Post on 15-Dec-2015
Definition: The various quantities of a good or
service that producers are willing and able to sell at all prices at a particular time.
SUPPLY
WHY DO PRODUCERS PRODUCE?
Two Words.
Profit
Motive.
**Remember the invisible hand?
Demand drives Supply…
LAW OF SUPPLY
• As P ↑, QS ↑• As P ↓, QS ↓• Opposite of the law of
demand
• Why? Example…
Mr. Bull’s Soccer LessonsHow many lessons might I give if I was able to charge…..
$5/hr?
$15/hr?
$40/hr?
As I am able to charge more, production becomes more valuable relative to other tasks.
What is my opportunity cost of soccer lessons?
THE LAW OF SUPPLY Reasons for a Change in Quantity
Supplied:(Always associated with a change in a product’s own price)
1. Assuming firms’ costs are constant, at higher prices, producers make more profits.
- Economies of Scale – as businesses grow, production costs tend to shrink
2. When prices rise, firms substitute production of one good for another.
-Aunt Jemima
SUPPLY SCHEDULE/CURVE
• Notice… opposite of Demand curve
• Upsloping
• Individual Supply vs. Market Supply
Change in quantity supplied (a movement along the curve)
Change in Quantity Supplied: Movement along the Supply Curve
Pric
e (p
er u
nit)
Quantity supplied (per unit of time)
S0
$15A
1,250 2,300
B
SHIFTS IN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE
If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.
Shift in SupplyPr
ice
(per
uni
t)
Quantity supplied (per unit of time)
S0
Shift in Supply(a shift of the curve)
S1
$15A B
1,250 2,300
7 REASONS FOR A CHANGE IN SUPPLY1. Change in the cost of inputs
• Land, labor, capital
2. Change in Productivity
3. Change in Technology
• Ask Henry Ford…
4. Change in Number of Sellers
• Duh.
7 REASONS FOR A CHANGE IN SUPPLY
5. Change in Taxes or Subsidies
• Excise tax
6. Change in Market Expectations
• Future prices/demand/conditions
7. Change in Government Regulation
Increasing Marginal Returns
Decreasing Marginal Returns
Negative Marginal Returns
PROFIT MAXIMIZATION• Profit =
• Total Cost = Fixed Cost + Variable Cost
• Fixed vs. Variable… examples?
• Fixed – rent, loan payments, utilities
• Variable – labor, raw materials
• Firms want TR > TC…
• But how do they maximize this profit?
• MARGINAL ANALYSIS!!!!
Total Revenue - Total Cost
PROFIT MAXIMIZATION• Marginal Cost = ∆ Price of Inputs / ∆
Output
MC = ∆ Variable Cost/ ∆ Quantity
• Marginal Revenue = Price
• Profit Maximization:
As long as MR > MC, producers will continue to produce.
Reach the point where MR = MC
Production Function.notebook
TEST TOPICS• Definition/Law of Supply
• Supply Curve
• Market Supply
• Change in Supply
• 7 factors
• Elasticity of Supply
• 3 factors
• 3 Stages of Production
• Profit Maximization
• MR = MC