Definition: The various quantities of a good or

service that producers are willing and able to sell at all prices at a particular time.

SUPPLY

WHY DO PRODUCERS PRODUCE?

Two Words.

Profit

Motive.

**Remember the invisible hand?

Demand drives Supply…

LAW OF SUPPLY

• As P ↑, QS ↑• As P ↓, QS ↓• Opposite of the law of

demand

• Why? Example…

Mr. Bull’s Soccer LessonsHow many lessons might I give if I was able to charge…..

$5/hr?

$15/hr?

$40/hr?

As I am able to charge more, production becomes more valuable relative to other tasks.

What is my opportunity cost of soccer lessons?

THE LAW OF SUPPLY Reasons for a Change in Quantity

Supplied:(Always associated with a change in a product’s own price)

1. Assuming firms’ costs are constant, at higher prices, producers make more profits.

- Economies of Scale – as businesses grow, production costs tend to shrink

2. When prices rise, firms substitute production of one good for another.

-Aunt Jemima

SUPPLY SCHEDULE/CURVE

• Notice… opposite of Demand curve

• Upsloping

• Individual Supply vs. Market Supply

Change in quantity supplied (a movement along the curve)

Change in Quantity Supplied: Movement along the Supply Curve

Pric

e (p

er u

nit)

Quantity supplied (per unit of time)

S0

$15A

1,250 2,300

B

SHIFTS IN SUPPLY VERSUS MOVEMENTS ALONG A SUPPLY CURVE

If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

Shift in SupplyPr

ice

(per

uni

t)

Quantity supplied (per unit of time)

S0

Shift in Supply(a shift of the curve)

S1

$15A B

1,250 2,300

7 REASONS FOR A CHANGE IN SUPPLY1. Change in the cost of inputs

• Land, labor, capital

2. Change in Productivity

3. Change in Technology

• Ask Henry Ford…

4. Change in Number of Sellers

• Duh.

7 REASONS FOR A CHANGE IN SUPPLY

5. Change in Taxes or Subsidies

• Excise tax

6. Change in Market Expectations

• Future prices/demand/conditions

7. Change in Government Regulation

Increasing Marginal Returns

Decreasing Marginal Returns

Negative Marginal Returns

PROFIT MAXIMIZATION• Profit =

• Total Cost = Fixed Cost + Variable Cost

• Fixed vs. Variable… examples?

• Fixed – rent, loan payments, utilities

• Variable – labor, raw materials

• Firms want TR > TC…

• But how do they maximize this profit?

• MARGINAL ANALYSIS!!!!

Total Revenue - Total Cost

PROFIT MAXIMIZATION• Marginal Cost = ∆ Price of Inputs / ∆

Output

MC = ∆ Variable Cost/ ∆ Quantity

• Marginal Revenue = Price

• Profit Maximization:

As long as MR > MC, producers will continue to produce.

Reach the point where MR = MC

Production Function.notebook

TEST TOPICS• Definition/Law of Supply

• Supply Curve

• Market Supply

• Change in Supply

• 7 factors

• Elasticity of Supply

• 3 factors

• 3 Stages of Production

• Profit Maximization

• MR = MC