Download Ch. 5: Demand


Supply anyone who provides goods & services is a
producer
 manufacturers, farmers, airlines, utility comp., pet
sitter

Key words –
 if prices to low – some not willing to take on
expense of growing and transport
 bad weather – not able to supply a farmers market

The law of supply –
 producers want to earn a profit
 when prices rises –
 when price falls –

Smith family – sell at Montclair farmers
market – lots of f & v, special – tomato
 how to price the tomatoes
▪ @ $1 per lbs. – supply 24 lbs to market
▪ @ $2 per lbs – supply 50 lbs to market
▪ @ $.50 pr lbs – supply 10 lbs or even none

Supply schedule –
 shows law of supply in table form

Market supply schedule –


Price per Pound
Quantity Supplied
in pounds
2.00
50
 left hand column –
1.75
40
various prices of a good
or service
 right hand column –
quantity supplied at
each price
1.50
34
1.25
30
1.00
24
0.75
20
0.50
10
2 column table similar
to a demand schedule
Figure 5.2 – Smith’s
supply schedule

Several stands sell tomatoes at the market
 want to know the quantity of tomatoes available
for sale at different prices for the entire farmers
market – need a market supply schedule
 shows quantity supplied by all the producers who
are willing and able

Figure 5.3 – similar to
supply schedule only
quantities are larger
 market quantity
supplied depends on
price
 market research can be
used to create a market
supply schedule

Producers use research
done by govt. or trade
organizations
Price per Pound
($)
Quantity Supplied
in Pounds
2.00
350
1.75
300
1.50
250
1.25
200
1.00
150
0.75
100
0.50
50


Supply curve –
Market supply curve –
 shows how much of a good or service all of the
producers in a market are willing or able to offer
for sale at each price
Tomatoes

2.5
Figure 5.4 – Smith’s
supply schedule
 when price increases –
2
 when price decreases –
1.5
 created using the
Tomatoes
1
0.5
0
10 20 24 30 34 40 50
assumption that all other
economic factors except
price remain the same


Figure 5.5
Shows the quantity of tomatoes that all the producers (the market
as a whole) are willing and able to offer for sale at each price
 differs in scope, but is made the same way
 direct relationship between price and quantity supplied
▪ if price increases among all suppliers then quantity supplied increases
▪ if price decreases, then quantity supplied decreases
 constructed on assumption that all other economic factors remain the
same

Supply curves for all producers follow the law of supply
 does not matter what is produced
 why spend more when prices are higher
 higher prices signal potential for higher profits
Tomatoes
2.5
2
1.5
Tomatoes
1
0.5
0
50
100 150 200 250 300 350

Marginal product –
 Janine’s jean factory – 3 workers produce 12 pairs
each day
 increase the # of workers and output increases
 adding a 5th worker allows for specialization

Specialization –
Shows relationship between labor and marginal
product
 Figure 5.7

 1 or 2 workers produce very little, but it is bigger with each
one
 between 3 & 6 workers allows for specialization, higher
production


Increasing returns –
Diminishing returns –




workers 7,8,9,10 work overlaps with 1st 6 workers
with worker 11, total output decreases
employees crowded, operations disorganized
this is rare, but it can happen





Goal is to make a profit –
Fixed costs – are expenses that the owners of
a business must incur whether they produce
nothing, a little , or a lot
Variable costs –
Total cost – adding fixed and variable costs
together
Marginal costs –

Janine fixed costs –
 the same whether producing or not
 salaries of managers who run the company, but
not involved directly in production

Variable costs –
 increase production and variable cost go up
 decrease production (cut back hours, vacation for
a week), variable cost decrease

To determine total cost of a pair of jeans –

Figure 5.8 – see costs and how they change as
quantity of jeans produced changes
 # of workers added is a major factor
 fixed costs stay the same no matter what the total
product amounts to

Marginal cost is determined by
 marginal cost decline b/c of specialization but
then increases b/c of diminishing returns
# of
workers
Total
Product
Fixed
Costs($)
Variable
Costs ($)
Total
Costs($)
Marginal
Costs($)
0
0
40
0
40
-
1
3
40
30
70
10
2
7
40
62
102
8
3
12
40
97
137
7
4
19
40
132
172
5
5
29
40
172
212
4
6
42
40
211
251
3
7
53
40
277
317
6
8
61
40
373
413
12
9
66
40
473
513
20
10
67
40
503
543
30
11
65
40
539
579
-

Marginal revenue –

Formula –
 it is the price

Total Revenue= P x Q
Total revenue –


P= price of the product
Q= quantity purchased
at that price

Janine & figure 5.9
 finds total revenue by multiplying marginal revenue by total product
 determine profit by subtracting total costs from total revenue
▪ wants to know how many workers to hire and how many pairs of jeans to make to get
most profit
 need to perform a marginal analysis – a comparison of added costs and
benefits

Examine figure 5.9
 with 1 worker – does not make a profit
 at 2 workers – earns a profit and passes break-even point – total costs and
total
▪ revenue are exactly the same
 profits continue to rise up to and including the 9th worker

