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Chapter 5. What is Supply? The amount of a product that would be offered for sale at all possible...
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Transcript of Chapter 5. What is Supply? The amount of a product that would be offered for sale at all possible...
![Page 1: Chapter 5. What is Supply? The amount of a product that would be offered for sale at all possible prices that could prevail in the market. The producer.](https://reader038.fdocuments.us/reader038/viewer/2022110209/56649e0e5503460f94af88e9/html5/thumbnails/1.jpg)
Chapter 5
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What is Supply?• The amount of a product that would
be offered for sale at all possible prices that could prevail in the market.
• The producer is receiving payments for his/her products. It should come as no surprise that more will be offered at high prices.
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Law of Supply
Principle that suppliers will normally offer more for sale at high prices and less for
sale at lower prices.PR
ICE
QS
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Supply Schedule• Listing of various
quantities of a particular product supplied at all possible prices in the market.
• Different than DEMAND.
• In supply: prices and quantities move in the same direction, whereas in demand they varied inversely.
Price Quantity Supplied
$1 10
$2 20
$3 30
$4 40
$5 50
Mrs. Amerson’s Supply Schedule forHandmade Christmas Ornaments
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Individual Supply Curve
• Graphic illustration of the supply schedule.
• Results in an UPWARD sloping line (supply curve).
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Market Supply Curve• Supply curve that shows the
quantities offered at various prices by all firms that offer the product for sale in a given market.
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Change in Quantity Supplied
• Quantity supplied- amount the producers bring to market at any given price.
• Change in quantity supplied- change in the amount offered for sale in response to a change in price.
QS
ΔQS
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Change in Quantity Supplied
• Illustrated by movement along the supply curve.
A
B
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Change in Supply• A change in
supply: • Increase- supply
curve shifts to the right
• Decrease- supply curve shifts to the left
• Page 117
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1. Costs of Inputs• If the cost of inputs decreases supply
might increase. (labor, packaging, raw materials)
• And increase in the cost of inputs has the opposite effect and may decrease the supply.
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2. Productivity• Motivated, incentivized
workers increase productivity the supply curve will shift to the right.
• Unmotivated, untrained or unhappy laborers produce less decreasing supply and shifting the curve to the left.
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3. Technology• New
technology tends to shift the supply curve to the right.
• Can decrease supply if it fails.
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4.Taxes and Subsidies• Taxes are costs- supply shifts to the
left
• Subsidy- government payment to encourage or protect a certain type of economic activity• Lower cost of productions and
encourages current producers to stay in the market and new producers to enter the market.
• Farmers.
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5.Expectations• Expectations
about future prices affect the supply curve.
• Think price will go up- withhold some of the supply
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6.Government Regulations
• New regulations can affect cost causing a change in supply.
• Ex. Air bags required in cars- cost more- less supply.
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7. Number of Sellers• Change in the
number of suppliers causes market supply curve to shift
• More enter the market- shifts to the right.
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Class/Homework
1. Explain how supply and demand are different.
2. Describe the difference between the supply schedule and the supply curve.
3. Describe 7 factors that can cause a change in supply.
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Supply Elasticity• Measure of the way in which quantity
supplied responds to a change in price.
• If a small increase in price leads to a relatively larger increase in output, supply is elastic.
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3 elasticities• Elastic - Change in price causes larger
change in quantity supplied.
• Inelastic- change in price causes relatively smaller change in quantity supplied.
• Unit elastic- change in price causes proportional change in quantity supplied.
%ΔP > %Δ QS = inelastic supply
%ΔP < %Δ QS = elastic supply
%ΔP = %Δ QS = unit elastic supply
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Determinants of Supply Elasticity
• If a firm can adjust to new prices quickly, then supply is likely to be elastic.• Ex. Candy
• If the nature of production is such that adjustments take longer, supply is likely to be inelastic.• Ex. Shale oil
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Economic Products with an ELASTIC SUPPLY
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Economic Products with an INELASTIC SUPPLY
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Theory of Production
• Theory dealing with the relationship between the factors of production and the output of goods and services.
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Runs• Short run- period of production that
allows producers to change only the amount of the variable input called labor. • Ex. Ford Motor Co. hires 300 new
workers
• Long run- period of production long enough for producers to adjust the quantities of all their resources, including capital.• Ex. Ford Motor Co. builds a new
factory
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Law of Variable Proportions
• In the short run, output will change as one input is varied while the others are held constant.
• Ex. Salt added to food- tastes better- more- better. More- too much…
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The Production Function
• Law of Variable Proportions illustrated by using a production function. • Use a schedule• Or graph• # workers and # output
• Total Product: total output produced by a firm
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3 Stages of Production
1. Increasing returns- great increases in production with each worker hired.
2. Diminishing returns- total production increases but at slower rate
3. Negative returns- total production decreases
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Marginal Product • The extra output or change in total
product caused by the addition of one more unit of variable input.
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Measure of Cost• Fixed cost- the cost that a business
incurs even if the plant is idle and output is zero. • Also called OVERHEAD- usually
machines, capital and goods• Ex. Salaries to executives, interest
charges on bonds, rent, local and state property taxes. • Depreciation- gradual wear and tear on
capital goods over time and their use.
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Measure of Cost• Variable cost- a cost that changes
when the business rate of operation or output changes.• Usually labor and new materials• Ex. Wage-earning workers, electric
power
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Measure of Cost• Total cost- sum of fixed and variable
costs
• Marginal cost- the extra cost incurred when a business produces one additional unit of a product• Usually a change within variable costs
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Applying Cost Principles
• 1. Self-service gas station:• Large fixed cost- lot,
pumps, tanks• Relatively small variable
costs- hourly wage of employee, gas, electricity
Ratio of variable to fixed costs is low.Makes sense to keep longer hours.
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Apply Cost Principles• 2. Internet Stores:
• Overhead, fixed costs, is low.
• No rent or large stock. • E-commerce-
electronic business or exchange over the internet.
Easy and profitable to have business 24/7
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Measure of Revenue
Businesses use two key measures of revenue to find the amount of output that will produce the greatest profits:
• Total revenue• Marginal revenue
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Measure of Revenue
• 1. Total revenue: Number of units sold multiplied by the average price per unit
$10 X 50 sold = $500
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Measures of Revenue• 3. Marginal revenue:
• Extra revenue associated with the production and sale of one additional unit of output.
• Dividing the change in total revenue by the marginal product
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Marginal Analysis• A type of cost-benefit analysis
decision making that compares the extra benefits to the extra costs of an action when increasing and input.
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Break-Even Point• Total output or total product the
business needs to sell in order to cover the total costs.
FC + VC = TC
Total Cost = Total Revenue = Break Even Point
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Profit-maximizing quantity of output
• Reached when marginal cost and marginal revenue are equal.