SUPPLY

Price As price

increases…

SupplyQuantity supplied increases

PriceAs price falls…

SupplyQuantity supplied

falls

The Law of Supply• As price increases, supply increase (Suppliers will

offer more of a good at a higher price).• As price falls, quantity or supply falls. • This is a direct relationship.

How Does the Law of Supply Work?

• Quantity supplied= how much of a good is offered for sale at a specific price.

• As the price of a good rises, existing firms (businesses) will produce more to earn additional revenue (cash). (ex. Flavor of Love, then I love NY…on MTV)

• New firms will have an incentive to enter the market to earn a profit for themselves (ex. Real Chance of Love on VH1, Bad Girls Club on Oxygen).

How do we show supply?

• Supply schedule- lists each quantity of a product that producers are willing to supply at various possible market prices. (at zero, not worth to produce any).

• Supply curve- plots the information from a supply schedule.

• Quantity varies directly with price.

How does a business decide how much to produce?

Production Costs

Paying workers & purchasing capital are all costs of producing goods. There are 2 categories for producer’s costs:

• A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries, property taxes, $36/hr at Wendy’s (taxes, salaries)

• Variable costs are costs that rise or fall depending on how

much is produced. Examples: costs of raw materials, some labor costs (changes with number of employees- less production, less workers).

Production Costs

Total revenue

Profit(total revenue –

total cost)

Marginal revenue

(market price)

Marginal cost

Total cost (fixed cost +

variable cost)

Variable cost

Fixed cost

Beanbags (per hour)

$ –36–20

02140

01234

$024487296

$2424242424

—$8

435

$3644485156

$08

121520

$3636363636

57728493

5678

120144168192

24242424

79

1215

63728499

27364863

36363636

98989279

216240264288

24242424

19243037

36363636

9101112

82106136173

118142172209

Setting Output• Total Cost= Fixed Costs + Variable Costs• Marginal cost = the cost of producing one more unit of a good. • Marginal revenue = additional income from selling one more unit of

a good. It is usually equal to price.• Total Revenue= Marginal Revenue (price) X # of bags• Profit= Total revenue- total cost• Level of Output= Firms determine the output level at which

marginal revenue is equal to marginal cost.

Input Costs and Supply

Input Costs go up= supply goes downex. Fryer breaks & needs new part adds to cost

of making fries

As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.

Input costs can also decrease. New technology can greatly decrease costs and increase supply.

Non-Price Determinants of Supply: Factors that cause supply to change.

Factor # 1 – Costs (Factors of Production) -Production cost rise = supply will decrease

(Ex. Market New Homes - Lumber, minimum wage increase)

Factor # 2 - Change in Technology

New Technology can reduce production costs= increase supply.• (Ex. Market Cars - Think of what the assembly line did to the supply of cars!!!!!

Robotics?)

Factor 3 - Change in the Number of Sellers in the Market/ More Competition

• More sellers in the market will usually increase supply, fewer sellers less supply.

(ex. Energy Drinks in the last few years, Homes Builders in Atlanta, Hybrid Cars, etc.)

Factor # 4- New Opportunities

• If prices for a related product rise, some producers will switch to the more profitable product.

(Ex. Farmers switching from Wheat to Corn to take advantage of high corn prices/ Stop producing SUV’s & switch to Hybrid Cars)

Factor # 5 – Producer Expectations • If producers expect a change in price in the future they might adjust current

production.

• Ex. Colder than usual weather predicted this winter, sweater producers will increase supply.

Factor # 6 Government Tools • Taxes – higher taxes = higher production costs, less supply.

• Subsidies – govt. payments to encourage production, more supply (Corn for ethanol, Photo-electric cells for Solar Energy)

• Regulations – the govt. can regulate certain industries, regulations tend to increase production costs, thus decreasing supply.

(Emission Standards for Cars, Fuel Efficiency standards, etc.)

Changes in SupplyImagine that you own a coffee

plantation. A recent strike by coffee bean pickers has resulted in an

increase in your costs of production, reducing your profit. How will this situation effect the

amount of coffee that you supply at each price?

The amount supplied will decrease

SUPPLY SHIFTSWhich way would the supply curve for coffee shift in

the following scenarios? 1. This year’s coffee bean harvest is the largest to date. 2. Coffee bean pickers go on strike. 3. Congress approves a tax cut for small businesses. 4. Agricultural subsidies for coffee bean plantations decreased. 5. Congress passes a new law regulating how brewed coffee must

be stored until it is served. 6. A new invention makes it easier and faster to harvest coffee

beans. 7. Coffee shops increase in popularity and their numbers increase

rapidly. 8. The price of herbal teas increases because of their popularity

with college students. 9. Producers expect the popularity of coffee shops to continue to

increase.

1. This year’s coffee bean harvest is the largest to date. (right) 2. Coffee bean pickers go on strike. (left) 3. Congress approves a tax cut for small businesses. (right) 4. Agricultural subsidies for coffee bean plantations are

decreased. (left) 5. Congress passes a new law regulating how brewed coffee must

be stored until it is served. (left) 6. A new invention makes it easier and faster to harvest coffee

beans. (right) 7. Coffee shops increase in popularity, and their numbers increase

rapidly. (right) 8. The popularity of herbal teas increases with college students.

(left) 9. Producers expect the popularity of coffee shops to continue to

increase. (right)