Download Understanding Supply

Understanding Supply
Supply side or producer side of
the market
Defined as….
•The willingness and ability of seller to
produce and offer to sell different
quantities of a good at different
prices during a specific time period.
•Amount of goods available.
• The supply of a good or service requires both a
supplier’s willingness and ability to produce and sell
• Willingness – a person (group) wants or desires to
produce and sell a good.
• Ability – a person (group) is capable of producing
and selling the good
Law of Supply
• Producers offer more of a good as its price increases and
less as its price falls.
• As the price of a good increases, the quantity supplied of
the good increases.
• As the price of a good decreases, the quantity supplied of
the good decreases.
• Thus, price and quantity supplied move in the same
direction.
• IF P↑ then Q↑
• IF P↓ then Q↓
Benefits of rising prices
• Existing firms will produce more in
order to earn additional revenue.
• An incentive for new firms to enter
the market.
Example
•A supply of new houses in the housing
market means that firms are
currently willing and able to produce
and offer to sell new houses.
Quantity Supplied
•Refers to the number of units of a
good produced and offered for sale at
a specific price.
•Iphone = $
Creating the Law of
Supply
• The two movements of individual
firms changing their level of
production and firms entering or
exiting the market.
Higher Production
• The promise of higher revenue for
each sale encourages the firm to
produce more.
• The search for profit drives the
supplier’s decision.
Market Entry
• If a type of business is making
money, draws others into that
business.
• Musicians joined the market
pertaining to the music that was
popular at the time.
Supply schedule
• Shows the
relationship
between price and
quantity supplied
for a specific good,
or how much of a
good a supplier will
offer at various
prices.
Market Supply Schedule
• Shows the relationship between
prices and the total quantity supply
by all firms in a particular market.
Supply Curve
•Slopes upward from left to right,
shows the amount of a good sellers
are willing and able to sell at various
prices.
Elasticity of Supply
• Measures how firms will respond to
changes in the price of a good.
• Elastic – big response to change
• Inelastic – small response to change
• Elasticity can also be dependant on
the type of business and long-term v.
short-term changes.
Costs of Production
Labor and Output
• One question to ask is how many workers
do I hire?
• When a new person is hired, production
does go up, but also need to consider
wages and other benefits.
• At some point, you become less profitable.
Marginal Production of
Labor
• Defined as the change in output from
hiring one more worker.
Increasing Marginal
Returns
• A rising marginal product of labor
Diminishing Marginal
Returns
• New workers increase output but at a
diminishing rate.
Negative Marginal
Returns
• Adding additional workers actually
decreases output.
Production Costs
• Two main costs: fixed and variable
• Fixed – does not change no matter how
much is produced. Rent, cost of loans,
property taxes.
• Variable – costs that rise or fall depending
on the quantity produced. Material, some
wages, taxes, electricity
Total Cost
• Sum of fixed and variable costs.
Marginal Cost
• Cost of production at each level.
Additional cost of producing one
more unit.
Marginal Revenue
• Additional income form selling one more
unit of a good.
• Business firms need to know marginal cost
and marginal revenue to make decisions
regarding production.
• The ideal level is where marginal cost
meets marginal revenue.
Changes in Supply
Input Costs
• Any changes in the cost of an input
used to produce a goods
• An input will cause a fall in supply at
all price levels because the good has
become more expensive to produce.
Effects of Rising Costs
• Cost of labor or raw materials will
result in a higher marginal cost
• Firm may not be as profitable
• May pass costs along to consumer
Technology
• Advances in technology can lower
production costs in many industries.
• Robotics
Government Influence on
Supply
• By raising or lowering the cost of
producing goods, the government can
encourage or discourage an
entrepreneur or an industry within
the country or abroad.
Subsidy
• A government payment that supports
a business or market (farms)
• Governments in developing countries
often subsidize manufacturers to
protect young, growing industries
from foreign competition.
Taxes
• Excise tax – tax on the production or
sale of a good.
• Cigarettes, alcohol
Regulation
• Government intervention in a market
that affects the price, quantity, or
quality of a good.
Secretary Paulson:
• “Excessive regulation slows
innovation, imposes needless costs on
investors, and stifles
competitiveness and job creation”.
Other influences on
supply
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Changes in global economy
Import restrictions
Future expectation of prices
Number of suppliers in market
Where firms produce?????