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Chapter 5
Supply
• Supply- the amount of a product that
would be offered for sale at all possible
prices that could prevail in the market.
• All suppliers of economic products must
decide how much to offer for sale at
various prices- a decision made according
to what is best for the individual seller.
• Supply Schedule
• Supply Curve
– Individual supply curve
– Market supply curve
Changes in quantity supplied
• The amount that producers bring to the
market at any given price.
• This will be represented graphically by one
curve sloping upward to the right.
Changed in Supply
• Sometimes something happens to cause a
change in supply, a situation where
suppliers offer different amounts of
products for sale at all possible prices in
the market.
• *** note just like with demand, changes in
supply are denoted graphically by two
supply curves.
Causes of change in supply
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Cost of inputs
Productivity
Technology
Taxes and subsidies
– Subsidy- a government payment to an individual,
business or other group to encourage or protect
certain type of economic activity.
• Expectations
• Government regulations
• Number of sellers
Elasticity of Supply
• Elastic
• Inelastic
• Unit elastic
Determinants of Supply Elasticity
• Elastic- if a firm can adjust quickly to changes in
prices (ie. Kites, candy other types of goods that
can be made quickly without lots of capital or
increase in skilled workers.)
• Inelastic- adjustments take longer for the firm.
(ie. Shale oil- takes lots of capital and many
skilled workers to increase supply)
• Unit elastic- changes in supply are proportional
to changes in price.
Differences between demand
elasticity and supply elasticity
• Number of substitutes has no bearing on
elasticity of supply
• Ability to delay purchase has no bearing
on supply elasticity.
• The fact that the purchase requires a large
portion of your income has no bearing on
elasticity of supply
• Only production considerations determine
supply elasticity.
– ie. Can be done quickly- elastic
– Long term- inelastic
5/2 Theory of Production
• It deals with the relationship between the
factors of production and the output of
goods and services. (recall chapter 1)
• Theory of production is generally based
on the short run, a period of production
that allows producers to change only the
amount of the variable input called-labor
• Contrast with long run.
• Examples:
• Short run Ford hires 300 extra workersstores hire extra workers for the holidays.
• Long run- Ford builds a new plant
Law of Variable proportions
• States that in the short run, output will vary
as one input is changed while others are
held constant. (ie. Salt added to food)
• The Law answers the question: How is the
output of the final product affected as
more units of one variable input or
resource are added to a fixed amount of
other resources. (farmer-fertilizer)
The Production Function
• A concept that describes ther relationship
between changes in output to different
amounts of a single input while other
inputs are held constant.
• Total production- total amount of product
produced by all workers.
• Total product rises
• Total product slows
• Marginal product- indicates the increase
in productivity by the addition of one more
variable unit. (ie one more worker)
Three stages of production
• Stage I- first workers hired- too much to do to be
efficient
• Stage II- total production grows by smaller and
smaller amounts- (additional workers not
directly involved in production) Stage II
illustrates the principle of diminishing returns.
• Stage III- too many workers production
decreases. Ideal number of workers would be
determined in stage II.
5/3 Cost, Revenue and Profit
maximization
• Measures of cost
• Fixed cost- overhead- even if output is zero.
• Include salaries to executives, interest on bonds,
rent on leased properties, local and state
property taxes, depreciation
• Variable cost- costs which change usually labor
costs and cost of raw materials.
• Total cost- sum of fixed and variable costs
• Marginal cost- extra cost incurred by the
production of one more item.
Applying Cost Principles
• Self service gas station
• Internet stores
– E-commerce
Measures of revenue
• Total revenue- number of units sold
multiplied by the average price per unit.
• Marginal revenue- amount of revenue
increased by the sale of one extra unit of
output.
Marginal Analysis
• It is a “cost-benefit” method
• Break-even point
• Profit-maximizing quantity of output is
reached when marginal cost and marginal
revenue are equal.