Economics Unit Three: Supply

Supply Supply refers to the willingness and ability of producers to to offer goods and services for sale – Anyone who provides a good or service is a producer Keep in mind that we are talking in “generally speaking” terms…

Supply Understanding from a different POV – We are all consumers, so demand is easy to understand. However, supply is more difficult. Put yourself in the position of a producer.

Supply What is your main goal as someone who is providing a good or a service? – PROFIT!!! You want to make sure that you are putting yourself in the best position you can to make the most money you can Your goal is to make the most profit for the cheapest amount of money, time, & effort You also need the ability to produce – You can desire to produce 1,000 cars, but unless you have a car factory, it ain’t gonna happen

Law of Supply “Holding all else equal, when the price of a good or service rises, suppliers increase their quantity supplied for that good or service.” – In other words, there is a direct, or positive, relationship between the price and the quantity supplied of a good – This predicts an upward, or positive, sloping supply curve

Law of Supply So… – As prices fall, the quantity supplied falls – As prices rise, the quantity supplied rises This is because producers are not willing to increase their supply of a good or service if they will not be able to maximize their profit. – They will, however, increase their supply if their consumers are willing and able (demand) to purchase items at high price, and thus at a higher profit margin, which would more then cover costs

Law of Supply As suppliers increase the quantity supplied of a good, they face rising marginal costs – As a result, they only increase the quantity supplied of that good if the price received is high enough to at least cover the highest marginal cost – Basically, is your decision to produce making sense?

Supply Schedule A supply schedule shows in a table that shows how much of a good or service an individual producer is willing and able to offer at each price in a market – A supply schedule shows the law of supply in table form – A market supply schedule is similar, however it takes into account all producers in a market, not just and individual producer

Supply Curve A supply curve is the line graph form of the supply schedule, with all of its points plotted on the graph – Supply curve: individual producers – Market supply curve: all producers

Supply Change Determinants In addition to the the price of the product itself, there are a number of variables, or determinants of supply, that account for the total supply of a good or service – The cost of an input – Technology – Taxes – Price expectations – Price of other outputs – Number of suppliers

Determinants Costs of Inputs: – These are the various things that go into making a product If cotton becomes cheaper, then making a t-shirt or jeans will become cheaper – This pushes the curve to the right » Larger quantity, same price If cotton becomes more expensive, then making a t- shirt or jeans will become more expensive – This pushes the curve to the left » Smaller quantity, same price

Determinants Technology or Productivity: – A technological improvement improves the producers ability to cut costs in producing a good or service, and can thus allow the producer to produce more products Think how the assembly line helped massively increase productivity in this country, while cutting costs

Determinants Taxes: – More taxes on business mean less profit for a company, which mean less potential to supply more goods or services Price Expectations: – Producers may hold the supply back in anticipation of more sales in the future Why don’t most stores sell coats for full price in the summer, but they do in the winter? - PROFIT

Determinants Price of Other Outputs: – Producers can use the same resources to produce different goods If coffee becomes popular in a town, then the supply of coffee would increase, while the supply of lemonade might decrease Number of Suppliers – When more suppliers enter the market, the supply curve will shift to the right. When fewer suppliers are in the market, the supply curve will shift to the left

In-Class Activity Complete the Supply and It’s Functions worksheet using the graph paper supplied