Chapter 5--Supply

What is Supply? Supply is the amount of a good or service which is available

So what is Quantity Supplied? Quantity Supplied is the amount that a supplier is willing and able to supply at a specific price.

What is Law of Supply? The Law of Supply The principle that, all other factors being equal, producers will supply more of a good or service at higher prices but less of a product or service at lower prices

Example of Law of Supply Wii: Keeping the prices high for the Wii (Nintendo games) increases profits for a business. If the price lowers, there is less profit. Wii: Keeping the prices high for the Wii (Nintendo games) increases profits for a business. If the price lowers, there is less profit.

The Cost of Production: The total cost of materials, labor, and other inputs required in the manufacture of a product Example: The total cost of running McDonalds including buying all of the food, paying their workers, paying their capital costs and taxes

Supply Curve A graphic representation of a supply schedule, showing the relationship between the price of an item and the quantity supplied during a given time period w/ all things being equal

Supply Schedule A table that lists each quantity of a product that producers are willing to supply at various prices

Determinants of Supply or Input Costs A non-price factor that influences the amount of supply for a good or service 1.Effect of Rising Costs 2.Technology 3.Government Tools (Subsidies, Taxes, Regulations) 4.Competition 5.Prices of Related Goods 6.Producer Expectations

1. Effect of Rising Costs Prices of Resources = The price of raw materials, all utilities, worker’s wages Example: The price of electricity or the price of bananas

2. Technology New technology with a product or with capital makes a product more efficient and less expensive to produce

3. Government Tool: Taxes Required payment of money to the government to help fund government services

3. Government Tool: Subsidies A government payment that supports (helps) a business or market A government payment that supports (helps) a business or market Farming is a prime example to help when there is a bad yearFarming is a prime example to help when there is a bad year Why do this?Why do this?

3. Government Tool: Regulation Government intervention in a market that affects the production of a good Government intervention in a market that affects the production of a good Usually happens through legislation or a lawUsually happens through legislation or a law

4. Competition Competition leads to an increase in supply

5. Prices of Related Goods Prices of Related Goods = The supply for one good is connected to the supply for its related goods. This means that changes in a product’s price can affect the supply for the product’s related goods Example: Farmers choosing to decide to grow corn vs beans (which product can they make more $)

6. Producer Expectations: Suppliers make current production decisions based on their expected future income Examples: Holidays

What is Elastic Supply? The situation that exists when quantity supplied changes greatly in response to a change in price. This includes when a product: Is made quickly Is inexpensively made Uses a few readily available resource Example: Buying L.A. Dodgers playoff merchandise which is “hot” in Los Angeles right now

What is Inelastic Supply? The situation that exists when quantity supplied changes only slightly or not at all in response to a change in price This includes when the product: Requires a great deal of time Requires a great deal of money Requires resources that are not readily available Example: Gold

Production Costs Paying your workers and purchasing capital are all costs of producing goods and services. The production costs break down into four categories: –1. Fixed Cost –2. Variable Cost –3. Total costs –4. Marginal Costs

1. Fixed Costs A cost that does not change, no matter how much of a good is produced – Examples include: The cost of renting/mortgage of a building, repairing equipment in a factory, property taxes, salaries of workers who run the business

Fixed Costs

2. Variable Costs A cost that rises or falls depending on the quantity produced – Examples include: The cost of raw material, the cost of labor, utilities bill (electricity and heating/air condition)

Variable Costs

Total Costs The sum of your fixed costs plus your variable cost equals your total costs – In other words, add up everything your paying for to run your business

Marginal Costs The cost of producing one more unit of a good is called the marginal cost. – In the business world, will you make more money leaving BP gas station open all night or even a couple of hours later make a difference in making more money?? or…….. Will you lose money (not worth the total cost). – All business deal with this (not only how late to be open but number of workers needed and how much supplies to order)