The Law of Supply and the Supply Curve Chapter 7 Section 3

“There is a sucker born every minute.” - P. T. Barnum

The Law of Supply Economic rule stating that price and quantity supplied move in the same direction. As the price rises for a good, the quantity supplied generally rises As the price falls the quantity supplied also falls.

Quantity supplied….. is the amount of a good/service that a producer is willing and able to supply at a specific price.

Producers: Are looking to make a profit. They won’t make the good or service if they can’t make a profit.

Producers have several considerations: Price: can you charge more than it costs to make? If no, you won’t make the product. If yes, you will make it. The higher the price the more you are willing to make. Technology Changes: Can you cut costs if you develop new tech? OR if your competition develops it, will they undersell you? Resource prices: What does the stuff it takes to make your product cost? Land, Labor, Capital Expectations about cost: If you think the price of your good/service will increase next month, you will offer less now so you can offer more later

Producers have several considerations: Price of other goods produced: If you make other things with the same resources, can you make more making them? Taxes: Is the government giving or getting? If the government is subsidizing the product you make, you will want to make more. If there is a big tax on your product (luxury tax on boats), you won’t make as many. ----- Meeting Notes (9/26/11 14:46) ----- per 7

Supply Schedule: Price/ Cookie # of Cookies Supplied Total $ earned .25 100 $25.00 .50 200 $100.00 .75 300 $225.00 1.00 400 $400.00 1.25 500 $625.00 How many cookies will we produce at each price? Why? As the price increases, we can make a greater profit. Therefore we want to make more. THE LAW OF SUPPLY

Just because we want to sell our cookies at $1.25, can we? Price/ # of Total Cookie Cookies $ earned Supplied .25 100 $ 25.00 .50 200 $100.00 .75 300 $225.00 1.00 400 $400.00 1.25 500 $625.00 Price per Cookie # of cookies demanded $1.25 100 $1.00 200 $.75 300 $.50 400 $.25 500 How many cookies were people willing to buy at $1.25? Is that the same number of cookies we are willing to supply at a price of $1.25?

So what happens? Unless we can find 500 people who want to buy cookies at $1.25 a piece, we will have too many cookies!

What happens when we put our supply schedule on a graph? We get a SUPPLY CURVE!

Supply Curve: The x-axis and y-axis are both still labeled the same as on the Demand Curve. Price is the y-axis. The x-axis is Quantity. The difference is now it is the amount SUPPLIED.

What is different between the two graphs? Different slopes: Demand slopes downward. As price drops, amount demanded goes up Supply slopes upward. As price increases, supply goes up.

What factors caused the demand curve to be responsive to changes in price? Availability of a substitute. Proportion of income spent on the item. Luxury v Necessity The Supply curve shows responsiveness the same way. What kind of curve was most responsive to a change in price? A flatter curve was more elastic. The Supply curve shows elasticity the same way.

If a supplier can produce more of h/is product easily, the supply curve will be relatively flat. Example, producing cereal is, for the most part, easy to do. It is easy to get into cereal producing. Conversely, if the supply curve is steep either beginning in the industry or increasing production is difficult. The example is automobile production. A person doesn’t just go out and start building cars for general consumption. Also, when GM wants to increase production the company must raise capital. How?

The 3 things that most affect suppliers responsiveness to changes in price: 1. Willingness to produce: we might not want to produce 200 cookies if we could only make $100.00. Yet, if we knew that we could sell all 500 @ $1.25 we would want to do it to make $625.00. ----- Meeting Notes (9/26/11 11:47) ----- per 3

2. Ability to produce If we were producing 300 cookies and demand suddenly increased to 400 … – What could cause demand to increase? Change in income, population, price of substitutes, taste We might not have the raw materials, sugar, flour, etc, OR the amount of labor OR enough capital to invest in new ovens. Therefore we lack the ability to produce more than we do right now. We would have to find a way to increase production or miss out on profits.

3. Length of time This relates to the time available to increase production. It will take us more than a week to get one new oven. But if it we were trying to move into mass production it would take us a long time to build a factory, buy the amount of equipment needed and hire labor.

Quantity supplied: A change in the price of the good causes movement along a fixed supply curve. B A

Change in Supply: (determinants of supply) An increase in price for which the good is sold isn’t the only influence on quantity supplied Size of the Industry: As more firms enter into the industry, the supply curve shifts to the right. Providing more of the good at each price. Taxes: If the government raising taxes on your product (luxury tax on boats), you won’t make as many. Curve moves? LEFT Technology: Increase in technology helps producer make more of the good more easily. Curve moves…. RIGHT Price of inputs: Inputs = 4 factors of production. If the cost of inputs drops, the producer can make more for cheaper, moving the curve to the right. If the cost of inputs rises, producers will make less of the good. The curve shifts to the left. ----- Meeting Notes (9/26/11 09:43) ----- Period 2

Change in supply: Again, a change in supply moves us from one supply curve to a whole new supply curve. S2 S1

Diminishing Returns Is this the best you can do? There comes a time when adding more factors of production does not benefit you proportionally. (Remember the pizza example for demand) You have a cookie factory with 10 machines. Each machine is capable of making 10 cookies/hour in a 10 hour day. You start with 9 workers. 1 machine is idle. You are making 810 cookies/day. Each worker produces 90 cookies a day. (Each worker gets a 1 hour off a day) You are not producing at full capacity. Is this the best you can do? ----- Meeting Notes (9/27/11 14:06) ----- Period 7

NO! You hire worker #10. Now you can increase production to 900 cookies/day because that last machine is being used for 9 hours a day. Is this a better use of your factors of production? YES! Your extra employee helped increase your production by 90 cookies/day. Is this the best you can do?

NO! You hire worker #11. This one uses every machine that is idle as the workers take their one hour off. Now you can make 990 cookies/day. Is this a better use of your factors of production? YES! Your extra employee increased your production by 90 cookies/day. Is this the best you can do?

This was an example of Diminishing Returns! You hire worker #12. Worker # 12 fills in for #11 when he takes his hour off. Now, all the machines are in use all day. Your extra employee increased production by 10 cookies/day. Is this employee really worth the hiring? What does he do with the extra 8 hours you pay him? Who knows?!?!? Is he a good use of your resources? NO! This was an example of Diminishing Returns!