Chapter 4

Supply

Supply

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

Quantity Supplied

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

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.

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.

Costs of Production

• Wages and salaries• Rent• Interest on loans• Bills for electricity,

raw materials, and other goods used in manufacturing and selling.

Profits and Markets

• Not only governs how individual companies make decisions.

• Helps direct the use of resources for the entire market.

Profits and Markets

• Twin Wheels Co. notices high demand for bikes.

• Offers more bikes.• BUT, seeing profit,

more competition enters the market place.

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.

REMEMBER!

• This is what Adam Smith meant by the Invisible Hand.– Tells what needs to be

produced and what needs to change.

Supply Schedules

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

Supply Curves

• Show the relationship between the price of a good or service and the quantity supplied.

Elasticity of Supply

• Degree to which price changes affect the quantity supplied.

Elastic Supply

• Exists when a small change in price causes a major change in quantity supplied

Elastic Supply

• Products are considered ELASTIC if they can be made:– Quickly

– Inexpensively

– Using a few, readily available resources.

Goods with elastic supply

• Sports teams’ souvenirs

• T-shirts• Posters

Inelastic Supply

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

Inelastic Supply

• A product usually has inelastic supply IF production requires a great deal of:– Time

– Money

– Resources that are NOT readily available.

Goods with Inelastic Supply

• Gold• Space shuttles• Fine art

Perfect Inelasticity

• Exists when producers, regardless of price, cannot increase the quantity supplied. – Beach-front property if

there are zoning restrictions.

– Money

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?

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.

Supply Shifts: Price of Resources

• Raw materials• Electricity• Workers’ wages.• Any change to prices

for resources increases or decreases the business’s production costs.

Supply Shifts: Government tools

• TAXES!• Subsidies• Regulation

Government Tools

• Taxes– Required payment of

money to govt. to help fund govt. services.

– Higher taxes – higher costs.

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.

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.

Technology as a cause of Supply Shifts

• Usually new technology makes production MORE efficient and LESS expensive.

Technology

• BUT: Technology has a cost.– Pay to have research

done.

– New technology often costs more at the start up.

Competition

• Competition tends to increase supply.

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.

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.

REMEMBER!

• Supply INCREASES always moves the curves to the RIGHT.

REMEMBER!

• Supply DECREASES always move the curves to the LEFT

Making Production Decisions

• Total Product – All the product can make in a given period of time.

Marginal Product

• The change in output generated by adding one more unit of input.

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

Three Types of Returns

• Increasing Marginal Returns

• Diminishing Marginal Returns

• Negative Marginal Returns

Costs of Production

• FIXED COSTS – Costs that don’t change month to month.– Rent

– Loan payments

– Salaries

– Taxes

– Insurance premiums

Costs of Production

DEPRECIATION – lessening in value of items over time.

OVERHEAD – Another term for total fixed costs

Costs of Production

• VARIABLE COSTS – Costs that change as the level of output changes.– Wages

– Electricity

COSTS OF PRODUCTION

• TOTAL COSTS – sum of fixed and variable costs.

• MARGINAL COSTS – Additional costs of producing one more unit of output.