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Chapter 5 - Supply
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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The Theory of Production
Section 2
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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
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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)
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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.
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Cost, Revenue, & Profit Maximization
Section 3
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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
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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.
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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
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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.