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Ch. 4 – Supply
Section 1 – Nature of (intro to) Supply
Supply is the quantity of goods & services that producers are “willing and
able” to offer at various prices.
Quantity supplied is the amount of … at a particular price.
Law of Supply – producers will provide more goods and services with _____
prices, and less goods & services with ______ prices.
Profit = Revenue – costs of production
Elastic supply occurs when a small change in price results in a large change
in quantity supplied. Products w/ elastic supply usually can be made:
a) quickly, &/or
b) cheaply, &/ or
c) using a few, readily available resources
ex: souvenirs, sports clothing, computers now
Inelastic Supply Occurs when a product requires:
a) more time, &/or
b) Money, &/or
c) Resources that are more rare (harder to get)
ex: fine jewelry, artwork, beachfront property, computers (20 yrs
ago)
Ch. 4 – Supply
Ch. 4, Section 2 – Changes in Supply
Determinants of Supply (things that make the curve shift) are also called non –
price of factors because (like with demand) price only affects quantity supplied
and causes a slide along the curve instead of a shift of the curve
A supply curve, which has a positive slope, shifts up (to the right) if:
1) prices of resources (input costs go _______)
2) Technology _______, making production more efficient, and thus, cheaper
3) Competition – more producers trying to get a piece of the demand results
in more overall supply
4) Prices of related goods
Ex: price of real fur drops, so suppliers of fake fur want to produce more
because the relative price of fake fur is now higher.
5) producer expectations – if producers expect demand &/or prices to go up
soon, they’ll increase production to make more money
ex: holidays, football season
6) government intervention
a) taxes – lower business taxes = lower costs of production, so supply shifts
up (to the right)
b) Subsidies – the government pays you to produce (farm crops usually in
U.S.) to make sure you can profit, so you produce more
c) Regulation – the government takes away pollution laws, making it
cheaper for you operate, and you can supply more
Ch. 4 – Supply
Ch. 4 Sect. 3 – Production Decisions
Total Product/Productivity = Total Output (total g & s produced in a given time w/
given inputs)
Marginal product = change in output as a result of adding one more input
Law of Diminishing Marginal Returns – when adding a unit of input, increased
returns will eventually diminish (too much of a good thing)
ex: too many workers clog up the operation
A company’s “costs of production” are:
a) fixed costs – business expenses that do not depend on (rent, salaries,
vehicles, etc.)
aka “overhead”
b) variable costs – business expenses that increase with increased
production/sales
(many of the resources: gas, paper, wages, food, etc)
Marginal Costs – added costs of producing one more output. Businesses analyze
to maximize profit.
Depreciation – decreasing value