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Chapter 5: Supply
Chapter 5: Supply
KEY CONCEPT
– Supply is the willingness and ability of
producers to offer goods and services for
sale.
WHY THE CONCEPT MATTERS
– Most people are producers. Doing household chores,
working at a job, providing rides to others are ways of
producing goods and services. Participating on a
team is a way of supplying skills, knowledge, and
support to one’s school. Producers incur costs and
receive rewards for the work they do.
What Is Supply?
The Law of Supply
KEY CONCEPTS
– Supply—willingness and ability of producers
to offer goods, services
– Anyone who provides goods or services is a
producer
– Law of supply:
producers willing to sell more of product at higher
than at lower price
Supply Schedules
KEY CONCEPTS
– Supply schedule shows
amount of product individual willing, able to offer at
each price
– Market supply schedule shows
amount of product all producers willing, able to
offer at each price
The Law of Supply
EXAMPLE: Price and Supply
– Smiths sell tomatoes at farmers’ market
willing to offer 24 pounds at standard price of $1
per pound
willing to offer 50 pounds at $2 per pound
willing to offer 10 pounds at 50 cents per pounds
not willing to supply any tomatoes below 50 cents
Supply Curves
KEY CONCEPTS
– Supply curve shows data from supply
schedule in graph form
– Market supply curve shows data from market
supply schedule
Supply Curves
EXAMPLE: Market Supply Curve
– Market supply curve differs in scope from
individual supply curve
both constructed same way
– Supply curves for all types of producers follow
law of supply
will provide more at higher prices although costs
more to produce more
reason: higher prices signal potential for higher
profits
Reviewing Key Concepts
Explain the differences between the terms
in each of these pairs:
– supply and law of supply
– supply schedule and supply curve
– market supply schedule and market supply
curve
What Are the Costs of
Production?
Labor Affects Production
KEY CONCEPTS
– Marginal product—change in total output
caused by adding one worker
– Specialization—having a worker focus on one
aspect of production
Labor Affects Production
EXAMPLE: Marginal Product Schedule
– Marginal product schedule—relation between
labor, marginal product
– Increasing returns—new workers cause
marginal product increase
– Diminishing returns—total output grows at
decreasing rate
– Negative returns—output decreases through
crowding, disorganization
Production Costs
KEY CONCEPTS
– Fixed costs—expenses owners incur no
matter how much they produce
– Variable costs—expenses that vary as level of
output changes
– Total cost—the sum of fixed and variable
costs
– Marginal cost—additional cost of making one
more unit of the product
Production Costs
EXAMPLE: Fixed and Variable Costs
– Fixed costs: mortgage, insurance, manager
salaries, machinery
– Variable costs: workers’ wages, electricity,
materials, shipping
Production Costs
EXAMPLE: Production Costs Schedule
– Fixed costs remain the same no matter what
total product amounts to
– Calculating marginal cost:
divide change in total cost by change in total
product
– Diminishing returns result in increase in
marginal cost
Earning the Highest Profit
KEY CONCEPTS
– Marginal revenue—money made from sale of
each additional unit sold
same as price
– Total revenue—income from selling a product
Total revenue = P (price) x Q (quantity purchased
at that price)
Earning the Highest Profit
EXAMPLE: Production Costs and
Revenues Schedule
– To make most profit, owner decides number
workers hired, units made
– To decide, owner performs marginal analysis
comparison of costs, benefits of adding a worker,
making another unit
– Profit-maximizing output—level of production
yielding highest profit
Reviewing Key Concepts
Explain the differences between the terms
in each of these pairs:
– marginal product and profit-maximizing output
– increasing returns and diminishing returns
– fixed cost and variable cost
What Factors Affect
Supply?
Changes in Quantity Supplied
KEY CONCEPTS
– Change in quantity supplied:
rise or fall in amount offered for sale because of
change in price
– Different points on supply curve show change
in quantity supplied
Changes in Supply
KEY CONCEPTS
– Change in supply —producers offer different
amounts at every price
– As production costs rise, supply drops; as
costs drop, supply rises
– Change in supply shifts the supply curve
– Six factors cause change in supply
What Is Elasticity of
Supply?
Elasticity of Supply
KEY CONCEPTS
– Elasticity of supply—measures producer response to
price changes
– Elastic— price change leads to larger change in
quantity supplied
– Inelastic— price change leads to smaller change in
quantity supplied
– Unit elastic— price and quantity supplied change by
same percentage
What Affects
Elasticity of Supply?
KEY CONCEPTS
– Main factor determining elasticity is ease of
changing production
given enough time, elasticity rises for most goods
and services
– Industries that respond quickly to rising or
falling prices:
do not need much capital, skilled labor, hard-toobtain resources