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Economics Unit Three: Supply Supply • Supply refers to the willingness and ability of producers to to offer goods and services for sale – Anyone who provides a good or service is a producer • Keep in mind that we are talking in “generally speaking” terms… Supply • Understanding from a different POV – We are all consumers, so demand is easy to understand. However, supply is more difficult. Put yourself in the position of a producer. Supply • What is your main goal as someone who is providing a good or a service? – PROFIT!!! • You want to make sure that you are putting yourself in the best position you can to make the most money you can • Your goal is to make the most profit for the cheapest amount of money, time, & effort • You also need the ability to produce – You can desire to produce 1,000 cars, but unless you have a car factory, it ain’t gonna happen Law of Supply • “Holding all else equal, when the price of a good or service rises, suppliers increase their quantity supplied for that good or service.” – In other words, there is a direct, or positive, relationship between the price and the quantity supplied of a good – This predicts an upward, or positive, sloping supply curve Law of Supply • So… – As prices fall, the quantity supplied falls – As prices rise, the quantity supplied rises • This is because producers are not willing to increase their supply of a good or service if they will not be able to maximize their profit. – They will, however, increase their supply if their consumers are willing and able (demand) to purchase items at high price, and thus at a higher profit margin, which would more then cover costs Law of Supply • As suppliers increase the quantity supplied of a good, they face rising marginal costs – As a result, they only increase the quantity supplied of that good if the price received is high enough to at least cover the highest marginal cost – Basically, is your decision to produce making sense? Supply Schedule • A supply schedule shows in a table that shows how much of a good or service an individual producer is willing and able to offer at each price in a market – A supply schedule shows the law of supply in table form – A market supply schedule is similar, however it takes into account all producers in a market, not just and individual producer Supply Curve • A supply curve is the line graph form of the supply schedule, with all of its points plotted on the graph – Supply curve: individual producers – Market supply curve: all producers Supply Change Determinants • In addition to the the price of the product itself, there are a number of variables, or determinants of supply, that account for the total supply of a good or service – – – – – – The cost of an input Technology Taxes Price expectations Price of other outputs Number of suppliers Determinants • Costs of Inputs: – These are the various things that go into making a product • If cotton becomes cheaper, then making a t-shirt or jeans will become cheaper – This pushes the curve to the right » Larger quantity, same price • If cotton becomes more expensive, then making a tshirt or jeans will become more expensive – This pushes the curve to the left » Smaller quantity, same price Determinants • Technology or Productivity: – A technological improvement improves the producers ability to cut costs in producing a good or service, and can thus allow the producer to produce more products • Think how the assembly line helped massively increase productivity in this country, while cutting costs Determinants • Taxes: – More taxes on business mean less profit for a company, which mean less potential to supply more goods or services • Price Expectations: – Producers may hold the supply back in anticipation of more sales in the future • Why don’t most stores sell coats for full price in the summer, but they do in the winter? - PROFIT Determinants • Price of Other Outputs: – Producers can use the same resources to produce different goods • If coffee becomes popular in a town, then the supply of coffee would increase, while the supply of lemonade might decrease • Number of Suppliers – When more suppliers enter the market, the supply curve will shift to the right. When fewer suppliers are in the market, the supply curve will shift to the left In-Class Activity • Complete the Supply and It’s Functions worksheet using the graph paper supplied