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Supply
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Chapter 5: Supply
KEY CONCEPT
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Supply is the willingness and ability of producers to offer goods and
services for sale.
WHY THE CONCEPT MATTERS
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Most people are producers. Doing household chores, working at a
job, providing rides to others are ways of producing goods and
services. Participating on a team is a way of supplying skills,
knowledge, and support to one’s school. Producers incur costs and
receive rewards for the work they do.
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What Is Supply?
The Law of Supply
KEY CONCEPTS
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Supply—willingness and ability of producers to offer goods, services
Anyone who provides goods or services is a producer
Law of supply:
– producers willing to sell more of product at higher than at lower
price
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The Law of Supply
EXAMPLE: Price and Supply
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Smiths sell tomatoes at farmers’ market
– willing to offer 24 pounds at standard price of $1 per pound
– willing to offer 50 pounds at $2 per pound
– willing to offer 10 pounds at 50 cents per pounds
– not willing to supply any tomatoes below 50 cents
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Supply Schedules
KEY CONCEPTS
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Supply schedule shows
– amount of product individual willing, able to offer at each price
Market supply schedule shows
– amount of product all producers willing, able to offer at each price
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Supply Schedules
EXAMPLE: Individual Supply Schedule
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Supply schedule is two-column table
– left-hand column lists various prices of a good or service
– right-hand column shows quantity supplied at each price
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Supply Schedules
EXAMPLE: Market Supply Schedule
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Market supply schedule format similar to supply schedule
– quantities supplied are much larger
– market quantity supplied also depends on price
Market research used to create market supply schedule
– some producers want to learn prices, amount offered by all in
market
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Supply Curves
KEY CONCEPTS
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Supply curve shows data from supply schedule in graph form
Market supply curve shows data from market supply schedule
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Supply Curves
EXAMPLE: Individual Supply Curve
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Supply curve is graphic representation of law of supply
Supply schedule and curve based on following assumption:
– all economic factors except price remain the same
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Supply Curves
EXAMPLE: Market Supply Curve
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Market supply curve differs in scope from individual supply curve
– both constructed same way
Supply curves for all types of producers follow law of supply
– will provide more at higher prices although costs more to produce
more
– reason: higher prices signal potential for higher profits
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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supply and law of supply
supply schedule and supply curve
market supply schedule and market supply curve
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What Are the Costs of Production?
Labor Affects Production
KEY CONCEPTS
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Marginal product—change in total output caused by adding one
worker
Specialization—having a worker focus on one aspect of production
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Labor Affects Production
EXAMPLE: Marginal Product Schedule
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Marginal product schedule—relation between labor, marginal product
Increasing returns—new workers cause marginal product increase
Diminishing returns—total output grows at decreasing rate
Negative returns—output decreases through crowding,
disorganization
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Production Costs
KEY CONCEPTS
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Fixed costs—expenses owners incur no matter how much they
produce
Variable costs—expenses that vary as level of output changes
Total cost—the sum of fixed and variable costs
Marginal cost—additional cost of making one more unit of the product
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Production Costs
EXAMPLE: Fixed and Variable Costs
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Fixed costs: mortgage, insurance, manager salaries, machinery
Variable costs: workers’ wages, electricity, materials, shipping
– the more a business produces, the more variable costs increase
– cutting back hours or workers, vacation closings decrease costs
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Production Costs
EXAMPLE: Production Costs Schedule
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Fixed costs remain the same no matter what total product amounts to
Calculating marginal cost:
– divide change in total cost by change in total product
Diminishing returns result in increase in marginal cost
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Earning the Highest Profit
KEY CONCEPTS
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Marginal revenue—money made from sale of each additional unit
sold
– same as price
Total revenue—income from selling a product
– Total revenue = P (price) x Q (quantity purchased at that price)
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Earning the Highest Profit
EXAMPLE: Production Costs and Revenues Schedule
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To make most profit, owner decides number workers hired, units
made
To decide, owner performs marginal analysis
– comparison of costs, benefits of adding a worker, making another
unit
Profit-maximizing output—level of production yielding highest profit
– marginal cost and marginal revenue are equal
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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marginal product and profit-maximizing output
increasing returns and diminishing returns
fixed cost and variable cost
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What Factors Affect Supply?
