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Supply
Chapter 5
Goals & Objectives
1.
2.
3.
4.
5.
6.
Supply Curve & Price
Changes to supply.
Theory of Production.
3 Stages of Production.
4 Measures of Cost.
Identify 2 key measures of revenue.
7. Business Decisions & Gov’t
Supply
• Amount of a product offered for sale
at all possible prices that could
prevail in the market.
• Law of Supply: principle that
suppliers will normally offer more for
sale at higher prices rather than
lower prices.
Supply & Price
Change in Supply
• 1. Cost of Inputs: Labor wages (minimum
wage increases?), gasoline prices, capital
goods prices, property taxes, business taxes,
gov’t regulations
• 2. Productivity: Commission, Sales, Piecework, fringe benefits, 401K, profit sharing.
Minimum Wage Requirements are
Input Costs
Change in Supply
• 3. Technology: Robotics, Computers, Smart Cars, Smart
phones, Wireless
• 4. Taxes and Subsidies: High taxes lowers profit margins which
lowers production and raises consumer prices.
– Subsidies: designed to protect producers profits. Short
Run: lowers consumer prices
– Long Run: Reduces competition and raises prices without
continued subsidies.
Supply & Taxes
Change in Supply
• 5. Expectations:
Futures/Options.
– Gasoline prices… Investors expect oil prices to rise due to gov’t
regulations, investors buy more oil stock, causes the price of oil to rise
which causes gasoline prices to rise, investors make dividends.
– Hurricane & Gas Prices: Hurricane shuts down supply of oil which
causes a shortage of gasoline which causes increased gasoline prices.
(JIT theory)
• 6. Government Regulations: Global Warming Scheme; shuts down
pipeline & drilling on public lands which causes artificial oil shortages &
high gasoline prices.
Regulations & Supply
Change in Supply
• 7. Number of Sellers:
– Increased number of sellers/producers/competing
business will cause an increase in production and lower
consumer prices.
– Decrease number of sellers/producers/competing business
will cause a decrease in production and higher consumer
prices.
– Cost-Push Inflation: government licensing requirements,
increased taxation & regulations decrease the number of
producers & high prices.
Community Reinvestment Act

Fannie Mae & Freddie Mac
Federal Requirement for Banks to issue
loans to borrowers with no credit history or
poor credit history.
 Trade Off: Increased default rate for banks.
Increased foreclosures and higher
collateralized debt obligations, fewer profits.
 Opportunity Costs: Less money to lend to
qualified borrowers & higher interest rates.

Sub-Prime Loans & Inflation
Theory of Production
How does Obamacare Affect the theory of production?
• SHORT RUN:
• LONG RUN:
• Ford Motor Co. hiring
300 temporary workers
instead of full time
employees.
• 29ers? Obamacare and
full time employee
costs.
• Ford Motor Co. building
a new factory.
• Re-tooling/designing
• 49ers? Obamacare and
fringe-benefit costs.
29ers & Obamacare
49ers & Obamacare
3 Stages of Production
1. Increasing returns: More workers equals increased
productivity. Greater supply equals greater profits.
(6 employees)
2. Diminishing returns: Workers at marginal
production rates creates increased costs and breakeven profits. (10 employees)
3. Negative returns: Too many workers at marginal
production rates creates costs exceeding profits. (11
employees)
Measures of Cost
1.
Fixed Costs: Land, Leases, Mortgages,
Capital Goods Costs, Utility Costs,
Property Taxes, Sales Taxes, Income
Taxes, License Fees, Insurance Costs,
Employee Benefits
2.
Overhead: Sum total of all fixed costs.
Fixed Costs/Overhead
Measures of Cost
• 3. Variable Costs: Labor and
Resource Costs
• 4. Total Costs: Sum Total of
Fixed and Variable Costs.
• 5. Marginal costs: producing
more than needed. (JIT Theory)
E-COMMERCE
 Avoids advertising Costs, Taxes and
Regulations
 Internet is the last unregulated commerce
market.
 State and Local Governments demand federal
interstate commerce regulation.
 Why? Who Benefits from regulation?
 Who loses from regulation and taxation?
Measures of Revenue
 Break-even point:
1.
2.
3.
4.
Total Costs: Variable + Fixed + Marginal
Subtracted By:
Total Revenue: Total output multiplied by units sold.
Break-Even Point: Total revenue needed to pay for total
business costs.
5. Marginal Revenue: Additional output past break-even
point.
Break-Even Point