Profit-maximizing output – reached a level where it has achieved the
highest level of profit
 marginal revenue and marginal cost are equal
 then profits begin to decline
 at 10th worker – increase in marginal cost is greater than increase in marginal
revenue
# of
Workers
Total
Product
Total
Cost($)
Marginal
Cost($)
Marginal
Revenue($)
Total
Revenue($)
Profit($)
0
0
40
-
-
0
-40
1
3
70
10
20
60
-10
2
7
102
8
20
140
38
3
12
137
7
20
240
103
4
19
172
5
20
380
208
5
29
212
4
20
580
368
6
42
251
3
20
840
589
7
53
317
6
20
1060
743
8
61
413
12
20
1220
807
9
66
513
20
20
1320
807
10
67
543
30
20
1340
797
11
65
579
-
20
1300
721

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Early curves created using the assumption
that all other economic factors except price
remain the same
The only thing influence how much producers
will offer for sale is price
 Supply curve shows that pattern
 different points on supply curve show change in
quantity supplied

Change in quantity supplied –

Each new point shows a change in quantity
supplied
 a change in quantity supplied  change is shown by the direction of movement along
the curve
▪ to the right –
▪ to the left –

Figure 5.10 shows individual information
 market supply curve show similar info for an entire
market
 they just have large quantities supplied
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Change in supply –
 production costs increase –
 production costs decrease –

6 factors can cause a change in supply: input
costs, labor productivity, technology, govt.
action, producer expectations, number of
producers
6
6
5
5
4
4
S2
3
S1
3
S1
S2
2
2
1
1
0
0
0 5 10 15 2025 30 35 4045 50
1520253035404550556065

Input costs –
 Anna and nutrition bars
made with peanuts
 price of peanuts
increases – cannot
afford to produce as
many bars
 supply curve shifts to the
left - & vice versa

Labor productivity –
 increased productivity
decreases the costs of
production – increases
supply
 specialized division of
labor allows for making
more goods at a lower cost
 better trained and more
skilled workers can usually
produce more goods in
less time and lower costs
then less educated and
less skilled

Technology –
 technology used to
make goods more
efficiently
 increased automation
leads to increased
supplies
 allows workers to be
more productive and
helps business to
increase the supply of
their services

Excise tax –
 often placed on alcohol & tobacco (govt. interested in
discouraging use)
 increases producer cost, decreases supply


Taxes tend to decrease supply, subsidy do the
opposite
Regulation –
 can affect supply
 banning a pesticide can decrease the supply of the crops
that depend on it
 worker safety can decrease supply by increasing
production costs or increase supply by
 reducing labor lost to on the job injuries

If producers expect
price of their product
to rise or fall,
 producers each react
differently
 if farmer expects corn
prices to rise –

When one company develops a new idea,
other producers will enter the market and
increase the supply of the good or service
 supply curve shifts to the right – figure 5.13
 increase in # of producers means increased
competition
 may drive less efficient producers out of the
market – decreasing supply
3.5

3
Figure 5.13 – ice cream
stores
 one starts – is a success –
2.5
2
S1
1.5
S2
1
0.5
0
50
150
200
300
6 months later – 3 more
stores
 supply of ice cream
cones increased all price
levels
 within 1 yr., one forced
out of the market

Media entrepreneur – b. April
8, 1946
 1970s – Washington lobbyist
for National Cable Television
Association
 recognized void of African
American TV market

Conceived idea for Black
Entertainment Television
(BET)
 took $15,000 loan and secured
a $500,000 investor
 picked up a space on cable TV
 started on Jan. 8, 1980
 started with 2 hours of
programming a week

Today – 5 separate
channels – operators in US,
Canada, Caribbean
 at 1st – shows similar to MTV
 later – more diverse
programming
 BET.com - #1 internet portal
for African-Americans

2001 – sold BET to Viacom
International for $3 Billion
 became 1st black billionaire
 continued to run company for
5 yrs.
 companies began to copy
Johnson’s ideas for
programming for the AfricanAmerican community

Toyota introduces hybrid Prius in 2000
 instant success – not able to increase supply at same pace that
consumer demand and prices rose
 5 yrs. Later – not meet growing demand
 inability to meet increased demand suggests the supply is
inelastic

Elasticity of supply –
 if a change is price leads to a relatively larger change in quantity
supplied  a 10% increase in price causes a greater than 10% increase in
quantity supplied
▪ if a change in price leads to a relatively smaller change in quantity
supplied –
▪ if the price and quantity supplied change by the exact same % -

Figure 5.15
 shows quantity supplied of
new leather boots – gained
popularity, shortage
developed
 is elastic

price was raised – and
quantity supplied kept
up
 producer able to keep up
because raw materials are
inexpensive & easy to get
 manufacturing process is
also fairly uncomplicated
and easy to increase
Series 1
160
140
120
100
80
Series 1
60
40
20
0
0 10 25 38 50
Series 1

4.5
Figure 5.16 – olive oil
 supply of olive oil is
4
3.5
3
2.5
Series 1
2
1.5
1
0.5
0
0 10 20 23 28 30 40 50
inelastic
 price rose by a factor of
4, supply could not keep
pace
 oil comes from previous
seasons olives

Ease of changing production to respond to price
change is the main factor in determining elasticity of
supply
 supply is more elastic over time – a year or several years

Industries that are able to respond quickly to changes
in price by either increasing or decreasing production
are those that don’t require a lot of capital, skilled
labor or difficult to obtain resources




dog-walkers
a business that sells small crafts
industries that would have trouble – auto & oil refiners
takes time to respond to price changes