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SUPPLY
Chapter 5
SUPPLY IS
 Supply is NOT how much of a good is sitting on the
grocery store shelves --- instead it is how much
producers are willing to supply of a given product at
all possible prices.
 SUPPLY = THE AMOUNT OF PRODUCT OFFERED
FOR SALE AT ALL POSSIBLE MARKET PRICES
 WHAT IS THE LAW OF SUPPLY?
 The higher the price, the more suppliers are willing to
produce…and vice versa
 Individual firms change levels of production in accordance
with price – the search for profit drives a producer’s
decision to make more or less of a product
LAW OF SUPPLY
Supply Schedule
Price per
Unit $
Quantity
Supplied
20
160
14
100
10
80
7
60
5
40
4
20
2
0
As increasingly lower
prices are offered,
suppliers are LESS
willing to supply goods
Price & quantity move in the
same direction for supply.
How does this differ from demand?
As increasingly higher
prices are offered,
suppliers are MORE
willing to supply goods
SUPPLY
CURVES
 Supply curves are upward sloping – from lower
left to upper right
 Supply Curves reflect how the quantity that a
producer will make rises as the price in the
marketplace rises.
SUPPLY CURVE
A CHANGE IN QUANTITY SUPPLIED is the amount offered for sale
purely in response to a CHANGE IN PRICE.
24
s
22
20
Price
per
Unit
$
18
16
14
12
10
8
6
4
2
s
20
40
60
80
100
120
Quantity Supplied
140
160
180
ELASTICITY OF SUPPLY
(how quantity supplied by producers responds to changes
in price)
3 POSSIBILITIES:
 ELASTIC
 a small increase OR
decrease in price leads
to a large change in
quantity supplied
 supply in the long term
will be more elastic –
why?
 INELASTIC
 a change in price
causes little
change in the
quantity supplied
 Supply in the
short-term will be
inelastic – why?
 UNITARY ELASTIC
 % Price Changes = %
change in quantity supplied
 e.g., doubling in price =
doubling in quantity supplied
DETERMINING
SUPPLY ELASTICITY
Determined solely by this question:
How quickly and easily can we make
or find more?
 The only thing that determines elasticity of
supply is production considerations.
 If a firm can respond & adjust quickly = elastic
 If production is complex and requires lots of
advance planning = inelastic
 Supply elasticity differs from demand
elasticity in that the number of substitutes
has no effect at all on supply
DETERMINING SUPPLY
ELASTICITY
Elastic or Inelastic?
Oil and gas
Electrical energy
Milk
Medical care
Candy
Oceanfront property
CHANGE IN SUPPLY
A change in supply is when suppliers offer different amounts of
products for sale at all possible prices in the market. The entire
supply curve shifts. BUT, what causes the change?
Productivity
(motivated vs. unmotivated)
Cost of Inputs
(raw materials,
machinery, labor, etc.)
Expectations
Government
regulation
Why does
supply change?
Number of sellers
(Which way does supply curve shift?
Taxes and Subsidies
(Which causes increase?)
(Which causes decrease?)
Technology
(Which way will supply curve shift?)
KNOW THE DIFFERENCE!!
Does the graph below represent a
“change in quantity supplied” or a “change in supply?”
24
s
22
20
18
Price
per
Unit
$
16
14
p2
12
10
8 p1
6
4
2
s
q1
20
40
60
q2
80
100
120
Quantity Supplied
If the only variable is a change in price, it’s a ….
Change in Quantity Supplied!
140
160
180
Change in Supply
s2
24
s
22
20
s1
18
Price
per
Unit
$
16
14
12
10
8
s2
6
4 s
s1
2
20
40
60
80
100
120
140
160
180
Quantity Supplied
Means there is a new supply provided at each and every price….
a totally new supply curve that has shifted either right or left.
Draw theoretical curves to show the following:
1. The cost of sheet metal has increased
2. Workers have received extra training
3. A better machine is installed and running
4. Many sellers have left the business
5. The government keeps increasing the tax on our product
6. Our product is red hot
7. The government is going to relax the clean air laws
Costs of Production
How does a firm decide how much to produce?
 Determining output will have a direct relation with
the factors of production……such as labor
 Generally, as you add more workers, what would
you expect to happen to output?
 Increase – why?
 Workers can specialize; division of labor; etc.
 BUT, what ultimately happens if too many workers
are added?
 Producers need to determine the marginal product of
labor, i.e., the change in output when an additional
worker is hired
Stages of Production
 THE THREE STAGES OF PRODUCTION
1. Increasing marginal returns
 Adding additional worker(s) increases
marginal product of labor
2. Diminishing marginal returns
 Continuing to add additional worker(s)
starts to decrease the marginal product
of labor
3. Negative returns
 WHY?
EFFECT OF PRODUCTION
COSTS ON SUPPLY:
 FIXED EXPENSES/COSTS are those that
have to be paid regardless of the amount of
production
 Executive salaries, rent, taxes, depreciation,
capital goods
 VARIABLE EXPENSES/COSTS are those that
will depend on the amount of business being done
 Labor and raw materials
 BREAK-EVEN POINT
 Total amount producer needs to sell in order to
cover production costs
 “Total costs of Production” = Fixed &
Variable Expenses combined
FIXED OR VARIABLE
COSTS?
 An advertisement for the store
that runs in the local newspaper
every week?
 FIXED COST
 5 new workers hired to help
out in the holiday season
 VARIABLE COST – THEIR
HOURS WILL NOT ALWAYS
BE THE SAME AMOUNT
 A store’s electrical bill?
 VARIABLE COST
 Cost of pizza dough for a
pizzaRIA parlor?
 VARIABLE COST
Equilibrium / Market Clearing