SUPPLY Chapter 5 What is Supply Supply is

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.

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

Change in Quantity Supplied • 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

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)

Change in Supply • Situation where suppliers offer different amounts of products for sale at all possible prices

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

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

The Law of Variable Proportions • 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 Production Function • 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)

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.

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