SUPPLY Chapter 5

What is Supply? Supply is the quantities that would be offered for sale and all possible prices that could prevail in the market.

The Law of Supply The quantity supplied, or offered for sale, varies directly with its price. If prices are high, suppliers will offer greater quantities for sale. If prices are low, suppliers will offer smaller quantities for sale. A change in overall supply will cause the Demand curve to shift. A change in quantity demanded will move along the original curve.

Supply Curve Individual Curve –Illustrates how the quantity that a producer makes varies depending on the price that will prevail in the market Market Curve –Illustrates the quantities and prices that all producers will offer in the market for any given product or service Economist analyze supply –by listing quantities and prices in a supply schedule –Forms supply curve with and UPWARD slope

Quantity supplied: –The amount that producers bring to the market at any given price Change in Quantity Supplied; –The change in the amount offered for sale in response to a change in price Change in Quantity Supplied

Quality Supplied Illustrates a change in quantity supplied –Shows as a movement along the line –Can increase or decrease amount of the product (movement from a to b)

Situation where suppliers offer different amounts of products for sale at all possible prices Change in Supply

Change in Supply (cont) Supply Curves can also shift in response to the following factors: –Resource costs: cost to purchase factors of production will influence business decisions –Productivity: increases whenever more output is produced with the same amount of inputs –Technology: improvements in production increase ability of firms to supply –Taxes: firms view taxes as a cost of production and lobby for lower taxes

Change in Supply (cont) –Subsidies: government subsides encourage production, while taxes discourage production –Government regulations: if government decides to reduce its regulations on business, production costs go down and firms produce more output at all possible prices –Number of sellers: how many firms are in the market –Expectations: businesses consider future prices and economic conditions

Elasticity of Supply Supply Elasticity: a measure of the way in which a quantity supplied responds to a change in price Elastic –Small increase in price leads to a larger increase in output—supply Inelastic –Mall increase in price causes little change in supply Unit Elastic –A change in price causes a proportional change in supply

Determinants of Supply Elasticity How quickly a producer can act when a change in price occurs: –Adjust quickly = elastic –Complex/advance planning = inelastic Factor of Substitution: –Easy = elastic –Difficult = inelastic

The Law of Variable Proportions Short Run: –Output will change as one variable input is altered, but other inputs are kept constant –i.e.: salting a meal (amount of input –salt- varies; so does the output – quality of the meal) Final Product is affected –How is the output of the final product affected as more units of one variable input or resources are added to a fixed amount of other resources? –i.e.: farmer may have all the land, machines, workers, and other items needed to produce a crop, but may have questions about the use of fertilizers,

The Production Function Concept that describes the relationship between changes in output to different amounts of a single input while others are constant

Possible to vary all the inputs at the same time –Economist prefer only a single variable be changed at a time –b/c more than one = harder to gauge the impact of a single variable The Law of Variable Proportions

Total product is the total output the company produces –Total Product Rises As more workers are added, total product rises until a point that adding more workers causes a decline in total product –Total product Slows As more workers are added output continues to rise = it does so at a slower rate until ti can grow no further –More workers “get in the way” The Production Function

Marginal Product is the extra output or change in total product caused by adding one more unit of variable output –i.e.: worker 1’s output is 7; worker 2’s output is 13 together their output is 20 (figure 5.5) The Production Function

Three Stages of Production Stage I: increasing returns –Marginal output increases with each new worker –Companies are tempted to hire more workers (moves them to stage II) Stage II: diminishing returns –Total production keeps growing but the rate of increase is smaller –Each worker is still making a positive contribution to total output (but diminishing) Stage III: negative returns –Marginal product becomes negative –Decreasing total plant output

Cost, Revenue and Profit Maximization

What kinds of cost do you have to consider? Fixed Cost – the cost that a business incurs even if the plant idle and output is zero. –Salaries –Rent –Property Taxes –Variable Cost – cost that does change when the business rate of operation or output changes –Electric power –Shipping charges

What kinds of cost do you have to consider? Variable Cost – cost that does change when the business rate of operation or output changes –Electric power –Shipping charges Total Cost – Sum of the fixed and variable costs Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

Measure of Revenue Average Revenue= - The average price that every unit of output sells for Total revenue = –Number of units sold multiplied by the average price per unit Marginal Revenue = –The extra revenue connected with producing and selling an additional unit

Marginal Analysis Profit maximization quantity of output is reached when marginal cost and marginal revenue are equal Break-even point is the total output or total product the business needs to sell in order to cover its total cost

Applying Cost Principles Self-service Principles –Gas station is an example of high fixed cost with low variable cost –Ration of variable to fixed cost is low E-Commerce –An industry with low fixed cost