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Supply
Oct 14th, 2013
Demand – Centers around the
Consumers
Supply – Focuses on the
Producers
Review
• What’s the definition
of demand?
SUPPLY Definition
• Quantity of a good or service
a producer is WILLING and
ABLE to make available for
sale at different prices
Individual Supply
•Qty of a good or service
that 1 business will make
available at various prices
Market SupplyTotal quantity of a good
or service that all firms
in a market will make
available for sale at
various prices
•Goal for Producers =
Maximize Profits
Profit =
(Quantity Sold X Price)
– Costs of Production
Question
• You’re selling coffee
• You think you can sell it for $.25 a cup.
Think of how much effort you’re going
to put into your business
• What if you could sell it for $4.75 a cup?
How much effort will you put into your
business?
Law of SupplyThe quantity of goods or
services supplied will be
greater at a higher price
than at a lower price
Law of Supply Cont’d
Producers will supply
for
Products they can sell at
Producers will supply
Products they can sell at
for
prices
prices
Supply Curve Direct
Relationship
Price
Supply
Quantity
Change in Quantity Supplied
• Caused by an increase or decrease in
price
• Causes a movement ALONG the
supply line
P
r
i
c
e
Point
A
Quantity Supplied
Point B
Change in Supply
• Implies a change in the # of units
supplied at every price
• Causes a shift on the ENTIRE
supply line
P
r
i
c
e
Qty Supplied
Determinants of Supply
• Reasons for a Change in Supply
• Non-price (having nothing to do
with the price they charge) reasons
that + or – a business’ willingness
or ability to produce
Technological Advances• Allows companies to produce G
& S faster, cheaper & better
• Increases productivity &
efficiency
• Examples?
Review Question
• What are the 5 Factors of
Production?
Change in Cost of ProductionInput (Factor) Costs
If the cost of a factor of production
goes up, producers may not be able
to afford to produce as much as they
used to
Cheaper? They can produce more
• Volunteer an example of a
factor of production & tell us
what company would be
affected by an increase or
decrease in the price of that
factor of production
What happened to the
market supply of coffee in
the last ten years?
What happened to the
market supply of doughnuts
in the last 8 years?
Changes in # of Sellers
•Businesses entering &
leaving the market
changes the market
supply for G & S
Producer Expectations for the
Future
If producers believe that they will
be able to charge higher prices in
the near future, they will increase
supply now to prepare. The
opposite is true. Think of 3
examples
+ or - Taxes & Subsidies
• Increases in tax rates placed upon
businesses & individuals often lead to
businesses to lower their production.
Opposite is true
• Gov’t subsidies (financial assistance)
has the opposite effect (encourages
production). Ex. Agricultural products
Change in Price of Related Goods
• If businesses find that they can
charge high prices for producing
other G & S, this encourages them
to shift production away from the
original G & S and more towards
the G & S they can charge higher
prices for
Weather/Natural Disasters
Natural disasters or bad weather will
decrease supply
Good weather could increase supply of
agricultural products
Change in Supply
Price
S2
Decrease:
S
Left
S1
Increase:
Right
Quantity
Price Elasticity of Supply
• Measure in the
responsiveness of the
quantity supplied to changes
in the product’s price
• Equation
• % change in QS
• %change in price
Remember
•Q
•Over
•P
Elastic Supply
• Change in prices will result
in a significant change in
Quantity Supplied
• It’s supply elastic if price
elasticity of supply equation is
greater than one
Elastic Supply
Cont’d
• Elastic Supply products are usually
products that can be made
Quickly
Inexpensively
Using a few, readily available
resources
Example: Angels 2014 World Series
Championship Souvenirs
Elastic Supply Cont’d
Price
Qty Supplied
Inelastic Supply
• A change in price will result in a
minimal change in Quantity
Supplied
• Price inelastic if calculated value
of price elasticity of supply is less
than one
Inelastic Supply Cont’d
• A product has an inelastic supply if
productions requires a great deal of
*Time *Money
*Resources that are not readily
available
Examples: Gold, Fine Art, Space
Inelastic Supply Cont’d
Price
Qty Supplied
Perfect Inelastic Supply
• Exists when producers,
regardless of price, cannot
increase the quantity supplied
• Example: U2 Concert at
Staples Center
Perfect Inelastic Supply
Cont’d
Price
Qty Supplied
Unitary Supply Elasticity
% change in the quantity supplied
=
% change in price
Producer Surplus
• Amount that sellers might be
willing to sell the G or S for but
don’t have to because it’s less than
the market price
• Area to the left of the supply line
and underneath price
Measuring
Production
Key Terms
• Output = Products or services
produced
• Input = Resources used to
produce the products or
services
Total Product
All units of a product
produced in a given
period of time
Average Product
•Number of units
of output
produced per unit
of input
Average Product Cont’d
Equation
• Units of output
• Units of input
Average Product
Cont’d
• Example:
Total Output Last
Year:124,727 Products
Input: 88 Workers that work
5 days a week
50 Weeks a Year
Marginal Product
• Amount that total product
increases or decreases as result of
adding one additional unit of an
input
• Decisions are based on dollar value
of additional output compared to
cost of additional input
Marginal Product
Equation
•Marginal Product =
Change in output
•Change in input
Marginal Product Cont’d
• Example:
90 Workers produced 510
Lamps/Day
91 Workers produced 515
Lamps/Day
Change in Output
515-510
Change in Input
91-90
Diminishing Marginal Returns/Product
• Occurs when units of input are added and
the MARGINAL PRODUCT
DECREASES.
• If even more units of input are added,
there will be a point where TOTAL
PRODUCT will actually DECREASE
(negative returns)
3 Stages to Production
st
•1
- Increasing Returns
nd
•2 – Diminishing
Returns
rd
•3 – Negative Returns