Download Changes in Supply

Supply – amount of goods available
 Law of supply – Producers offer more of a good
as its price increases and less as the prices
decreases
 Impacts existing and new producers
 Existing - want to increase their revenue
 New – want to enter market to make profit for
themselves
 Quantity supplied – the
amount a supplier is
willing and able to
supply at a certain
price
 So why does a firm
INCREASE supply as the
price goes up?
 Incentive: PROFIT!
Firms will increase price on an existing good
if they are already earning a profit at the
current price
 Higher revenue will cause the firm to produce
more
Profits increase even more if the cost of
production remains the same as it was
BEFORE the price increase
 Profit is the main focus of suppliers:
 Existing producers will make modifications to existing
supply to fit consumer demand
 New producers enter the marketplace to get their share
of the profits


Rising prices encourages others to enter the market and adds to
quantity supplied
Falling prices might encourage existing firms to produce other
goods
*Main objective is to profit from the current trend
(Which might be short lived)
 Supply schedule – a chart
that lists how much of a
good a supplier will offer
at different prices
 Variables – a factor that
can change
 It lists supply for a very
specific set of conditions
 Besides the variables, the
assumption is that all
other output decisions
remain constant
 If we added up all of the supply schedules of all
the firms in a particular market we would call
this - market supply schedule
 Market predictions at various prices
 Economists use this information to determine the
number of firms in a specified area supplying a
product at a particular price
 It reflects the law of supply like an individual supply
schedule
 Supply curve – a graph
of the quantity
supplied of a good at
different prices
 Market supply curve –
is the same thing but
for all the firms in a
particular market
 Both curves always rise,
left to right
More suppliers = more goods
supplied
Supply curve shifts to the right
Less suppliers = less goods
supplied
Supply curve shifts to the left
Elasticity of supply - is a measurement of
how suppliers react to a change in price
All of these are comparable to their use in
terms of demand
 Elastic
 Inelastic
 Unitary elastic
 Time determines if a good will be inelastic or
elastic:
 In the short run suppliers cannot change their
output level quickly – inelastic supply
 Ex: Orange grove will supply oranges regardless of
price, still sell just as many
 In the long run suppliers can change their
output level based on prices– elastic supply
 Some businesses are naturally more elastic
 Ex: Hair salon
As new labor sources enter into production
the output increases
 Only up to a certain point (limit or cap)
Marginal product of labor – the change in
output from hiring one additional unit of labor
 Measures the change in
output at the margin
 The margin is where the
last laborer was either
hired or fired.
 Increases total output but
at a decreasing rate
 Ex: Beanbags
Labor
(# of
workers)
Output of
Product
Marginal
product of
labor
0
0
-
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
Increasing marginal returns – a level of
production in which the marginal product of
labor increases as the number of workers
increases
 Specialization: Focus on a certain skill/task
 Once there is a worker for each task, additional
workers are less beneficial
 Diminishing Marginal Returns: a level of
production in which the marginal product of
labor decreases as the number of workers
increases
 Happens due to limited amount of capital
 Time/$ is wasted on labor if capital remains constant
 Ex: Sewing machines/materials
 Negative Marginal Returns: Point where adding
labor actually decreases output
 Profit: Revenue minus total cost
 Total Revenue: Price of each good x # sold
 Production Costs:
 Fixed Costs: Does not change, no matter how much is
produced

Ex: Building/office/factory/store/restaurant/property
tax/machinery repairs/salaried workers
 Variable Costs: Rise/Fall depending on quantity produced
 Ex: Raw materials/part-time labor/utility bills
 Total Cost: Fixed and variable cost added together
 A change in the cost of
the following will
impact the level of
supply of a firm:
 Raw materials
 Machinery
 Labor
 Output set at the most profitable level
 Price is equal to marginal cost
 Marginal Cost: Cost of producing one more unit
 If the input cost increases so to will the marginal
cost
 If input costs increase too much it can surpass
the marginal cost – NO PROFIT
 If no control over the price
 Cut production
 Lower marginal costs until = new lower price
 Average Cost = Total Cost /Quantity Produced
 Profit = Difference between market and average
price
 Operating Cost: Paid whether open or not to run
the business
 A firm could be producing at a profitable output level
but if the market price is too low then total revenue
might still be less than total cost = losing money
 Beneficial to stay open as long as you can until you’re
making money
 Most small businesses don’t make profit for 2-5 years
 Only open new branch when price is high enough that
revenue will cover all costs of new and old
How can technology impact input costs?
Provides efficiency
Replace workers with robots
E-mail makes communication instantaneous
Computers can save overhead in terms of
paper products and advertising online
It lowers costs & increases supply at all price
levels
 Subsidy – A government payment that supports a
business or a market
 This is often done in agriculture to prevent over
production
Pay farmers not to grow a product
 A result of the Great Depression
 Use of herbicides/pesticides to compensate profit with
other crops

