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Notes: Chapter 5- Supply
I.
The Law of Supply
A. Supply: the amount of goods available
B. Law of supply
1.
Tendency of supplies to offer more of a good at a higher price
2.
↑ price↑ supply, ↓ price ↓ supply
C. Quantity supplied: the amount a supplier is willing and able to supply at a
certain price
D. Because producers want to make more money they will produce more
(increase supply)
1.
Conversely, when prices fall the producer has incentive to produce
less
E. When prices are high more firms will try to enter the market
II.
The Supply Schedule and Supply Curve
A. Supply schedule
1.
A chart that lists how much of a good a supplier will offer at
different prices
2.
See Figure 5-2
3.
Ceteris paribus
B. Market supply schedule
1.
Chart that lists how much of a good all suppliers will offer at
different prices
2.
See Figure 5-3
C. Supply curve
1.
Graph of the quantity supplied of a good at different prices
D. Market supply curve
1.
Graph of the quantity supplied of a good by all suppliers at
different prices
III.
Elasticity of Supply
A. A measure of the way quantity supplied reacts to a change in price
B. Elasticity = % change in quantity demanded
% change in price
Percent change = original # - new #
original #
X
100
C. Same as elasticity of demand
1.
>1 = elastic
2.
=1 = unitary elastic
3.
<1 = inelastic
D. Rule of thumb: short-term vs. long-term
1.
Short term: supply is more inelastic
2.
Long term: supply becomes more elastic
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IV.
Labor and Output
A. Marginal product of labor
1.
The change in output of hiring one additional unit of labor
B. Increasing marginal returns
1.
The marginal product of labor increases as the number of workers
increases
2.
Ex: yard work being kids
C. Decreasing marginal returns
1.
The marginal product of labor decreases as the number of workers
increase
2.
“Too many cooks in the kitchen”
D. Negative marginal returns
1.
Production actually decreases with each new worker
2.
The firm will need to layoff some workers
V.
Production Costs
A. Fixed costs
1.
Does not change no matter how much of a good is produced
2.
Ex: taxes, rent, and salaries
B. Variable costs
1.
Costs that rise and fall depending on how much is produced
2.
Ex; costs of raw materials
3.
Ex: some labor
a. Ex: stores adding workers during Christmas
C. Total cost = fixed costs + variable costs
D. Marginal cost
1.
The cost of producing one more unit of a good
2.
Obviously you want your marginal costs to be low
VI.
Setting Output
A. Profit
1.
Profit = total revenue – total cost
2.
Total revenue = (# sold) X ( cost of each item)
B. Marginal revenue
1.
The additional income from selling one more unit of a good
2.
Often = the price
3.
If marginal cost = marginal revenue then you will maximize profits
C. Operating cost
1.
The cost of operating a facility such as a store or factory
2.
Ex: electricity
3.
At what point do you cut your losses and shutdown?
VII.
Changes in Supply
A. Input costs
2
1.
Rising costs likely decrease supply because of higher marginal
costs
a. Supply curve goes to the left
2.
Lowering costs
a. Ex: efficiency of technology
b. Usually increases supply
c. Supply curve shifts to the right
B. Government influence on supply
1.
Subsidies
a. Government payments that support a business or market
b. Often done with agricultural goods
c. Farmers are sometimes paid to take land out of cultivation
d. Ex: the French government offers large subsidies to farmers
2.
Taxes
a. Excise tax
i. v Tax on the production of a good or service
i. vi Ex: cigarettes and alcohol
i. vii Sometimes done to discourage a behavior
b. Increases the cost of goods
3.
Regulation
a. Government intervention in a market that affects the
production of a good
b. Ex: regulations on autos (emissions, seatbelts, etc)
c. Often leads to higher costs and lower supply
C. Supply in the global economy
1.
Because the economies of nations are so interrelated events in one
country can affect supply in another
2.
Ex: a war in the Middle East can drive up the cost of oil and that
effect would ripple throughout the world
D. Other influences
1.
Future expectations of prices
a. Ex: sellers will withhold goods if they expect the price to rise
in the future
2.
Number of suppliers
a. More suppliers = ↑ quantity supplied
b. Fewer suppliers = ↓ quantity supplied
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