1. Chapter 4
Supply

2. Supply
The quantity of goods and services that producers are willing to offer at various possible prices during a given period of time.

3. Quantity Supplied
Amount of a good or service that a producer is willing to sell at each particular price.

4. Law of Supply
Producers supply more of a good or service when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices.

5. Why does the law of supply work the way it does?
PROFIT MOTIVE!!!!
Profit: Amount of money left after producers have paid all their costs.
Profit happens when revenues are greater than the COSTS OF PRODUCTION.

6. Costs of Production Wages and salaries Rent Interest on loans
Bills for electricity, raw materials, and other goods used in manufacturing and selling.

7. Profits and Markets
Not only governs how individual companies make decisions.
Helps direct the use of resources for the entire market.

8. Profits and Markets Twin Wheels Co. notices high demand for bikes.
Offers more bikes.
BUT, seeing profit, more competition enters the market place.

9. Profits and Markets
Twin Wheels finds demand low because of competition.
Profits are down.
Twin Wheel Co. needs to use their resources to make products that earn higher profits.
Discourages other companies from entering the field.

10. REMEMBER! This is what Adam Smith meant by the Invisible Hand.
Tells what needs to be produced and what needs to change.

11. Supply Schedules
Schedule lists each quantity of a good or service and the price they could get.

12. Supply Curves
Show the relationship between the price of a good or service and the quantity supplied.

14. Elasticity of Supply
Degree to which price changes affect the quantity supplied.

15. Elastic Supply
Exists when a small change in price causes a major change in quantity supplied

16. Elastic Supply Products are considered ELASTIC if they can be made:
Quickly
Inexpensively
Using a few, readily available resources.

17. Goods with elastic supply
Sports teams’ souvenirs
T-shirts
Posters

18. Inelastic Supply
Goods that when a change in a good’s price has little impact on the quantity supplied.

19. Inelastic Supply
A product usually has inelastic supply IF production requires a great deal of:
Time
Money
Resources that are NOT readily available.

20. Goods with Inelastic Supply
Gold
Space shuttles
Fine art

21. Perfect Inelasticity
Exists when producers, regardless of price, cannot increase the quantity supplied.
Beach-front property if there are zoning restrictions.
Money

22. Changes in Supply
Supply curves show in a period of time, if price is the only thing changing, what will be supplied.
BUT – what if other things happen?

24. Supply Shifts
Supply stays constant as long as DETERMINANTS OF SUPPLY are constant:
Price of resources
Government tools
Technology
Competition
Price of related goods
Producer expectations.

25. Supply Shifts: Price of Resources
Raw materials
Electricity
Workers’ wages.
Any change to prices for resources increases or decreases the business’s production costs.

26. Supply Shifts: Government tools
TAXES!
Subsidies
Regulation

27. Government Tools Taxes
Required payment of money to govt. to help fund govt. services.
Higher taxes – higher costs.

28. Government Tools Subsidies
To ensure consumers an affordable supply, government may give money to suppliers to make sure there is a supply.
Subsidies REDUCE costs.
Lower costs of production means higher profits.

29. Government Tools
Regulation: - laws about how companies conduct business to protect the public.
Pollution laws
Discrimination.
Less regulation USUALLY means greater supply.
More regulation USUALLY means less supply.

30. Technology as a cause of Supply Shifts
Usually new technology makes production MORE efficient and LESS expensive.

31. Technology BUT: Technology has a cost. Pay to have research done.
New technology often costs more at the start up.

32. Competition
Competition tends to increase supply.

33. Price of Related Goods
Supply for one good often is connected to the supply for its related goods.
If a farmer were to find corn more profitable than wheat – he’ll switch from wheat to corn farming.

34. Producer Expectations
Suppliers make production decisions based on expected future income.
IF producers expect prices for the products to fall, they might shift their supply curve to the left.

35. REMEMBER!
Supply INCREASES always moves the curves to the RIGHT.

36. REMEMBER!
Supply DECREASES always move the curves to the LEFT

37. Making Production Decisions
Total Product – All the product can make in a given period of time.

39. Marginal Product
The change in output generated by adding one more unit of input.

41. Law of Diminishing Returns
The more input added to a fixed supply of other resources – productivity only increases UP TO A POINT.
Eventually marginal product will diminish.
Negative Marginal Product

42. Three Types of Returns Increasing Marginal Returns
Diminishing Marginal Returns
Negative Marginal Returns

44. Costs of Production
FIXED COSTS – Costs that don’t change month to month.
Rent
Loan payments
Salaries
Taxes
Insurance premiums

45. Costs of Production
DEPRECIATION – lessening in value of items over time.
OVERHEAD – Another term for total fixed costs

46. Costs of Production
VARIABLE COSTS – Costs that change as the level of output changes.
Wages
Electricity

47. COSTS OF PRODUCTION TOTAL COSTS – sum of fixed and variable costs.
MARGINAL COSTS – Additional costs of producing one more unit of output.