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Supply
What is Supply?
 Supply-The
amount of a product that
would be offered for sale at all possible
prices that could prevail in the market
 Do not forget, this is a behavior; not a
number
 Supply is showing what could possibly
happen at various prices
The Law of Supply
 Because
the producer is receiving
payment, it should be no surprise that
more will be offered at high prices
 The principle that suppliers will normally
offer more for sale at high prices and less
at lower prices
Individual Supply Schedule
 Supply
Schedule  a listing of the various
quantities of a particular product supplied
at all possible prices in the market
Individual Supply Curve
 Supply
Curve  the graphical
representation of the supply schedule;
The Market Supply
Schedule/Curve
 Refer
to page 114, read about Individual
and Market Supply Curves and explain
the difference between the two
 Market Supply Curve-shows the quantities
offered at various prices by all firms that
offer the product for sale in a given
market
 What’s is the difference between a
Demand Curve vs. Supply Curve??
Change in Quantity Supply vs.
Change in Supply
 Think
back to what we talked about with
demand, grab a partner and read about
the difference between a change in
quantity supplied and a change in supply.
 Change in supply-a situation where
suppliers offer different amounts of
products for sale at all possible prices in
the market
Factors Causing a change in
Supply

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




Cost of Inputs; labor or packaging
Productivity; motivation, training, or satisfaction of
the job
Technology; efficiency or factors of production
Taxes and Subsidies-government payment to an
individual, business, or other group to encourage or
protect a certain type of economic activity
Expectations
Government Regulations; increased->restricts supply
(shifts to the left), decreased->lower production
costs->increasing supply (shifts to the right)
Number of Sellers
 Using
the table, read pages 116-118 and
provide explanations in the first column for
each of the following topics. Show your
understanding of each of these topics
and how they effect the producers ability
to supply products.
Elasticity of Supply
 Supply
elasticity- a measure of the way in
which quantity supplied responds to a
change in price
 After you have drawn the graph
representing all 3 types of elasticity of
supply, in the box next to the graph
explain the determinant of supply and
how elasticity of supply is different than
elasticity of demand.
Elasticity of Supply vs. Demand
 Number
of substitutes has no bearing on
supply
 Considerations such as the ability to delay
the purchase or the portion of income
consumed have no relevance
 ONLY PRODUCTION CONSIDERATIONS
DETERMINE SUPPLY ELASTICITY!!! (i.e.
automobiles, dishwashing machines, ships
vs. ice cream cones, kites, candy)
The Theory of Production


The relationship between factors of
production (land, labor, capital, and
entrepreneurs) and the output of goods and
services
Deals with production in short and long run


Short Run a period of production that allows
production to change only the amount of the
variable input called labor
Long Run a period of production long enough
for producers to adjust the quantities of all their
resources, including capital
Law of Variable Proportions
 Says
that in the short run, output will
change as one input is varied while the
others are held constant.
 Deals with the relationship between the
input of productive resources and the
output of final products.
 Economists like to only gauge one factor
at a time…Why is that?
Production Function
 Illustrates
the Law of variable Proportions
 Describes the relationship between
changes in output to different amounts of
a single input while other inputs are held
constant
Answer the following questions
using Figure 5.5 of page 124
 What
is the one input that is changing on
the table?
 Explain in your own terms what the
second column is telling us.
 Explain in your own terms what the third
column is telling us.
 What’s the point…?
Three Stages of Production

…To determine the optimal number of variable units to be used in production
therefore maximizing profits

Total product-total output produced by a firm

Marginal product- the extra output or change in total product caused by the
addition of one more unit of variable input

Increasing returns (efficiency, balanced worker to resources ratio ->increased
marginal products), diminishing returns (total output grows but at a slower
rate-> decreasing marginal products, however still positive), and negative
returns (marginal product becomes negative)
Based on the way marginal product changes as the variable input of labor is
changed
Measures of Cost

A business must analyze all the things that are a
cost to the business; land, labor, capital, and
entrepreneurship

Total fixed cost/overhead-the cost that a business
incurs even if the plant is idle and output is zero
(i.e. salaries to executives, interest charges on
bonds, rents payments on leased properties, and
local and state property taxes)

Also includes depreciation which is the gradual
wear and tear on capital goods over time an
through use
Measures of Cost

Variable cost-a cost that changes when the business rate
of operation or output changes; associated with labor and
raw materials (other examples include electric power costs
to run machines and freight charge to ship the final
product)

Total cost- the sum of the fixed and variable costs; takes
into account all the costs a business faces in the course of
its operations

Marginal cost- the extra cost incurred when a business
produces one additional unit of a product; per-unit
increase in variable costs that stems from using additional
factors of production (unit variable cost/marginal product)
Applying Cost Principles
 The
cost and combination, or mix, of
inputs affects the way business produce
 Examples


Self-Service Gas Station
Internet Stores (e-commerce-electronic
business or exchange conducted over the
internet)
Measures of Revenue
 Marginal
revenue-the extra revenue
associated with the production and sale
of one additional unit of output (change
in total revenue/marginal product)
 Total
revenue- the number of units sold
multiplied by the average price per unit
Marginal Analysis
 Examining
the cost and Benefits of every
single decision
 All businesses take this examination stepby-step and find the exact point where
your cost out-weighs your benefit; at that
point they have gone too far.
 All businesses and people desire for
benefits to out-weigh your cost.
Marginal Analysis
Comparing the costs and benefits of decisions
that are made in small, incremental steps
 Break-even point- the total output or total product
the business needs to sell in order to cover its total
costs (How many workers must be hired to break
even?)
 Profit-maximizing quantity of output- reached
when marginal cost and marginal revenue are
equal; no other combination will be more
profitable
As long as marginal cost < marginal revenue, the
business will keep hiring workers