 Controversial in relation to NAFTA: North
American Free Trade Agreement
 Protect industry from foreign competition
Taxes
 Excise tax – a tax on the
production or sale of a good
 Governments do this to
reduce supply
 Tax adds to production cost
 Often put on products the
government wants to
discourage
 Alcohol & tobacco
Regulations
 Indirect means to increase
or decrease supply
 Regulation – Government
intervention in a market
that affects the production
of a good
 Like taxes, regulations
cause the supply curve to
shift to the left
 Can slow growth
 Ex: Pollution
 Globalization – import
prices reflect the
production costs of the
firm’s country of origin
 Wage changes
 Resource discovery
 Political relations
 Embargos
 Boycotts
 War
 Quota system
 Inflation is a condition of rising prices
 The value of currency decreases as the cost of
goods increases
 The decrease in currency can be ongoing
 A good may hold its value if it can be stored for a
long period of time
 This can cause suppliers to hold onto their product for
longer periods
This causes supply in the short term to drop
 Ex: Southern crops during Civil War

Key factor in deciding where to place business
or factory = cost of transport
 How close to resources or to consumers
 Weight contributes to
shipping costs
 Near specialized labor
 Ex: Silicone Valley, Mining
 Low energy costs
 Pollution restrictions: Outsourcing
Demand schedule shows how much consumers are
willing to buy at various price points
Supply schedule shows how much sellers are willing
to sell at various prices
 Try to find the highest price the market can bear (no
waste, most profit)
Bringing them together helps to determine the
common ground between the two
 Equilibrium – the point at which quantity demanded and
quantity supplied are equal
 When equilibrium is achieved the good becomes stable in
the marketplace
 How to find it – look for the price at which the quantity
supplied equals the quantity demanded.
 Suppliers willing to sell at the equilibrium price will find
enough buyers for their goods
 Buyers and sellers both benefit at this point
Demand Curve
Supply Curve
Equilibrium Pricing
 Disequilibrium - describes any price or quantity
not at equilibrium; when quantity supplied is not
equal to quantity demanded
 Pricing becomes flexible in this condition
 When this occurs two conditions occur
 Excess demand (shortage)
 Excess supply (surplus)
Excess demand –
when quantity
demanded is more
than quantity
supplied
When the actual price is below the
equilibrium price excess demand will occur less sellers willing to sell = shortage
To earn a profit, the firm raises the price but
less buyers result from this shift in supply
Should only raise it until equilibrium is
achieved – closing the gap
 Excess supply – when
quantity supplied is more
than quantity demanded
 Suppliers need to get rid
of excess stock
 Begin to offer less to
achieve equilibrium again
 Often why we see
closeouts

http://www.huffingtonpost.com/2014/03/08/worst
-product-flops_n_4926112.html
Enter marketplace to control pricing
Can impose the following:
 Price ceiling – a maximum price that can be legally
charged for a good or service
 Price floor – a minimum price for a good or
service
 Government will establish this when a good or service
has been deemed - essential
 This allows for more people to participate in the
market
 Otherwise people may be forced out of the
marketplace because of rising costs
 Increases the quantity demanded but decreases the
quantity supplied
Rent control – a price ceiling placed on rent
 Ex: Friends
Can help the economically disadvantaged
Can also hurt existing neighborhoods:
 Can reduce the quantity supplied
 Can reduce the quality supplied
 Landlords have no incentive improve the building
if there is no profit
 Why increase upfront costs if it will not increase
profit?
 If there is not ceiling then supply would increase
with demand because the incentive to invest
would be there
 Equilibrium could be achieved
Government imposes when they want
producers/suppliers to reap some minimum
reward for their work
Minimum wage – a minimum price that an
employer can pay a worker for an hour of
labor
 National standard
 States can increase it to meet their expected
standard of living (Federalism at work)
Government sets minimum price for several
commodities
When price falls below the price floor the
government manufactures demand by buying
excess crops
National government ended this program in
the mid-1990s but federalism allows states
and private companies to subsidize the
agricultural community
Market naturally tries to achieve equilibrium
Starting here, two factors can push it to
disequilibrium: Shifts in supply curve or
demand curve
 Ex: Digital camera
 Inventory: Quantity of goods a firm has on hand
Equilibrium is a moving target, changing
constantly as market conditions change
Caused by weather, natural disasters, fire,
new fad, etc.
Search Costs: Financial opportunity cost that
consumers pay in search for a good (EBay)
 Bidding in the market: Consumers drive up their
own prices
In a free market system, prices are the key to
finding equilibrium
 They move the market, narrow choice of diverse
goods, help create target audiences, etc.
 Always the best way to distribute goods through
the economy-efficient allocation and distribution
 They are the language, incentive, and signal of
economic conditions (join market or not?)
 Free and
flexible: allows for diverse goods
 Command Economy: Much less efficient
 Sudden shortage: Cant meet demand, must
decide how to divide up the remaining
 Rationing: System to allocate, raise and fix
prices
 Ex: WWII Office of Price Administration
 Ex: Command Economy: Limits choices to cut
down administrative costs
 Black Market: Conducting business without
regard to govt controls on price/quantity
 Ex: Buy rationed meat under the table at a higher
price
Free market attempts but does not always
achieve efficiency, which can be held back by:
 Imperfect competition (monopolies)
 Imperfect information (Internet/reviews help)
 Negative Externalities: Side effects of production
 Ex: Pollution/Carbon emissions
 If producers don’t pay for unintended costs, then prices
become artificially low and it’s paid for by the
consumer