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Chapter 5 - Supply Law of Supply • Suppliers (Producers) will offer more goods and services for sale at higher prices and less at low prices. • Price and Quantity Supplied (Qs) have a direct relationship – both increase together Graphing Supply • Supply Schedule – Listing of various quantities of a particular product supplied at all possible prices in the market. • Supply Curve - Graph that illustrates the various quantities of a product offered at various prices - always slopes upward. • Market Supply Curve – Same as Supply Curve but this applies to all suppliers (producers) in a given market GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 5 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 303540 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P $5 Plot the Points S P QS 4 3 2 1 o CORN Connect the Points 10 20 30 40 50 60 70 80 Quantity of Corn $5 4 3 2 1 Q 60 50 35 20 5 The Effects on Supply • Determinants are factors that can effect suppliers in a particular market in both a positive and negative fashion. • We express this on a graph by showing a shift of the entire curve. • An increase in Supply shifts the curve to the right • A decrease in Supply shifts the curve to the left List of Supply Determinants • Cost of Inputs (Labor, Natural Resources, Capital Goods) • Worker performance (Productivity) • Number of Sellers • Technology & Innovation • Taxes & Subsidies • Government Regulation • Future Expectations GRAPHING SUPPLY Price of Corn P $5 S CORN P QS If Supply increases,$5 what happens 4 3 to our curve? 2 4 60 50 35 20 1 5 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q GRAPHING SUPPLY Price of Corn P $5 4 3 2 1 Increase in Supply S S’ CORN P QS $5 4 3 Increase 2 in Quantity 1 Supplied o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 80 50 70 35 60 20 45 5 30 Movement Along the Curve • As was just demonstrated, a price change has a different effect on Supply than a determinant would. • Price changes do not shift the curve but rather move along it from point to point. • Determinants = Change in Supply • Price changes = Change in Quantity Supplied GRAPHING SUPPLY Price of Corn P $5 4 3 2 S What if Supply Decreases? 1 o 10 20 30 40 50 60 70 80 Quantity of Corn CORN P QS $5 4 3 2 1 Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn Decrease P $5 4 3 2 1 o in Supply S’ S CORN P QS $5 4 3 Decrease 2 in Quantity 1 Supplied 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 45 50 30 35 20 20 0 5 -- Quantity Supplied vs. Change in Supply • Remember, a determinant change effects the entire curve. A price change simply moves along the curve. • Anytime its says “change in quantity supplied”, understand this is a price change and will only move along the curve. • When its says just “change in supply”, this is a determinant change and will move the entire curve. Supply Elasticity • Just as for Demand, Supply also has 3 different elasticity levels. • Elastic – Production can easily increase due to a change in price (Candy, Toys, Textiles) • Inelastic – Production stays roughly the same even though prices are increasing (Oil, Natural Gas) • Unit elastic – Production increase is proportional to price change The Theory of Production Section 2 Terminology • Theory of Production – Relationship between Factors of Production and Output of goods & services • Short run – Time period in which suppliers can only adjust labor • Long run – Time period in which suppliers can adjust for all factors of production • Input – Necessary resources for production • Output – What is produced, TOTAL PRODUCT Law of Variable Proportions • At some point, additional inputs will not lead to greater output. • Production Function – Shows specifically how output is affected by the addition of a single input – usually as a schedule or chart. (Page 124) Stages of Production • 3 Stages • Stage I – Too many resources per worker, workers need to be added to achieve maximum output • Stage II – Principle of diminishing returns, output starts to decrease as workers are added • Stage III – Too many workers hired. Marginal product becomes negative as output decreases. Cost, Revenue, & Profit Maximization Section 3 Measures of Cost • Fixed Costs (Overhead) – Costs such as rent and interest. They do not change from month to month, or in some cases, year to year. • Variable Costs – Costs that fluctuate based on output or production. • Total Costs – Variable + Fixed • Marginal Cost – Change in or extra cost incurred when a single unit of output is produced E-Commerce • Internet businesses help themselves by keeping fixed costs very low compared to that of a company who operates out of a physical location. Measures of Revenue • Total Revenue - # of units sold multiplied by the average price per unit. • 7units X $15 = $105 in Total Revenue • Marginal Revenue – Key factor in determining profitability. Represents the extra revenue gained by each additional input. • $105 / 7units = $15 Marginal Revenue Marginal Analysis • Break Even Point – The total revenue necessary to pay for all costs associated with production. • Profit Maximizing Quantity of Output – Achieved when marginal cost = marginal revenue. Other production combinations may yield equal revenues. They will not be as profitable however.