1. Chapter 5 - Supply

2. 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

3. 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

4. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q 5
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o 5 Q
Quantity of Corn

5. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

6. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o 35 Q
Quantity of Corn

7. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

8. GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

9. GRAPHING SUPPLY Plot the Points Connect the Points P QS $5 4 3 2 1 60
Price of Corn P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5
Connect the Points o Q
Quantity of Corn

10. 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

11. 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

12. GRAPHING SUPPLY If Supply increases, what happens to our curve? P QS
Price of Corn
If Supply increases,
what happens
to our curve? P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

13. GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P
Increase in
Supply S’ S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30
Increase
in Quantity
Supplied o Q
Quantity of Corn

14. 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

15. GRAPHING SUPPLY What if Supply Decreases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn
What if
Supply
Decreases? P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

16. GRAPHING SUPPLY P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease
Price of Corn S’ P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 --
Decrease
in Quantity
Supplied o Q
Quantity of Corn

17. 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.

18. 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

19. The Theory of Production
Section 2

20. 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

21. 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)

22. 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.

23. Cost, Revenue, & Profit Maximization
Section 3

24. 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

25. 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.

26. 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

27. 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.