Chapter 5 Supply

Students will identify factors that affect supply. In this lesson, students will identify characteristics of the Law of Supply. Students will identify factors that affect supply. Students will be able to identify and/or define the following terms: Law of Supply Supply Curve Elasticity of Supply 7 Determinants that Affect Supply

What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices.

Law of Supply What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. As price increases, the quantity producers make increases As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more.

Law of Supply There is a direct relationship between price and quantity supplied. Quantity supplied rises as price rises, other things constant. Quantity supplied falls as price falls, other things constant.

The Supply Schedule The only real difference between a supply schedule and a demand schedule is that prices and quantities now move in the same direction for supply can also be illustrated graphically as an upward-sloping line

Change in Quantity Supplied Suppliers have some control over the price Ultimately the final interaction between supply and demand determines the price. Again if the price changes then it is a movement along the supply curve.

Change in Supply Appears as a SHIFT in the Supply curve. Decrease in Supply – Shift to the Left Increase in Supply – Shift to the Right

GRAPHING SUPPLY Supply Schedule Price of Milk Supply $5 50 $4 40 $3 30 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 10

GRAPHING SUPPLY What if there are new and more productive Supply Schedule What if there are new and more productive milking machines? Price of Milk Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 11

Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 12

Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 13

Change in Supply Supply Schedule Price of Milk Supply $5 70 $4 60 $3 2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 10 20 30 40 50 60 70 80 Q Quantity of Milk 14

Prices didn’t change but there is MORE milk produced Change in Supply Supply Schedule Price of Milk Supply S2 $5 4 3 2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 Increase in Supply Prices didn’t change but there is MORE milk produced 10 20 30 40 50 60 70 80 Q Quantity of Milk 15

Change in Supply What if the price for dairy cows increases Supply Schedule What if the price for dairy cows increases drastically? Price of Milk Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 16

Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 17

Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 10 20 30 40 50 60 70 80 Q Quantity of Milk 18

Change in Supply Supply Schedule Price of Milk Supply $5 30 $4 20 $3 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 10 20 30 40 50 60 70 80 Q Quantity of Milk 19

Prices didn’t change but there is LESS milk produced Change in Supply Supply Schedule Price of Milk Supply S2 $5 4 3 2 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 Decrease in Supply Prices didn’t change but there is LESS milk produced 10 20 30 40 50 60 70 80 Q Quantity of Milk 20

Cost of Inputs A change in the cost of inputs can cause a change in supply If the price of the inputs drops, producers are willing to produce more at each price

Productivity If workers work more efficiently, productivity should increase The result is more is produced at every price supply shifts right if workers are unmotivated, untrained, or unhappy, productivity could decrease Supply shifts left

Technology New technology tends to shift the supply curve to the right New Technology can affect supply by lowering the cost of production or by increasing productivity

Taxes and Subsidies Firms view taxes as costs If the producer’s inventory is taxed or if fees are paid the cost of production goes up. Taxes shift supply left

Taxes and Subsidies A subsidy is a government payment to encourage or protect a certain type of economic activity Subsidies lower the cost of production Subsidies shift supply right

Expectations Expectations about the future price can affect the supply curve If producers think the price of their product will go up, they may withhold some of the supply If producers may expect lower prices they may try to produce and sell as much as possible right away

Government Regulations When the government establishes new regulations, the cost of production can be affected Increased government regulations restrict supply supply curve to shifts to the left Relaxed regulations allow producers to lower the cost of production Shift to the right

Elasticity of Supply If a small increase in price leads to a large increase in output, supply is elastic. If the quantity supplied changes very little, supply is inelastic

Determinants of Supply Elasticity If a firm can adjust to new prices quickly, then supply is likely to be elastic. If adjustments take longer, then supply is likely to be inelastic.

Theory of production The relationship between the factors of production and the output of goods and services. Short run vs Long run Some things take longer to change and can only be changed in the long run.

Short run vs Long run Short run – only the variable inputs can be changed Long run – any input, fixed or variable, can be changed hiring 300 extra workers is a short-run adjustment building a new factory, this is a long-run adjustment

Stage 1 - Increasing With only a couple of workers not all resources are used Some machines are idle Each extra worker adds more than the previous

Stage 1 - Increasing Workers begin to specialize and work as a unit This stage is characterized by increasing marginal returns

Stage 2 - Decreasing Eventually the plant is at full employment All resources are maximized Adding more workers still increases production But each work adds less than the previous This is called decreasing marginal production

Stage 3 - Negative Finally there are just too many workers They get in the way and slow down production Each worker actually subtracts from total production This is call negative marginal product

Law of Supply Subsidy Change in supply Theory of Production Short run Demand Law of Demand Marginal utility Diminishing marginal utility Microeconomics Market demand curve Income effect Substitution effect Change in demand Change in quantity demanded Substitutes Compliments Elasticity Elastic Inelastic Law of Supply Subsidy Change in supply Theory of Production Short run Long Run Total product Marginal product Diminishing returns Fixed cost Variable cost Marginal cost