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Supply
What is Supply?
• What is the difference between supply and demand?
• How do we graph supply?• What is the supply curve?
Supply
• Quantity of a product that is offered for sale.
• Law of Supply is the idea that more of a product will be sold for a high price and less will be offered for a low price.
Individual and Market Supply Curves
• The curves follow the same concepts that the demand curves follow.
• Individual Supply involves the quantities provided by only one firm.
• Market curves are the sum of more than one firm and the quantities.
Changes in Supply
• Changes in quantity of supply move up and down the curve.
• Changes in supply are the movement of the curve within the graph.
Factors that affect supply
• Costs of inputs• Productivity• Technology• Taxes• Expectations• Govt. Regulation• Number of sellers.
Costs of inputs and Productivity
• Costs of inputs can change supply. An example would be the cut in production costs or labor cost. This is inversely related.
• Productivity will allow for companies to manufacture at a more efficient rate. If efficiency goes up so will supply.
Technology and Taxes
• New technology will lead to an increase in supply.
• Taxes have an inverse effect on the supply curve. If taxes go up, supply goes down and vice versa.
• Subsidies will lower the cost of production and will force supply up, when they are removed, supply goes down.
Expectations, Govt. Regs, and Sellers
• Firms gamble with the price and quantity of a product. If they expect price to go up, they will hold some inventory.
• Govt. regulation can affect the cost of production.
• Numbers of producers affect the market because when there are more to produce the product, there will be a higher supply of that product.
Elasticity of Supply
• Responsiveness• Elastic supply occurs when the change
in P causes a relatively large change in Q.
• Inelastic supply occurs when the change in P causes little change in Q.
• Unit elasticity of supply happens when proportional change occurs.
Determinants
• If a firm can adjust to the changes in price, then there will be a more likely chance for elasticity to occur.
• Some commodities have an inelastic effect because of the production costs.
Demand vs. Supply elasticity
• The two differ for the following reasons• Substitution has no real effect on supply.• The delay to purchase has no real effect
either.• Only production variables play a role in the
elasticity of supply.
The Theory of Production
• What is the theory of production?• What are the three stages of
production?• What is diminishing return?
Theory of Production
• Explains the relationship between land, labor, capital, and the output of goods and services.
• Deals with the short run, which calls for change in production and its relation to labor.
Short run vs. Long run
• Short run deals with just labor, while long run allows for a firm to adjust over an extended period of time.
The Law of Variable Proportions
• The Law of Variable Proportions is an extension of the theory of production. It says that changes will occur in the short run if you adjust just one factor.
• It answers the question: How will the final product turn out if I adjust an input or variable?
Production function
• Illustrates the Law of Variable Proportions.
• Relationship between production variables and output.
• Usually graphed as a production schedule.
Three stages of Production
• Stage 1- As the number of workers increases, they make better use of machinery and resources. Known as stage of increasing returns.
• Stage 2- Output increases at a decreasing rate. This is known as diminishing returns.
• Stage 3- Marginal product occurs and the firm produces at a negative rate.
Section 2-8
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Figure 5.5aFigure 5.5a
Section 2-9 Figure 5.5bFigure 5.5b
Costs, Revenue, and Profit Maximization
• What are the four types of cost?• What are the two types of revenue?• How do we apply cost principals?
Costs (4 types)
• Fixed cost- business incurs no matter what. Ex. Salaries, interest payments, rent, taxes, machinery.
• Remains the same no matter what.
More costs
• Variable costs- costs change with the rate of production, usually represents labor and raw materials.
• Total Cost-Variable costs + Fixed Costs.
• Marginal Costs- extra costs (variables) that come with an adjustment to production.
Section 3-7 Figure 5.6Figure 5.6
Applying Cost Principals
• Combination of costs and inputs affect the way businesses produce.
• Gas stations have high fixed costs due to equipment and taxes, but have a low amount of variable costs.
• E-commerce is the exact opposite. It has a low overhead, but high ratio of variable costs.
Revenue
• Total revenue is number of units sold multiplied by the price of product.
• Marginal revenue is extra revenue.
Marginal Analysis
• Cost benefit analysis used to measure profit maximizing potential.
• Companies will either hit the break-even point.
• Certain scenarios call for certain measures.
• Profit maximizing qty. of output is reached when Marginal revenue (MR)=Marginal Cost (MC).