supply chapter 5. what is supply? supply is the quantities that would be offered for sale and all...
TRANSCRIPT
SUPPLY
Chapter 5
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
• 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– Technology: improvements in production increase
ability of firms to supply– Taxes: firms view taxes as a cost of production and
lobby for lower taxes
Change in Supply (cont)
– Subsidies: government subsides encourage production, while taxes discourage production
– Government regulations: if government decides to reduce its regulations on business, production costs go down and firms produce more output at all possible prices
– 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
– Mall 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
The Law of Variable Proportions
• 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) • 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 ,
The Production Function
• Concept that describes the relationship between changes in output to different amounts of a single input while others are constant
• 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
The Law of Variable Proportions
• 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”
The Production Function
• 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)
The Production Function
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
Cost, Revenue and Profit Maximization
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.– 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