Download Supply Lecture Notes

SUPPLY – PRODUCER SIDE
OF ECONOMICS
Supply
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Supply – the amount of goods available
Law of Supply – the higher the price the larger the
quantity produced
As the price of a good rise existing firms will
produce more to earn extra revenue
New firms will enter the market to earn profit from
higher prices
- if the price falls, some firms will produce less and
others will leave the market
Profit
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The search to make a profit drives the law of
supply.
Price goes up = a chance to make a profit
Price goes down = supplier is discouraged from
producing
Quantity supplied- how much of a good is offered
for sale at a specific price
Remember!!!!
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Law of demand = “consumer side of economics”
Law of supply = “producer side of economics”
Consumers want low prices and producers want high
prices.
The law of demand and the law of supply are
competing forces in the market!
Elasticity of Supply
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Measurement of the way suppliers respond to a
change in price
Elastic- supply is very sensitive to price
examples: electronics, furniture
Inelastic- supply is not very sensitive to price
example: airline ticket
Elasticity of Supply
Type of
Supply
Meaning
Example
Related to Time
Elastic
Supply is very sensitive to
price changes
T-shirts
Cookies
Electronics
Additional output is
not much more
costly to produce
Unit(ary)
Elastic
Supply is moderately
sensitive to price changes
Fresh Fish
Additional output
has little or no cost
Inelastic
Supply is not very sensitive Gold
to price
Houses
Airplane Tickets
Additional output is
much more costly to
produce
Shifts in the Supply Curve
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A shift of the supply curve is the result of a change
in the quantity supplied at every price, not to be
confused with a movement along the supply curve,
which is the result of a change in the price.
Costs of Inputs
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To produce goods firms must pay for inputs such as
raw materials, labor, rent, equipment, taxes, etc.
Higher input costs cause supplies to produce less at
every price– lower margin of profit
High input costs cause supply curves to shift to the left
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Lower input costs cause supplies to produce more at
every price– larger margin of profit
lower input costs cause supply curves to shift to the right
Government Policies
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Government policies can change the cost of
producing a good, or they can change the amount
of money the suppliers receive for selling their
goods.
As a result, the actions of the government can cause
supply curves to shift.
Government policies include: taxes, regulations and
subsidies
Government Policies- Taxes
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Governments raise tax rates to pay for items like
national defense, schools, roads and vital goods
and services.
Governments can also collect an excise tax: an
extra tax on goods considered harmful or
dangerous.
Example: Cigarettes
Colorado $5.65
($3.50 + .84 excise CO + $1.01 Federal +.30 sales tax)
New York $14.95
($3.50 + $1.01 excise federal + $11.45 excise and sales taxes)
Because of the tax (think $11.95 in NY) producers receive less
revenue from the selling price. Lower revenues = less profit
higher taxes cause the supply curve to shift to the left
Government Policies -Regulations
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a.
b.
Regulations place restrictions on what how firms can
produce.
Regulations designed to make products safer.
Example:
Children’s Pajamas must be made from flameresistant material. This costs more than cheaper
material.
Organic produce must be certified organic- pass a
series of tests. This increases the cost.
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Regulations that make goods safer increase the cost
of producing them.
supply curve shifts to the left
Government Policies- Subsidies
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A subsidy is a payment made by the government to
support a particular activity or good.
Example: Corn
The federal government pays a subsidy payment to farmers to
grow corn. This payment is in addition to the profit they
receive for selling their corn.
Subsidy increase the amount of money farmers receive for a
bushel of corn at any given price
Subsides increase the profit made on a particular good
supply curve shifts to the right
Number of Firms
If the number of firms that produce a good
increases, supply will increase as well.
 Example: Gasoline (see graph)
Only Foreign
Foreign & Domestic
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curve will shift to the right
Technological Change
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Technology refers to the methods used to create
goods and services from inputs.
Technological progress- discovery of new
production methods or new, less costly inputs
enables firms to produced more goods.
Technological progress causes a firms costs to
decrease and production becomes more profitable.
At any price the firm will want to produce more.
curve shifts to the right