protect local business if supply runs out (WWII)
Protect local culture (French countryside)
Protect young businesses from foreign competition
Taxes
Excise tax is the tax on the production or sale of a good.
Increases production costs by adding an extra cost for each unit sold.

18. Used on the sale of products that the government thinks are harmful to the public good.
Examples: cigarettes, alcohol, etc…
Built in to the prices, not realizing you are paying them.
Because it is a cost increase, supply curve shifts left (down)
Regulation
Government intervention in a market that affects the price, quantity, or quality of a good.
Protecting the environment, safety of the public, etc…

19. Supply in the Global Economy
A large share of goods are produced in one country and imported by another to be sold to consumers.
The supplies of goods are affected by changes in other countries.
Import restrictions

20. Other Influences on Supply
Producers’ expectations of future prices affect their output decisions.
Store goods in order to sell more in the future.
This reduces supply now and increase supply later.
Inflation is a condition of rising prices
During periods of inflation the value of cash decreases from day to day as prices rise.
A good will still hold its value, if it can be stored for long periods of time

21. Supply of goods increases with the number of firms producing the good.
The more producers of a good in the market will increase the amount of that good in the market.