Ch. 5: Supply

Sec. 1: What Is Supply?

Supply- anyone who provides goods & services is

a producer manufacturers, farmers, airlines, utility

comp., pet sitter Key words –

if prices to low – some not willing to take on expense of growing and transport

bad weather – not able to supply a farmers market

The Law of Supply

The law of supply – producers want to earn a profit when prices rises – when price falls –

Example: Price and Supply

Smith family – sell at Montclair farmers market – lots of f & v, special – tomato how to price the tomatoes▪ @ $1 per lbs. – supply 24 lbs to market▪ @ $2 per lbs – supply 50 lbs to market▪ @ $.50 pr lbs – supply 10 lbs or even none

Supply Schedule

Supply schedule – shows law of supply in table form

Market supply schedule –

Example: Individual Supply Schedule

2 column table similar to a demand schedule left hand column –

various prices of a good or service

right hand column – quantity supplied at each price

Figure 5.2 – Smith’s supply schedule

Price per Pound

Quantity Supplied in

pounds

2.00 50

1.75 40

1.50 34

1.25 30

1.00 24

0.75 20

0.50 10

Example: Market Supply Schedule

Several stands sell tomatoes at the market want to know the quantity of tomatoes

available for sale at different prices for the entire farmers market – need a market supply schedule

shows quantity supplied by all the producers who are willing and able

Example: Market Supply Schedule

Figure 5.3 – similar to supply schedule only quantities are larger market quantity

supplied depends on price

market research can be used to create a market supply schedule

Producers use research done by govt. or trade organizations

Price per Pound ($)

Quantity Supplied in

Pounds

2.00 350

1.75 300

1.50 250

1.25 200

1.00 150

0.75 100

0.50 50

Supply Curves

Supply curve – Market supply curve –

shows how much of a good or service all of the producers in a market are willing or able to offer for sale at each price

Example: Individual Supply Curve

10 24 34 500

0.5

1

1.5

2

2.5

Tomatoes

Tomatoes

Figure 5.4 – Smith’s supply schedule when price increases

– when price

decreases – created using the

assumption that all other economic factors except price remain the same

Example: Market Supply Curve

Figure 5.5 Shows the quantity of tomatoes that all the producers (the

market as a whole) are willing and able to offer for sale at each price differs in scope, but is made the same way direct relationship between price and quantity supplied▪ if price increases among all suppliers then quantity supplied increases▪ if price decreases, then quantity supplied decreases

constructed on assumption that all other economic factors remain the same

Supply curves for all producers follow the law of supply does not matter what is produced why spend more when prices are higher higher prices signal potential for higher profits

Market Supply Schedule

50 100 150 200 250 300 3500

0.5

1

1.5

2

2.5

Tomatoes

Tomatoes

Sec. 2: What Are the Costs of Production?

Labor Affects Production

Marginal product – Janine’s jean factory – 3 workers produce

12 pairs each day increase the # of workers and output

increases adding a 5th worker allows for

specialization Specialization –

Example: Marginal Product Schedule

Shows relationship between labor and marginal product

Figure 5.7 1 or 2 workers produce very little, but it is bigger with

each one between 3 & 6 workers allows for specialization, higher

production Increasing returns – Diminishing returns –

workers 7,8,9,10 work overlaps with 1st 6 workers with worker 11, total output decreases employees crowded, operations disorganized this is rare, but it can happen

Production Costs

Goal is to make a profit – Fixed costs – are expenses that the

owners of a business must incur whether they produce nothing, a little , or a lot

Variable costs – Total cost – adding fixed and variable

costs together Marginal costs –

Example: Fixed and Variable Costs

Janine fixed costs – the same whether producing or not salaries of managers who run the company,

but not involved directly in production Variable costs –

increase production and variable cost go up decrease production (cut back hours,

vacation for a week), variable cost decrease To determine total cost of a pair of

jeans –

Example: Production Costs Schedule

Figure 5.8 – see costs and how they change as quantity of jeans produced changes # of workers added is a major factor fixed costs stay the same no matter what

the total product amounts to Marginal cost is determined by

marginal cost decline b/c of specialization but then increases b/c of diminishing returns

Production Costs Schedule

# of workers

Total Product

Fixed Costs($)

Variable Costs ($)

Total Costs($)

Marginal Costs($)

0 0 40 0 40 -

1 3 40 30 70 10

2 7 40 62 102 8

3 12 40 97 137 7

4 19 40 132 172 5

5 29 40 172 212 4

6 42 40 211 251 3

7 53 40 277 317 6

8 61 40 373 413 12

9 66 40 473 513 20

10 67 40 503 543 30

11 65 40 539 579 -

Earning the Highest Profit

Marginal revenue – it is the price

Total revenue –

Formula –

Total Revenue= P x Q

P= price of the product

Q= quantity purchased at that price

Example: Production Costs and Revenue Schedules

Janine & figure 5.9 finds total revenue by multiplying marginal revenue by total product determine profit by subtracting total costs from total revenue

▪ wants to know how many workers to hire and how many pairs of jeans to make to get most profit

need to perform a marginal analysis – a comparison of added costs and benefits

Examine figure 5.9 with 1 worker – does not make a profit at 2 workers – earns a profit and passes break-even point – total costs and

total ▪ revenue are exactly the same

profits continue to rise up to and including the 9th worker Profit-maximizing output – reached a level where it has achieved

the highest level of profit marginal revenue and marginal cost are equal then profits begin to decline at 10th worker – increase in marginal cost is greater than increase in

marginal revenue

Production Costs & Revenue Schedule

# of Worker

s

Total Produ

ct

Total Cost($

)

Marginal

Cost($)

Marginal Revenue

($)

Total Revenue

($)

Profit($)

0 0 40 - - 0 -40

1 3 70 10 20 60 -10

2 7 102 8 20 140 38

3 12 137 7 20 240 103

4 19 172 5 20 380 208

5 29 212 4 20 580 368

6 42 251 3 20 840 589

7 53 317 6 20 1060 743

8 61 413 12 20 1220 807

9 66 513 20 20 1320 807

10 67 543 30 20 1340 797

11 65 579 - 20 1300 721

Sec. 3 What Factors Affect Supply?