Changes in Quantity Supplied
KEY CONCEPTS
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Change in quantity supplied:
– rise or fall in amount offered for sale because of change in price
Different points on supply curve show change in quantity supplied
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Changes in Quantity Supplied
EXAMPLE: Changes Along a Supply Curve
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Change in quantity supplied does not shift the supply curve
– movement to right means increase in price and quantity supplied
– movement to left means decrease in price and quantity supplied
Market supply curves show larger changes than individual curves
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Changes in Supply
KEY CONCEPTS
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Change in supply—producers offer different amounts at every price
As production costs rise, supply drops; as costs drop, supply rises
Change in supply shifts the supply curve
Six factors cause change in supply
– input costs, labor productivity, technology, government action,
producer expectations, number of producers
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Changes in Supply
Factor 1: Input Costs
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Input costs—price of resources needed to produce good or service
– if price of resource increases, costs increase
– if price of resource decreases, costs decrease
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Changes in Supply
Factor 2: Labor Productivity
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Labor productivity—amount of product worker can produce in set time
Rise in productivity lowers production costs; supply increases
Specialization can allow producer to make more goods at lower cost
Better-trained workers produce more in less time; decrease costs
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Changes in Supply
Factor 3: Technology
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Technology—use of scientific methods, discoveries in production
– results in new products or manufacturing techniques
Manufacturers use technology to make goods more efficiently
Technology enables workers to be more productive
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Changes in Supply
Factor 4: Government Action
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Excise tax—tax on production or sale of specific good or service
– often placed on items that government wants to discourage use of
– taxes increase producers’ costs; decrease supply
Regulation—set of rules, laws designed to control business behavior
– examples: banning use of certain resources, worker safety laws
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Changes in Supply
Factor 5: Producer Expectations
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Producers have expectations about future price of their product
– expectations affect how much they will supply at present
Expectations of higher price in future may lead to different actions
– Farmer may withhold part of current crop and decrease supply
– Manufacturer may buy more equipment to increase future supply
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Changes in Supply
Factor 6: Number of Producers
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When one producer has successful new idea, others enter the market
– supply of good or service increases
Increase in number of producers leads to increased competition
– may drive less-efficient producers out of market
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Robert Johnson: Supplying African-American
Entertainment
EXAMPLE: Expanding the Number of Producers
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Johnson recognized cable TV industry ignored African-American
market
1980, launched Black Entertainment Television: music, public affairs
Cable operators in U.S., Canada, Caribbean began to buy BET’s
shows
Started BET.com—number one Internet portal for African Americans
In 2001, Johnson sold BET, became first black billionaire
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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change in quantity supplied and change in supply
input costs and technology
excise tax and regulation
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What Is Elasticity of Supply?
Elasticity of Supply
KEY CONCEPTS
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Elasticity of supply—measures producer response to price changes
Elastic—price change leads to larger change in quantity supplied
Inelastic—price change leads to smaller change in quantity supplied
Unit elastic—price and quantity supplied change by same percentage
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Elasticity of Supply
EXAMPLE: Elastic Supply
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As product gains popularity, shortage develops, price goes up
Producers can increase supply if
– resources are easy to come by, inexpensive
– production uncomplicated, easy to increase
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Elasticity of Supply
EXAMPLE: Inelastic Supply
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Producers may not increase supply if
– availability of resources limited
– production capacity cannot be increased
– shipping too costly or unavailable
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What Affects Elasticity of Supply?
KEY CONCEPTS
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Main factor determining elasticity is ease of changing production
– given enough time, elasticity rises for most goods and services
Industries that respond quickly to rising or falling prices:
– do not need much capital, skilled labor, hard-to-obtain resources
Other industries need a lot of time to shift resources
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Reviewing Key Concepts
Use each of the terms in a sentence that gives an
example of how the term relates to supply:
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elastic
inelastic
elasticity of supply
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Case Study: Robots—Technology Increases
Supply
Background
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Robots—machines that can be programmed to perform a variety of
tasks—perform numerous functions in industry. Half of all industrial
robots are used in the automobile industry. Robots are ideal for lifting
heavy objects and doing repetitive tasks humans find boring but can
perform more refined tasks as well.
What’s the Issue?
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How does technology increase supply?
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Case Study: Robots—Technology Increases Supply
{continued}
Thinking Economically
1. Which of the six factors that can cause a change in supply is
highlighted in the three documents? Does this factor generally
increase or decrease supply?
2. Which document, B or C, addresses the issue of elasticity? Explain.
3. In which article, A or C, are the robots an example of variable costs?
Why?
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