1. Principles of Supply
Unit 2
Socioeconomics

2. Law of Supply
Quantity Supplied is the amount of goods and services that producers are willing to sell at each price in a given time period.
Law of supply states that producers supply more goods and services when they can sell them at a higher price and fewer goods when they must sell them at lower prices
Primary motive is profit = price – production costs
Profit motive directs use of resources and signals for other companies to enter or leave a market

3. Supply Curve
As price increases, quantity supplied increases  upward slope

4. Elasticity of Supply
Elastic supply exists when a small change in price causes a major change in quantity supplied
Note: The curve is nearly horizontal
Products can be made quickly, cheaply, and use few resources.
Ex: shoe laces, pencils, printed materials, T-Shirts

5. Elasticity of Supply (Con’t)
Inelastic Supply exists when a change in a good’s price has little impact on the quantity supplied
Production requires time, money, and resources
Ex: Gold/Diamonds, electronics, medications
Note: The curve is nearly vertical

6. Elasticity of Supply (Con’t)
Perfectly inelastic supply exists when producers cannot supply any more of a product, regardless of price.
Occurs when some resource is strictly limited (time, space)
Ex: Beachfront property, fine art

7. Determinants of Supply
Non-price factors that shift the supply curve, instead of simply changing the quantity supplied along the original curve.
Prices of Resources: When the price of a resource increase, it adds to the costs of production and lowers profits  supply curve shifts to the left (less supply)

8. Determinants of Supply
2. Government Tools: Taxes, Subsidies, and Regulations.
Taxes: payments made to the government to fund public services  increase production costs  shifts supply curve left
Subsidies: payments made by government to private businesses  lower costs  shifts supply curve right
Regulations: government rules about how companies conduct business  increase costs  shifts supply curve left

9. Determinants of Supply
3. Technology – new technology makes production more efficient  cuts costs  increase supply (shift right)
4. Competition – more competition leads to increased supply as producers enter the market to get a share of the market’s demand. Supply decreases as demand drops and producers leave the market

10. Determinants of Supply
5. Prices of Related Goods: Substitute Goods and Complementary Goods
- Price changes have the same effect on a good’s complements – the supply curve will shift in the same direction (price increase = supply increase for comp)
- Price changes have opposite effect on a good’s substitutes – if the price of a good falls, it’s substitute will see an increase in supply. (price decrease = supply increase for sub)

11. Determinants of Supply
6. Producer Expectations – When producers expect the price of a good to increase or decrease, they may take proactive steps to increase or decrease supply of a product.
- Halloween USA is only open for 2 months of the year  the rest of the year they store their product (decrease supply), and wait for the price/demand for their product to increase before releasing the product back on the market.

12. QUANTITY SUPPLIED v. SUPPLY
Change in Quantity Supplied
A movement along a Supply curve; caused only by a change in a good’s own-price.
Change in Supply
A shift in the entire Supply curve, either right or left, caused by a change in a non-price determinant of Supply.

13. CHANGE IN QUANTITY SUPPLIED
Price
Supply
$2.00
$1.00 7 13
Quantity

14. CHANGE IN SUPPLY
Price S1 S2
$2.00 7 15
Quantity

15. OUTPUT
PROCESS
INPUTS

16. PRODUCTIVITY Total Product
All of the product a company makes in a given period of time – with a given amount of input.
Increase volume
Improve services
Reduce costs
Marginal Product
Change in output generated by adding one more unit of input
Formula: current total product minus previous total product = marginal product

17. PRODUCTIVITY 10 – 0 = 10 50 – 10 = 40 320 – 245 = 75 LABOR INPUT
TOTAL PRODUCT
MARGINAL PRODUCT 1 10 2 50 40 3
110 60 4
175 65 5
245 70 6
320 75 7
400 80 8
485 85 9
575 90
675
100 11
875
200 12
985 13
1,000 15 14
975
-25
925
-50 16
825
-100
10 – 0 = 10
50 – 10 = 40
320 – 245 = 75

18. LAW OF DIMINISHING RETURNS
Describes the effect that varying the level of an input has on total and marginal product
3 stages of production that can be predicted by the law of diminishing return are
Increasing marginal returns
Diminishing marginal returns
Negative marginal returns

19. LAW OF DIMINISHING RETURN
INCREASING MARGINAL RETURNS
An increase in the variable input results in an increase in the marginal product of the variable input
DIMINISHING MARGINAL RETURNS
as additional inputs are put into production, the additional returns will be in small increments
NEGATIVE MARGINAL RETURNS
Additional inputs result in lowers the level of output

20. PRODUCTIVITY LABOR INPUT TOTAL PRODUCT MARGINAL PRODUCT 1 10 2 50 40 31 10 2 50 40 3
110 60 4
175 65 5
245 70 6
320 75 7
400 80 8
485 85 9
575 90
675
100 11
875
200 12
985 13
1,000 15 14
975
-25
925
-50 16
825
-100

21. COSTS OF PRODUCTION Fixed costs Variable costs Total costs
Marginal costs

22. FIXED COSTS
Production costs that do not change as the level of output changes
Rent
Interest on loans
Property insurance premiums
Local and state taxes
Salaries
A/K/A overhead costs
Depreciation – lessening in value on capital goods (equipment)

23. VARIABLE COSTS Costs that change as the level of output changes
Raw materials
Wages (part-time workers)
Electricity

24. TOTAL COSTS MARGINAL COSTS
The sum of the fixed and variable production costs
fixed + variable = total
Additional costs of producing one more unit of output
Marginal costs rise and production rises
Formula
Additional cost / the number of additional units

25. + = 215 / 85 = $2.53 - Marginal Costs TOTAL COST
LABOR INPUT
TOTAL PRODUCT
MARGINAL PRODUCT
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
MARGINAL COSTS
$3,400 $0 - 1 10
215
3,615
$21.50 2 50 40
430
3,830
5.38 3
110 60
645
4,045
3.58 4
175 65
860
4,260
3.31 5
245 70
1,075
4,475
3.07 6
320 75
1,290
4,690
2.87 7
400 80
1,505
4,905
2.69 8
485 85
1,720
5,120
2.53 9
575 90
1,935
5,335
2.39
675
100
2,150
5,550
2.15 11
875
200
2,365
5,765
1.08 12
985
2,580
5,980
1.95 13
1,000 15
2,795
6,195
14.33 14
975
-25
3,010
6,410
925
-50
3,225
6,625 16
828
-100
3,440
6,840
TOTAL COST =
Variable costs – 1505 = 215
Marginal Product = 85
215 / 85 = $ Marginal Costs