SUPPLY

Chapter 5

Lesson 1

What is Supply?

• Supply is the quantities that would be

offered for sale and all possible prices

that could prevail in the market.

Figure 5.1Figure 5.1

The Law of Supply

• The quantity supplied, or offered for sale, varies directly with its price.

• If prices are high, suppliers will offer greater quantities for sale. If prices are low, suppliers will offer smaller quantities for sale.

• A change in overall supply will cause the Demand curve to shift.

• A change in quantity demanded will move along the original curve.

Supply Curve

• Individual Curve– Illustrates how the quantity that a producer makes

varies depending on the price that will prevail in the market

• Market Curve – Illustrates the quantities and prices that all

producers will offer in the market for any given product or service

• Economist analyze supply – by listing quantities and prices in a supply

schedule

– Forms supply curve with and UPWARD slope

Figure 5.2Figure 5.2

Practice making supply

curves

examples on page 129

Supplier 2: Headphones To Go

Price per SetSets Supplied

per Month

$20 15,000

$25 20,000

$30 25,000

$35 30,000

$40 35,000

$45 40,000

$50 45,000

$55 50,000

Practice Supply Curves:

Price Per Golf Ball Golf Balls Supplied

$.50 5,000

$1.00 10,000

$1.50 15,000

$2.00 20,000

$2.50 25,000

$3.00 30,000

Price Per Slice of Pizza

Slices Supplied

$1.00 100

$2.00 150

$3.00 200

$4.00 250

$5.00 300

$6.00 350

• Quantity supplied:

– The amount that producers bring to the

market at any given price

• Change in Quantity Supplied;

– The change in the amount offered for sale

in response to a change in price

Change in Quantity Supplied

Quality Supplied

• Illustrates a change

in quantity supplied

– Shows as a

movement along the

line

– Can increase or

decrease amount of

the product

(movement from a to

b)

Figure 5.1Figure 5.1

• Situation where suppliers offer different

amounts of products for sale at all

possible prices

Change in Supply

Figure 5.3Figure 5.3

Change in Supply(cont)

• Supply Curves can also shift in

response to the following factors:

–Resource costs: cost to purchase

factors of production will influence

business decisions

–Productivity: increases whenever

more output is produced with the

same amount of inputs

Change in Supply (Cont.)

–Technology: improvements in

production increase ability of firms to

supply

–Taxes: firms view taxes as a cost of

production and lobby for lower taxes

–Subsidies: government subsides

encourage production, while taxes

discourage production

Change in Supply (cont)

–Number of sellers: how many firms are

in the market

–Expectations: businesses consider

future prices and economic conditions

Elasticity of Supply

• Supply Elasticity: a measure of the way in which a quantity supplied responds to a change in price

• Elastic – Small increase in price leads to a larger increase

in output—supply

• Inelastic– Small increase in price causes little change in

supply

• Unit Elastic – A change in price causes a proportional change in

supply

Figure 5.4aFigure 5.4a Figure 5.4bFigure 5.4b

Figure 5.4cFigure 5.4c

Figure 5.4dFigure 5.4d

Determinants of Supply

Elasticity

• How quickly a producer can act when a

change in price occurs:

– Adjust quickly = elastic

– Complex/advance planning = inelastic

• Factor of Substitution:

– Easy = elastic

– Difficult = inelastic

Copy and answer the following

questions (lesson1)

1. What does the Law of Supply State?

2. Explain each of the following: Supply

Schedule, Supply Curve, Market

Supply Curve

3. What does a change in quantity

supplied respond to?

4. Why does the supply curve shift to the

left?

Copy and answer the following

questions

5. Name the eight factors that

determine whether supplies increase

or decrease.

6. What is supply elasticity?

7. What Characterizes an inelastic

supply curve?

8. What changes does a unit elastic

supply curve?

Theory of Production

Lesson 2

The Production Function

• Concept that describes the relationship

between changes in output to different

amounts of a single input while others

are constant

The Production Period

• Short Run:

–Output will change as one variable input is altered, but other inputs are kept constant

– i.e.: salting a meal (amount of input –salt- varies; so does the output –quality of the meal)

cont.

• Final Product is affected

–How is the output of the final product affected as more units of one variable input or resources are added to a fixed amount of other resources?

– i.e.: farmer may have all the land, machines, workers, and other items needed to produce a crop, but may have questions about the use of fertilizers.

• Possible to vary all the inputs at the

same time

– Economist prefer only a single variable be

changed at a time

– b/c more than one = harder to gauge the

impact of a single variable

Cont.

• Total product is the total output the company produces

– Total Product Rises • As more workers are added, total product rises

until a point that adding more workers causes a decline in total product

– Total product Slows• As more workers are added output continues

to rise = it does so at a slower rate until ti can grow no further– More workers “get in the way”

Total Product

• Marginal Product is the extra output or

change in total product caused by

adding one more unit of variable output

– i.e.: worker 1’s output is 7; worker 2’s

output is 13 together their output is 20

(figure 5.5)

Marginal Product

Figure 5.5aFigure 5.5a

Figure 5.5bFigure 5.5b

Three Stages of Production

• Stage I: increasing returns – Marginal output increases with each new worker

– Companies are tempted to hire more workers (moves them to stage II)

• Stage II: diminishing returns – Total production keeps growing but the rate of

increase is smaller

– Each worker is still making a positive contribution to total output (but diminishing)

• Stage III: negative returns – Marginal product becomes negative

– Decreasing total plant output

Copy and answer Lesson 2

questions1. Describe the relationship on which the

theory of production is based.

2. Explain how marginal product changes in

each of the three stages of production

3. Identify what point will eventually be

reached if companies continue adding

workers.

Cost, Revenue and Profit

Maximization

Lesson 3

What kinds of cost do you

have to consider?• Fixed Cost – the cost that a business incurs

even if the plant idle and output is zero. Sometimes called overhead.– Salaries

– Rent

– Property Taxes

– Variable Cost – cost that does change when the business rate of operation or output changes

– Electric power

– Shipping charges

What kinds of cost do you

have to consider?• Variable Cost – cost that does change

when the business rate of operation or output changes– Electric power

– Shipping charges

• Total Cost – Sum of the fixed and variable costs

• Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

Figure 5.6Figure 5.6

Measure of Revenue

• Average Revenue=

-The average price that every unit of

output sells for

Total revenue =

– Number of units sold multiplied by the average

price per unit

• Marginal Revenue =

– The extra revenue connected with producing

and selling an additional unit

Marginal Analysis

• Profit maximization quantity of output

is reached when marginal cost and

marginal revenue are equal

• Break-even point is the total output or

total product the business needs to sell

in order to cover its total cost

Applying Cost Principles

• Self-service Principles

– Gas station is an example of high fixed

cost with low variable cost

– Ration of variable to fixed cost is low

• E-Commerce

– An industry with low fixed cost