Supply Unit 4

Organizing Principle  The invisible forces within the marketplace determine supply, which in turn determines price and output(quantity).

Supply Terms  Break-even point  Change in quantity supplied  Change in supply  Diminishing returns  Elasticity of supply  Fixed cost  Increasing returns  Input cost  Law of supply  Marginal cost  Marginal product  Marginal revenue  Productivity  Profit-maximizing output  Supply  Supply curve  Supply schedule  Total product  Total revenue  Variable cost

Understanding Supply What is supply? What is the law of supply? What are supply schedules and supply curves?

What is supply? willingness and ability  Supply is the willingness and ability of producers to offer goods and services for sale.  Why does supply matter?  Because most people are producers.  Producers have costs and receive rewards for the work they do.

The Law of Supply According to the law of supply, producers willing to sell more of product at higher than at lower price. Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls

Law of Supply  Quantity supplied describes how much of a good is offered for sale at a specific price.  The promise of increased revenues when prices are high encourages firms to produce more.

Law of Supply  EXAMPLE:  Smiths sell tomatoes at farmers’ market  willing to offer 24 pounds at standard price of $1 per pound  willing to offer 50 pounds at $2 per pound  willing to offer 10 pounds at 50 cents per pounds  not willing to supply any tomatoes below 50 cents

Supply Schedules  Individual supply schedule shows  amount of product individual willing, able to offer at each price  Market supply schedule shows  amount of product all producers willing, able to offer at each price  Uses market research

Individual Supply Schedule Source: Economics: Concepts & Choices – Holt McDougal

Market Supply Schedule Source: Economics: Concepts & Choices – Holt McDougal

Applying Economic Concepts  Imagine that you own a health food store that sells several brands of nutrition bars. Create a supply schedule showing how many bars you would be willing to sell each month at prices of $5, $4, $3, $2, and $1.

Supply Curves  Individual supply curve shows data from supply schedule in graph form  Market supply curve shows data from market supply schedule

Supply Curves Individual Supply Curve Market Supply Curve Source: Economics: Concepts & Choices – Holt McDougal

Jet wants to know… Are we done yet? Almost!

Quick Quiz! What is the law of supply? (a) the lower the price, the larger the quantity supplied (b) the higher the price, the larger the quantity supplied (c) the higher the price, the smaller the quantity supplied (d) the lower the price, the more manufacturers will produce the good

Quick Quiz! What is the law of supply? (a) the lower the price, the larger the quantity supplied (b) the higher the price, the larger the quantity supplied (c) the higher the price, the smaller the quantity supplied (d) the lower the price, the more manufacturers will produce the good

The End!

What Factors Affect Supply? How do input costs affect supply? How can the government affect the supply of a good? What other factors can influence supply?

Change in Quantity Supplied  Change in quantity supplied:  rise or fall in amount offered for sale because of change in price  Different points on supply curve show change in quantity supplied

Change in Supply  Change in supply—producers offer different amounts at every price  As production costs rise, supply drops; as costs drop, supply rises  Change in supply shifts the supply curve  Six factors cause change in supply  input costs, labor productivity, technology, government action, producer expectations, number of producers

Factor 1: Input Costs  Input costs—price of resources needed to produce good or service  if price of resource increases, costs increase  if price of resource decreases, costs decrease

Factor 2: Labor Productivity  Labor productivity—amount of product worker can produce in set time  Rise in productivity lowers production costs; supply increases

Factor 3: Technology  Technology—use of scientific methods, discoveries in production  results in new products or manufacturing techniques

Factor 4: Government Action  Excise tax—tax on production or sale of specific good or service  Regulation—set of rules, laws designed to control business behavior

Factor 5: Producer Expectations  Producers have expectations about future price of their product  Expectations of higher price in future may lead to different actions

Factor 6: Number of Producers  When one producer has successful new idea, others enter the market  supply of good or service increases  Increase in number of producers leads to increased competition  may drive less-efficient producers out of market

Quick Quiz! 1. What affect does a rise in the cost of raw materials have on the cost of a good? (a) A rise in the cost of raw materials lowers the overall cost of production. (b) The good becomes cheaper to produce. (c) The good becomes more expensive to produce. (d) This does not have any affect on the eventual price of a good. 2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good? (a) It shifts to the left. (b) It shifts to the right. (c) It reverses direction. (d) The supply curve is unaffected.

Quick Quiz! 1. What affect does a rise in the cost of raw materials have on the cost of a good? (a) A rise in the cost of raw materials lowers the overall cost of production. (b) The good becomes cheaper to produce. (c) The good becomes more expensive to produce. (d) This does not have any affect on the eventual price of a good. 2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good? (a) It shifts to the left. (b) It shifts to the right. (c) It reverses direction. (d) The supply curve is unaffected.

Quick Quiz! 1. What affect does a rise in the cost of raw materials have on the cost of a good? (a) A rise in the cost of raw materials lowers the overall cost of production. (b) The good becomes cheaper to produce. (c) The good becomes more expensive to produce. (d) This does not have any affect on the eventual price of a good. 2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good? (a) It shifts to the left. (b) It shifts to the right. (c) It reverses direction. (d) The supply curve is unaffected.

Elasticity of Supply What is elasticity of supply? What factors affect elasticity of supply?

Elasticity of Supply  Elasticity of supply—measures producer response to price changes  Elastic—price change leads to larger change in quantity supplied  Inelastic—price change leads to smaller change in quantity supplied

EXAMPLE: Elastic Supply  As product gains popularity, shortage develops, price goes up  Producers can increase supply if  resources are easy to come by, inexpensive  production uncomplicated, easy to increase

EXAMPLE: Inelastic Supply  Producers may not increase supply if  availability of resources limited  production capacity cannot be increased  shipping too costly or unavailable

What Affects Elasticity of Supply? TIME In the short run, a firm cannot easily change its output level, so supply is inelastic. In the long run, firms are more flexible, so supply can become more elastic.

Quick Quiz! 1. Elasticity of supply measures how responsive (a) consumers are to price change (b) government is to price change (c) producers are to price change (d) workers are to price change 2. Which of the following is most likely to have elasticity of supply for their product? (a) apple grower (b) car manufacturer (c) electronics manufacturer (d) wedding-cake baker

Quick Quiz! 1. Elasticity of supply measures how responsive (a) consumers are to price change (b) government is to price change (c) producers are to price change (d) workers are to price change 2. Which of the following is most likely to have elasticity of supply for their product? (a) apple grower (b) car manufacturer (c) electronics manufacturer (d) wedding-cake baker

Quick Quiz! 1. Elasticity of supply measures how responsive (a) consumers are to price change (b) government is to price change (c) producers are to price change (d) workers are to price change 2. Which of the following is most likely to have elasticity of supply for their product? (a) apple grower (b) car manufacturer (c) electronics manufacturer (d) wedding-cake baker

The End!