Supply Constance Wehner

The Law of Supply Firms will generally produce and offer for sale more of their product at a high price than at a low price. Firms will generally produce and offer for sale more of their product at a high price than at a low price.

Supply is just like demand, only different supply schedule lists quantities supplied at all possible prices in the market. supply schedule lists quantities supplied at all possible prices in the market. supply curve illustrates supply schedule values supply curve illustrates supply schedule values supply curve is always upward-sloping (+) supply curve is always upward-sloping (+) individual supply curves, for single firms, & market supply curves, for all firms that offer the product in a given market. individual supply curves, for single firms, & market supply curves, for all firms that offer the product in a given market.

Change in quantity supplied key word is price key word is price Change in qty supplied is change in amount offered in response to a change in price. Change in qty supplied is change in amount offered in response to a change in price. Qty supplied increases as price increases, moving up (or down) original supply curve Qty supplied increases as price increases, moving up (or down) original supply curve

Change in qty supplied movement results from price changes movement results from price changes thanks to rochester.edu

A DIRECT RELATIONSHIP: price and supply provided A DIRECT RELATIONSHIP: price and supply provided

Change in supply Suppliers offer different amounts of products for sale at all possible prices in the market. Suppliers offer different amounts of products for sale at all possible prices in the market. Entire curve shifts right (increase) or left (decrease) Entire curve shifts right (increase) or left (decrease)

Change: Decrease in supply Decrease in supply offered at all prices; curve shifts left Decrease in supply offered at all prices; curve shifts left

Causes of change in supply Cost of inputs (CLL) Cost of inputs (CLL) Productivity (efficiency) Productivity (efficiency) Technology (may make the items obsolete, or may reduce production costs) Technology (may make the items obsolete, or may reduce production costs) Taxes (shift left) & subsidies (shift right) Taxes (shift left) & subsidies (shift right) Expectations (suppliers & future prices) Expectations (suppliers & future prices) Government regulations (requiring greater cost of inputs) Government regulations (requiring greater cost of inputs) Number of sellers (competition brings prices down) Number of sellers (competition brings prices down)

Supply elasticity Response to change in price Response to change in price Elastic, unit elastic & inelastic supply Elastic, unit elastic & inelastic supply Determined by firm’s ability to adjust to new prices quickly Determined by firm’s ability to adjust to new prices quickly

Supply elasticity is different ONLY production considerations affect supply elasticity ONLY production considerations affect supply elasticity Has nothing to do with # of substitutes available Has nothing to do with # of substitutes available Ability to delay purchase & portion of income consumed are NOT factors Ability to delay purchase & portion of income consumed are NOT factors

Theory of production Short run & long run are considered Short run & long run are considered Law of Variable Proportions: in the short run, output will change as one input is varied while the others remain constant Law of Variable Proportions: in the short run, output will change as one input is varied while the others remain constant Production function describes relationship between changes in output to different amounts of a single input (all others unchanged) Production function describes relationship between changes in output to different amounts of a single input (all others unchanged)

Production function A production function describes how much output can be produced using different amounts of inputs, assuming current technology. A production function describes how much output can be produced using different amounts of inputs, assuming current technology. A production function can be represented symbolically as A production function can be represented symbolically as Y = f (X1| X2, X3…. Xn) Y = f (X1| X2, X3…. Xn) Where: Y stands for quantity of output. Where: Y stands for quantity of output.

Marginal product In economics, what does “marginal” mean? In economics, what does “marginal” mean? Marginal product (column 3 on chart, p.124, fig.5.5) is the extra output caused by the addition of one more unit of variable input Marginal product (column 3 on chart, p.124, fig.5.5) is the extra output caused by the addition of one more unit of variable input

Production Schedule Lists Lists the different values of one input the different values of one input total product (total produced by firm) total product (total produced by firm) marginal product (extra output caused by the addition of one more unit of the marginal product (extra output caused by the addition of one more unit of the variable input variable input See chart & curve on p. 124 (figure 5.5)

Chart explanation The variable is the number of workers The variable is the number of workers As more workers are added, total product rises very rapidly at first As more workers are added, total product rises very rapidly at first As even more workers are added, total product rises more slowly than before. These are diminishing returns As even more workers are added, total product rises more slowly than before. These are diminishing returns When still more workers are added, total product decreases: negative returns. When still more workers are added, total product decreases: negative returns.

3 stages of production:p124, fig 5.5

3 stages of production Define the 3 stages: Define the 3 stages: Stage 1Stage 1 Stage 2Stage 2 Stage 3Stage 3

Measures of Cost (4) See figure 5.6, p. 128 See figure 5.6, p. 128 Fixed cost (overhead)—costs incurred even if the plant is idle and output is 0. Fixed cost (overhead)—costs incurred even if the plant is idle and output is 0. Variable costs change when the business rate of operation or output changes Variable costs change when the business rate of operation or output changes Total cost—sum of fixed & variable costs Total cost—sum of fixed & variable costs Marginal cost—extra cost incurred to make one additional unit of output Marginal cost—extra cost incurred to make one additional unit of output

Fixed costs Executive salaries Executive salaries Bond interest payments Bond interest payments Rent on leased properties Rent on leased properties Local & state property taxes Local & state property taxes depreciation depreciation

Variable costs Labor Labor Raw materials Raw materials

Marginal cost Per-unit increase in variable costs that results from using extra factors of production Per-unit increase in variable costs that results from using extra factors of production

Measures of revenue Total revenue—total # of items sold multiplied by average price per unit Total revenue—total # of items sold multiplied by average price per unit Marginal revenue—extra revenue from production & sale of 1 additional unit Marginal revenue—extra revenue from production & sale of 1 additional unit

Marginal analysis compares extra benefits with extra costs compares extra benefits with extra costs Break-even point—total output a business must sell in order to cover total costs Break-even point—total output a business must sell in order to cover total costs Profits= total revenues-total costs Profits= total revenues-total costs Analysis reveals the best combo of marginal inputs for max profits Analysis reveals the best combo of marginal inputs for max profits

Profit-maximizing quantity of output This is reached when marginal cost & marginal revenue are equal This is reached when marginal cost & marginal revenue are equal If marginal revenue exceeds marginal cost, this is still in the profit-maximizing zone If marginal revenue exceeds marginal cost, this is still in the profit-maximizing zone