Changes in Quantity Supplied

Early curves created using the assumption that all other economic factors except price remain the same

The only thing influence how much producers will offer for sale is price Supply curve shows that pattern different points on supply curve show

change in quantity supplied Change in quantity supplied –

Example: Changes Along a Supply Curve

Each new point shows a change in quantity supplied a change in quantity supplied - change is shown by the direction of

movement along the curve▪ to the right – ▪ to the left –

Figure 5.10 shows individual information market supply curve show similar info for an

entire market they just have large quantities supplied

Changes in Supply

Change in supply – production costs increase – production costs decrease –

6 factors can cause a change in supply: input costs, labor productivity, technology, govt. action, producer expectations, number of producers

Decrease Increase

0 10 20 30 40 500

1

2

3

4

5

6

S2S1

15 25 35 45 55 650

1

2

3

4

5

6

S1S2

Factor 1: Input Costs

Input costs – Anna and nutrition

bars made with peanuts

price of peanuts increases – cannot afford to produce as many bars

supply curve shifts to the left - & vice versa

Factor 2: Labor Productivity

Labor productivity – increased productivity

decreases the costs of production – increases supply

specialized division of labor allows for making more goods at a lower cost

better trained and more skilled workers can usually produce more goods in less time and lower costs then less educated and less skilled

Factor 3: Technology

Technology – technology used to

make goods more efficiently

increased automation leads to increased supplies

allows workers to be more productive and helps business to increase the supply of their services

Factor 4: Government Action

Excise tax – often placed on alcohol & tobacco (govt. interested in

discouraging use) increases producer cost, decreases supply

Taxes tend to decrease supply, subsidy do the opposite

Regulation – can affect supply banning a pesticide can decrease the supply of the

crops that depend on it worker safety can decrease supply by increasing

production costs or increase supply by reducing labor lost to on the job injuries

Factor 5: Producer Expectations

If producers expect price of their product to rise or fall, producers each

react differently if farmer expects

corn prices to rise –

Factor 6: Number of Producer

When one company develops a new idea, other producers will enter the market and increase the supply of the good or service supply curve shifts to the right – figure

5.13 increase in # of producers means

increased competition may drive less efficient producers out of

the market – decreasing supply

50 150 200 3000

0.5

1

1.5

2

2.5

3

3.5

S1S2

Figure 5.13 – ice cream stores one starts – is a

success – 6 months later – 3 more stores

supply of ice cream cones increased all price levels

within 1 yr., one forced out of the market

Economic Pacesetter: Robert Johnson: Supplying African –American Entertainment

Media entrepreneur – b. April 8, 1946 1970s – Washington lobbyist

for National Cable Television Association

recognized void of African American TV market

Conceived idea for Black Entertainment Television (BET) took $15,000 loan and

secured a $500,000 investor picked up a space on cable TV started on Jan. 8, 1980 started with 2 hours of

programming a week

Today – 5 separate channels – operators in US, Canada, Caribbean at 1st – shows similar to MTV later – more diverse

programming BET.com - #1 internet portal

for African-Americans 2001 – sold BET to Viacom

International for $3 Billion became 1st black billionaire continued to run company for

5 yrs. companies began to copy

Johnson’s ideas for programming for the African-American community

Sec. 4: What Is Elasticity of Supply?

Elasticity of Supply

Toyota introduces hybrid Prius in 2000 instant success – not able to increase supply at same

pace that consumer demand and prices rose 5 yrs. Later – not meet growing demand inability to meet increased demand suggests the supply

is inelastic Elasticity of supply –

if a change is price leads to a relatively larger change in quantity supplied -

a 10% increase in price causes a greater than 10% increase in quantity supplied▪ if a change in price leads to a relatively smaller change in

quantity supplied – ▪ if the price and quantity supplied change by the exact same % -

Example: Elastic Supply

Figure 5.15 shows quantity supplied of

new leather boots – gained popularity, shortage developed

is elastic price was raised – and

quantity supplied kept up producer able to keep up

because raw materials are inexpensive & easy to get

manufacturing process is also fairly uncomplicated and easy to increase

0 102538500

20

40

60

80

100

120

140

160

Series 1

Series 1

Example: Inelastic Supply

0 20 28 400

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Series 1

Series 1

Figure 5.16 – olive oil supply of olive oil is

inelastic price rose by a

factor of 4, supply could not keep pace

oil comes from previous seasons olives

What Affects Elasticity of Supply?

Ease of changing production to respond to price change is the main factor in determining elasticity of supply supply is more elastic over time – a year or several years

Industries that are able to respond quickly to changes in price by either increasing or decreasing production are those that don’t require a lot of capital, skilled labor or difficult to obtain resources dog-walkers a business that sells small crafts industries that would have trouble – auto & oil refiners takes time to respond to price changes