SupplySupply

Constance WehnerConstance Wehner

The Law of SupplyThe Law of Supply

Firms will generally produce and Firms will generally produce and offer for sale more of their product offer for sale more of their product at a high price than at a low price.at a high price than at a low price.

Supply is just like demand, only Supply is just like demand, only differentdifferent

supply schedule lists quantities supplied at supply schedule lists quantities supplied at all possible prices in the market.all possible prices in the market.

supply curve illustrates supply schedule supply curve illustrates supply schedule valuesvalues

supply curve is always upward-sloping (+)supply curve is always upward-sloping (+) individual supply curves, for single firms, & individual supply curves, for single firms, &

market supply curves, for all firms that market supply curves, for all firms that offer the product in a given market.offer the product in a given market.

Change in quantity suppliedChange in quantity supplied

key word is key word is priceprice Change in qty supplied is change in Change in qty supplied is change in

amount offered in response to a amount offered in response to a change in price.change in price.

Qty supplied increases as price Qty supplied increases as price increases, moving up (or down) increases, moving up (or down) original supply curveoriginal supply curve

Change in qty suppliedChange in qty supplied

movement movement results results from from price price changeschanges

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A DIRECT RELATIONSHIP:A DIRECT RELATIONSHIP: price and supply price and supply

providedprovided

Change in supplyChange in supply

Suppliers offer different amounts of Suppliers offer different amounts of products for sale at all possible products for sale at all possible prices in the market.prices in the market.

Entire curve shifts right (increase) or Entire curve shifts right (increase) or left (decrease)left (decrease)

Change: Decrease in supplyChange: Decrease in supply

Decrease Decrease in supply in supply offered offered at all at all prices; prices; curve curve shifts leftshifts left

Causes of change in supplyCauses of change in supply

Cost of inputs (CLL)Cost of inputs (CLL) Productivity (efficiency)Productivity (efficiency) Technology (may make the items Technology (may make the items

obsolete, or may reduce production costs)obsolete, or may reduce production costs) Taxes (shift left) & subsidies (shift right)Taxes (shift left) & subsidies (shift right) Expectations (suppliers & future prices)Expectations (suppliers & future prices) Government regulations (requiring greater Government regulations (requiring greater

cost of inputs)cost of inputs) Number of sellers (competition brings Number of sellers (competition brings

prices down)prices down)

Supply elasticitySupply elasticity

Response to change in priceResponse to change in price Elastic, unit elastic & inelastic supplyElastic, unit elastic & inelastic supply Determined by firm’s ability to adjust Determined by firm’s ability to adjust

to new prices quicklyto new prices quickly

Supply elasticity is differentSupply elasticity is different

ONLY production considerationsONLY production considerations affect supply elasticityaffect supply elasticity

Has nothing to do with # of Has nothing to do with # of substitutes availablesubstitutes available

Ability to delay purchase & portion of Ability to delay purchase & portion of income consumed are income consumed are NOTNOT factors factors

Theory of productionTheory of production

Short run & long run are consideredShort run & long run are considered Law of Variable Proportions: in the Law of Variable Proportions: in the

short run, output will change as one short run, output will change as one input is varied while the others input is varied while the others remain constantremain constant

Production function describes Production function describes relationship between changes in relationship between changes in output to different amounts of a output to different amounts of a single input (all others unchanged)single input (all others unchanged)

Production functionProduction function A A production functionproduction function

describes how much describes how much output can be produced output can be produced using different amounts of using different amounts of inputs, assuming current inputs, assuming current technology. technology.

A A production functionproduction function can be represented can be represented symbolically assymbolically as

Y = f (X1| X2, X3…. Xn)Y = f (X1| X2, X3…. Xn) Where: Y stands for Where: Y stands for

quantity of output.quantity of output.

Marginal productMarginal product

In economics, what does “marginal” In economics, what does “marginal” mean?mean?

Marginal product (column 3 on chart, Marginal product (column 3 on chart, p.124, fig.5.5) is the extra output p.124, fig.5.5) is the extra output caused by the addition of one more caused by the addition of one more unit of variable inputunit of variable input

Production ScheduleProduction Schedule

Lists Lists • the different values of one inputthe different values of one input• total product (total produced by firm)total product (total produced by firm)• marginal product (extra output caused marginal product (extra output caused

by the addition of one more unit of the by the addition of one more unit of the

variable inputvariable input

See chart & curve on p. 124 (figure 5.5)See chart & curve on p. 124 (figure 5.5)

Chart explanationChart explanation

The variable is the number of workersThe variable is the number of workers As more workers are added, total product As more workers are added, total product

rises very rapidly at firstrises very rapidly at first As even more workers are added, total As even more workers are added, total

product rises more slowly than before. product rises more slowly than before. These are diminishing returnsThese are diminishing returns

When still more workers are added, total When still more workers are added, total product decreases: negative returns.product decreases: negative returns.

3 stages of production:p124, fig 5.53 stages of production:p124, fig 5.5

3 stages of production3 stages of production

Define the 3 stages:Define the 3 stages:• Stage 1Stage 1• Stage 2Stage 2• Stage 3Stage 3

Measures of Cost (4)Measures of Cost (4)

See figure 5.6, p. 128See figure 5.6, p. 128 Fixed cost (overhead)—costs incurred Fixed cost (overhead)—costs incurred

even if the plant is idle and output is 0. even if the plant is idle and output is 0. Variable costs change when the business Variable costs change when the business

rate of operation or output changesrate of operation or output changes Total cost—sum of fixed & variable costsTotal cost—sum of fixed & variable costs Marginal cost—extra cost incurred to make Marginal cost—extra cost incurred to make

one additional unit of outputone additional unit of output

Fixed costsFixed costs

Executive salariesExecutive salaries Bond interest paymentsBond interest payments Rent on leased propertiesRent on leased properties Local & state property taxesLocal & state property taxes depreciationdepreciation

Variable costsVariable costs

LaborLabor Raw materialsRaw materials

Marginal costMarginal cost

Per-unit increase in variable costs Per-unit increase in variable costs that results from using extra factors that results from using extra factors of production of production

Measures of revenueMeasures of revenue

Total revenue—total # of items sold Total revenue—total # of items sold multiplied by average price per unitmultiplied by average price per unit

Marginal revenue—extra revenue Marginal revenue—extra revenue from production & sale of 1 from production & sale of 1 additional unitadditional unit

Marginal analysisMarginal analysis

compares extra benefits with extra compares extra benefits with extra costscosts

Break-even point—total output a Break-even point—total output a business must sell in order to cover business must sell in order to cover total coststotal costs

Profits= total revenues-total costsProfits= total revenues-total costs Analysis reveals the best combo of Analysis reveals the best combo of

marginal inputs for max profitsmarginal inputs for max profits

Profit-maximizing quantity of outputProfit-maximizing quantity of output

This is This is reachedreached when marginal cost & when marginal cost & marginal revenue are equalmarginal revenue are equal

If marginal revenue If marginal revenue exceedsexceeds marginal cost, this is still in the marginal cost, this is still in the profit-maximizing zoneprofit-maximizing zone