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

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

35

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

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

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

If Supply increases,

what happens

to our curve?

GRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

Price of Corn

Quantity of Corn

$54321

60503520 5

P QS

CORN

8070604530

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

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

What if

Supply

Decreases?

GRAPHING SUPPLY

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

S’

453020 0 --

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.