Supply Unit 4. Organizing Principle The invisible forces within the marketplace determine supply,...

SupplyUnit 4

Organizing PrincipleThe invisible forces within the

marketplace determine supply, which in turn determines price and output(quantity).

Supply Terms Break-even point Change in quantity

supplied Change in supply Diminishing returns Elasticity of supply Fixed cost Increasing returns Input cost Law of supply Marginal cost

Marginal product Marginal revenue Productivity Profit-maximizing output Supply Supply curve Supply schedule Total product Total revenue Variable cost

Understanding Supply•What is supply?•What is the law of supply?•What are supply schedules and supply curves?

What is supply? Supply is the willingness and ability of

producers to offer goods and services for sale.

Why does supply matter? Because most people are producers. Producers have costs and receive rewards

for the work they do.

The Law of Supply• According to the law of supply,

producers willing to sell more of product at higher than at lower price.

Price

As price increases…

Supply

Quantity supplied increases Price

As price falls…

Supply

Quantity supplied

falls

Law of Supply Quantity supplied describes how much

of a good is offered for sale at a specific price.

The promise of increased revenues when prices are high encourages firms to produce more.

Law of Supply EXAMPLE:

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

Supply Schedules Individual 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 Uses market research

Individual Supply Schedule

Source: Economics: Concepts & Choices – Holt McDougal

Market Supply Schedule


Applying Economic Concepts Imagine that you own a health food

store that sells several brands of nutrition bars. Create a supply schedule showing how many bars you would be willing to sell each month at prices of $5, $4, $3, $2, and $1.

Supply Curves Individual supply curve shows data from

supply schedule in graph form

Market supply curve shows data from market supply schedule

Supply Curves

Individual Supply CurveMarket Supply Curve


Jet wants to know…Are we done yet?

Almost!

Quick Quiz!What is the law of supply?

(a) the lower the price, the larger the quantity supplied(b) the higher the price, the larger the quantity supplied(c) the higher the price, the smaller the quantity supplied(d) the lower the price, the more manufacturers will produce the good

The End!

What Factors Affect Supply?How do input costs affect supply?How can the government affect the supply of a good?What other factors can influence supply?

Change in Quantity Supplied 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

Change in Supply 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

Factor 1: Input Costs 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

Factor 2: Labor Productivity Labor productivity—amount of product

worker can produce in set time Rise in productivity lowers production

costs; supply increases

Factor 3: Technology Technology—use of scientific methods,

discoveries in production results in new products or manufacturing

techniques

Factor 4: Government Action Excise tax—tax on production or sale of

specific good or service

Regulation—set of rules, laws designed to control business behavior

Factor 5: Producer Expectations Producers have expectations about

future price of their product

Expectations of higher price in future may lead to different actions

Factor 6: Number of Producers 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

Quick Quiz!1. What affect does a rise in the cost of raw materials have on the cost of a good?(a) A rise in the cost of raw materials lowers the overall cost of production.(b) The good becomes cheaper to produce.(c) The good becomes more expensive to produce.(d) This does not have any affect on the eventual price of a good.

2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good?(a) It shifts to the left.(b) It shifts to the right.(c) It reverses direction.(d) The supply curve is unaffected.

Elasticity of SupplyWhat is elasticity of supply?What factors affect elasticity of supply?

Elasticity of Supply 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

EXAMPLE: Elastic Supply 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

EXAMPLE: Inelastic Supply Producers may not increase supply if

availability of resources limited production capacity cannot be increased shipping too costly or unavailable

What Affects Elasticity of Supply?

TIME

• In the short run, a firm cannot easily change its output level, so supply is inelastic.

• In the long run, firms are more flexible, so supply can become more elastic.

Quick Quiz!1. Elasticity of supply measures how responsive

(a) consumers are to price change(b) government is to price change(c) producers are to price change(d) workers are to price change

2. Which of the following is most likely to have elasticity of supply for their product?(a) apple grower(b) car manufacturer(c) electronics manufacturer(d) wedding-cake baker

The End!

Supply Unit 4. Organizing Principle The invisible forces within the marketplace determine supply,...

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