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Chapter 4
SUPPLY
How are the roles of
producers and consumers
different?
Brainstorm 2 examples of
decisions made by
producers and consumers.
TINSTAAFL
• There is no such thing as a free lunch.
Supply
• quantity of goods and services
producers would be willing to offer
for sale at various possible prices
during a given time period
• A supplier is anyone who offers
an economic product for sale
How do we show
supply?
• Supply schedule- lists each
quantity of a product that
producers are willing to
supply at various possible
market prices.
• Supply curve- plots the
information from a supply
schedule.
• Law of supply- tendency of
suppliers to offer more for
sale at higher prices and less
at lower prices.
• quantity varies directly with
price.
Quantity Supplied- amount of a
good or service that a
producer is willing to sell at
each particular price.
• Change in quantity suppliedchange in the amount offered
for sale in response to a
change in price.
• Profit- money
remaining after
producers have
paid costs.
• Costs of
productionwages, salaries,
rent, interest on
loans, etc.- any
goods and
services used to
manufacture a
product.
Price Elasticity of Supply
• Elasticity of Supplydegree to which price
changes affect the quantity
supplied
Elastic supply: when a small
change in price causes a major
change in the quantity supplied.
Can be elastic when made:
• Quickly
• Inexpensively
• Using a few, readily available
resources
Inelastic
Supply
• when a change in a
good’s price has little
impact on the quantity
supplied.
Product’s supply is
inelastic if production
requires much:
• time
• money
• difficult resources to
obtain
4.2 Changes in Supply
Imagine 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
Non- Price Determinants of supply
• non price factors (things besides price) that
can shift the entire supply curve of a product
1. Technology
2. Competition
3. Prices of Related Goods
4. Producer Expectations
5. Prices of resources
6. Government tools
• Subsidies
• Regulation
• Taxes
SUPPLY SHIFTS
Which 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 are
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 price of herbal teas increases because of their popularity
with college students. (left)
9. Producers expect the popularity of coffee shops to continue to
increase. (right)
4.3 Making Production
Decisions
What is productivity?
amount of goods and services
produced per unit of input
• Why do producers examine productivity to
make supply decisions?
to maximize efficiency and profits
• What do producers look at when trying to
increase productivity?
how various levels of inputs affect total
product and marginal product
Total v. Marginal Product
• Total product- all of the products a
company makes with a given amount of
input during a given period of time
• Marginal product- the change in output
generated by adding one more unit of
input.
• Marginal product = total level of input -total
product at the previous level of input.
Supply: Should we produce?
• Profit: make a profit firms must determine
if their total revenue will be greater than
their total cost.
• Total revenue: total money that firms
receive from consumers (price X unit sold)
• Total costs: includes wages, rents, price
for capital, interest on loans, insurance,
utilities, etc
Costs of Production
Fixed costs- business incurs these even if the
plant is idle and output is 0. They do not change
as the level of output changes
-Ex. Insurance, property taxes, rent, salaries,
interest on loans, depreciation
• Types of Fixed Costs
-Depreciation- gradual wear and tear on capital goods
over time through use. (machines will not last forever
b/c they will eventually wear out and break) reduction
in value on capital goods.
-Overhead- total of a business’s fixed costs minus
wages and material costs.
Variable v. Marginal costs
Variable costs- change when
the business rate of operation
or output changes
Marginal costs- extra cost
incurred when a business
produces one additional unit of
product
Law of diminishing
-describes
the effect that
varying the level of
input has on total
marginal product.
As more of 1 input
is added to a fixed
supply of other
resources,
productivity
increases up to a
point.
returns
Ex: Suppose that 1 lb of seed
applied to a plot of land of a
fixed size produces 1 ton of
harvestable crop. You might
expect that an additional lb
of seed would produce an
add’l ton of output.
However, if there are
diminishing marginal
returns, that additional
pound will produce less than
1 add’l ton of harvestable
crop (on the same land,
during the same growing
season, and w/ nothing else
but the amount of seeds
planted changing).
For example:
the 2nd lb. of seed may only
produce a half ton of extra output.
And diminishing marginal returns
also implies that a 3rd lb. of seed
will produce an additional crop
that is even less than a 1/2 ton of
additional output. Assume that it
is 1/4 of a ton.
Another Example through the 3
stages of production:
1st stage: Adding each new worker
to a factory causes an increase in
the total product for the factory.
Increasing marginal returnsadditional input (labor) increases
returns because workers can
specialize
What happens if you add
more workers to this factory?
• 2nd stage: at this stage • 3rd stage: At this
stage each new
adding add’l workers
worker overcrowds
causes an increase in
the
factory
so
much
product, but a smaller
that the output
increase because
decreases.
workers are getting in
• Negative marginal
each other’s way.
returns- additional
• Diminishing
input actually
marginal returnsdecreases output
usually because
add’l input is causing
overcrowded workers
less of an increase in
get in each other’s
output
way.