Supply

What is Supply?

• What is the difference between supply and demand?

• How do we graph supply?• What is the supply curve?

Supply

• Quantity of a product that is offered for sale.

• Law of Supply is the idea that more of a product will be sold for a high price and less will be offered for a low price.

Individual and Market Supply Curves

• The curves follow the same concepts that the demand curves follow.

• Individual Supply involves the quantities provided by only one firm.

• Market curves are the sum of more than one firm and the quantities.

Changes in Supply

• Changes in quantity of supply move up and down the curve.

• Changes in supply are the movement of the curve within the graph.

Factors that affect supply

• Costs of inputs• Productivity• Technology• Taxes• Expectations• Govt. Regulation• Number of sellers.

Costs of inputs and Productivity

• Costs of inputs can change supply. An example would be the cut in production costs or labor cost. This is inversely related.

• Productivity will allow for companies to manufacture at a more efficient rate. If efficiency goes up so will supply.

Technology and Taxes

• New technology will lead to an increase in supply.

• Taxes have an inverse effect on the supply curve. If taxes go up, supply goes down and vice versa.

• Subsidies will lower the cost of production and will force supply up, when they are removed, supply goes down.

Expectations, Govt. Regs, and Sellers

• Firms gamble with the price and quantity of a product. If they expect price to go up, they will hold some inventory.

• Govt. regulation can affect the cost of production.

• Numbers of producers affect the market because when there are more to produce the product, there will be a higher supply of that product.

Elasticity of Supply

• Responsiveness• Elastic supply occurs when the change

in P causes a relatively large change in Q.

• Inelastic supply occurs when the change in P causes little change in Q.

• Unit elasticity of supply happens when proportional change occurs.

Determinants

• If a firm can adjust to the changes in price, then there will be a more likely chance for elasticity to occur.

• Some commodities have an inelastic effect because of the production costs.

Demand vs. Supply elasticity

• The two differ for the following reasons• Substitution has no real effect on supply.• The delay to purchase has no real effect

either.• Only production variables play a role in the

elasticity of supply.

The Theory of Production

• What is the theory of production?• What are the three stages of

production?• What is diminishing return?

Theory of Production

• Explains the relationship between land, labor, capital, and the output of goods and services.

• Deals with the short run, which calls for change in production and its relation to labor.

Short run vs. Long run

• Short run deals with just labor, while long run allows for a firm to adjust over an extended period of time.

The Law of Variable Proportions

• The Law of Variable Proportions is an extension of the theory of production. It says that changes will occur in the short run if you adjust just one factor.

• It answers the question: How will the final product turn out if I adjust an input or variable?

Production function

• Illustrates the Law of Variable Proportions.

• Relationship between production variables and output.

• Usually graphed as a production schedule.

Three stages of Production

• Stage 1- As the number of workers increases, they make better use of machinery and resources. Known as stage of increasing returns.

• Stage 2- Output increases at a decreasing rate. This is known as diminishing returns.

• Stage 3- Marginal product occurs and the firm produces at a negative rate.

Section 2-8

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Figure 5.5aFigure 5.5a

Section 2-9 Figure 5.5bFigure 5.5b

Costs, Revenue, and Profit Maximization

• What are the four types of cost?• What are the two types of revenue?• How do we apply cost principals?

Costs (4 types)

• Fixed cost- business incurs no matter what. Ex. Salaries, interest payments, rent, taxes, machinery.

• Remains the same no matter what.

More costs

• Variable costs- costs change with the rate of production, usually represents labor and raw materials.

• Total Cost-Variable costs + Fixed Costs.

• Marginal Costs- extra costs (variables) that come with an adjustment to production.

Section 3-7 Figure 5.6Figure 5.6

Applying Cost Principals

• Combination of costs and inputs affect the way businesses produce.

• Gas stations have high fixed costs due to equipment and taxes, but have a low amount of variable costs.

• E-commerce is the exact opposite. It has a low overhead, but high ratio of variable costs.

Revenue

• Total revenue is number of units sold multiplied by the price of product.

• Marginal revenue is extra revenue.

Marginal Analysis

• Cost benefit analysis used to measure profit maximizing potential.

• Companies will either hit the break-even point.

• Certain scenarios call for certain measures.

• Profit maximizing qty. of output is reached when Marginal revenue (MR)=Marginal Cost (MC).