Chapter 5What is Supply?

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Supply

• The amount of product that would be offered to sale at all possible prices that could prevail in the market.

• Law of Supply: the principle that the suppliers will normally offer more for sale at higher prices and less at lower prices.

• Shows information for a single firm (and/or individual).– You = your labor is a service supplies

Introduction to supply• Supply can be illustrated by a supply schedule or a

supply curve. See figure 5.1 on page 118• Supply schedule is a listing of the various quantities

of a particular product supplied at all possible prices in a market.

• Quantity goes up when $price goes up. • Supply curve graphically illustrates the supply

schedule data. • Normally have a positive slope that goes up from the

lower left-hand corner to the upper right-hand corner.

Market Supply Curve

• A graph that shows various amounts offered by all firms over a range of possible prices.

• Example Figure 5.2 page 119

Activity 1 & 2- Chapter 5• 1. Using the apple farm supply schedule

create a supply curve and a supply market curve.(20 points)– Make sure you title the graphs correctly.– Make sure you label the graph correctly.– Use color markers or pencils to make graph

visible.

2. Using the internet search for a supply schedule for an agriculture product and use excel to create a supply curve for you. (20 points)

A Change in Quantity Supplied

• Amount offered for sale at a given price.• Change in quantity supplied is the change in

amount offered for sale in response to a change in price.– Can be an increase or decrease

• Interaction of supply and demand usually determines the final price of the product

Change in Supply

• Several factors can contribute to a change in supply.– Cost of resources– Productivity– Technology– Taxes and subsidies– Expectations– Government regulations– Number of sellers

Cost of Resources

• A change in the cost of production inputs such as land, labor, and capital can cause a change in supply.

• If the price of inputs drops, producers are willing to produce more, thereby the curve shifts to the right.

• Increase in the costs has the opposite effect. Shift to the left

Productivity

• When management trains or motivates workers, productivity usually goes up.

• Unhappy, unmotivated workers

Technology

• New technology shifts curve to right

• Production cost go down makes it possible to produce more.

• Example: – Milking machine, vaccinations, feed supplements

Taxes & Subsidies

• Tax viewed as a cost/increase in production costs

• Taxes goes down• Subsidy: government payment to an

individual, business, or other group to encourage or protect a certain type of economic activity. Lower the cost of production.

• Examples of industries that receive subsidies• Wheat, cotton, corn, soybean, milk

• Expectations: future prices of a product can affect supply.

• Government regulations: if new regulations change the cost of production this can change the supply. Example Prop 2

• Number of sellers: change in number of sellers can change the market supply curve.

• More sellers • Fewer sellers

Elasticity of Supply

• The response to a change in price varies for different products.

• If an increase in price leads to a proportionally large increase in outputs, supply is elastic.

• Proportionally small change in outputs is inelastic.

Determinants of supply elasticity

• Firms that can adjust to new prices quickly elastic.

• If nature of production is such that adjustments take longer this is inelastic.

• Activity: list 2 agriculture industries that have elastic and inelastic supply and explain why?

Chapter 5, Section 1 Review

• Page 125• Questions 2-8.

Chapter 5, Section 2• The Production Function: shows how outputs

changes when a variable input such as labor changes.

• See figure 5.5• Make a production schedule and production

function curve.• Short run: a period that is so brief that only

the amount of the variable input can be changed.

• Long run: changes during a longer period of time that a firm can adjust the quantities of all productive resources, including capital.– Examples: Car dealers shut down some dealers

now and will have to close down production lines because the amount of capital used for production changes.

– Example:

Total Production

• Total out put produced by firm.• Short term relationship• Only one variable changes and other

resources remain unchanged.

Marginal Production

• Extra output or change in total production caused by adding one more unit of variable input.

• Sum of marginal production= total production• See page 128 figure 5.5

Stages of Production

• Help companies determine the most profitable number of workers to hire.

• Stage 1- Increasing Marginal Returns• Stage 2- Decreasing marginal Returns• Stage 3- Negative Marginal Returns

Stage 1

• As long as each worker contributes more to total output than the worker before, total output rises at an increasing rate.

Stage 2

• Production keeps growing, but it does by smaller and smaller amount.

• Each additional worker then, is making a diminishing, but still positive, contribution to total output.

Stage 3

• Outputs start to fall• Marginal products of additional workers are

negative.• Workers are not as efficient and production

decreases.

Chapter 5, Section 2 review

• Page 130• Questions 2-7

Chapter 5 Section 3

• Measures of Cost: Business analyzed fixed, variable, total, and marginal costs to make production decisions.

• All used to keep an eye on their costs.

Fixed Costs• The costs that an organization incurs even if

there is little or no activity.• It makes no difference whether the business

produces nothing, very little, or a large amount.

• Sometimes called overhead• Includes salaries paid to executives, interest

charges on bonds, rent payments on leased properties, state and local taxes

• Also includes depreciation on capital goods

Variable Costs• Costs that changes when business rate of

operation or outputs change.• Usually associated with labor and raw

materials. Labor, power, freight charges• Largest variable labor

Total Cost• the sum of the fixed and variable costs, taking

in account all of the cost a business faces in the course of operation.

Marginal Cost

• The extra cost incurred when producing one more unit of output.

• See page 134 for examples using figure 5.6

Applying Cost Principles

• Fixed and variable costs affect the way a business operated.

• Internet business: fixed costs of operation, on the Internet are so low. Also no need for large inventory.

Break-Even Point

• The level of production that generates just enough revenue to cover its total operating costs.

Marginal Analysis and Profit Maximization

• Businesses compare marginal revenue with marginal cost to find the level of production that maximizes profits.

• Businesses use two key measures of revenue to find the amount of outputs that will produce the greatest profit.– Total revenue: all revenue that the business receives.– Marginal revenue : the extra revenue a business receives from the production

and sale of one additional unit of production. Dividing the change in total revenue by the marginal product

Marginal Analysis:

• Decision making that compares the extra costs of doing something to the extra benefits gained.

Profit Maximization Quantity of Output

• Level of production where marginal cost is equal to marginal revenue.

• Marginal cost = marginal revenue– Extra cost for making one more = extra revenue

from addition production or one additional unit or output.

Chapter 5 Section 3 Review

• Page 137 Questions 2-7

Chapter 5 review

• Page 140-141• Review Content Vocabulary 1-12• Review main Ideas 19-28• Critical Thinking 29-34• Applying Economic concepts 36• Thinking Like an Economist 37• Analyzing Visuals 38• Test will be on Chapt. 4 & 5 Supply & Demand