SUPPLY

Law of Supply Producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices.

Supply schedule A supply schedule shows the relationship between price and quantity supplied.

Supply Curve A supply curve is a graphic representation of the relationship between price and quantity supplied.

Profit Motive Profit is the money remaining after all costs have been met. Producers are seeking to make a profit. Profit Motive is the critical factor in helping to explain the Law of Supply.

Elasticity of Supply Elasticity of supply is the degree to which changes in price affect the quantity supplied.

Elastic Supply Elastic supply exists when a small change in price causes a major change in the quantity supplied Products with elastic supply are those that can be made Quickly Inexpensively Using a few, readily available resources

Inelastic Supply Inelastic supply exists when a change in a goods price has little impact on the quantity supplied. A product is normally inelastic in supply if its production requires a great deal of Time Money Resources that are not readily available

Determinants of Supply Non-price factors that can shift the entire supply curve of a product, instead of simply changing the quantity supplied along the original supply curve.

Change in supply vs. change in quantity supplied Change in supply Change in quantity supplied

Prices of Resources If the prices of resources increase it will cause a decrease in supply. The curve will shift to the left.

Price of resources As the price of a resource rises, profitability declines, leading to a reduction in the quantity supplied at any price.

Government Tools Taxes- Increased taxes act as an increased cost and cause the curve to shift to the left. Subsidies- Encourage more production and cause the curve to shift to the right. Regulations- act as an increased cost and cause the curve to shift to the left.

Technology New technology typically makes production more efficient and less expensive. Better technology causes the curve to shift to the right.

Technological improvements Technological improvements (and any changes that raise the productivity of labor) lower production costs and increase profitability.

Competition Increased competition tends to increase supply. As more sellers enter the market each seller must be more competitive. Increased competition causes the curve to shift to the right.

Increase in # of sellers Competition

Prices of Related Goods The change in a products price can affect the supply for the products related goods. Corn vs. Wheat

Prices of Related Goods Cont. Firms produce and sell more than one commodity. Firms respond to the relative profitability of the different items that they sell. The supply decision for a particular good is affected not only by the good’s own price but also by the prices of other goods and services the firm may produce.

Producer Expectations Producers may increase or decrease production based on expectations of future income.

Productivity Why is productivity such an important concern for producers?