Supply

SUPPLYThe amount of a product that would be

offered for sale at all possible prices that could prevail in a market

Law of Supply- suppliers will offer more for sale at higher prices than at lower prices

A supply line is an upward sloping line represented by SS

SupplySupply curve is a

graph showing the various quantities supplied at each and every price that might prevail in a market

Market supply curve is a curve that shows prices by all firms that offer the product

Supply schedule, is a listing of various quantities of a particular product supplied at all possible prices in the market

gQuantity supplied- amount producers bring to

a market at any given

Change in quantity supplied- change in the amount offered for sale in response to a change in price

Change in supply- a situation where suppliers offer different amounts of products for sale at all possible prices in the market

Reasons for Changes in Supply1. costs of inputs, supply increases because

of decreases in the cost of inputs such as labor or packaging

-producers are more willing to purchase and produce for cheaper inputs

2. productivity, when workers decide to work more efficiently or if managers motivate productivity goes up

-same for the opposite

3. technology, new technology tends to change supply curve. Introduction of new machines, industrial processes which can lower the cost of production

4. Taxes and Subsidies, if taxes are raised on businesses their production goes up and vice versus

Subsidy- government payment to an individual business to encourage production of a certain activity (example, farmers)

continued5. Expectations, if a producer anticipates a

rise in price in products they may withhold their supplies and if they expect prices to go down they will try and sell

6. Government Regulations, for example, when the government mandates new auto safety features such as air bags cars cost more to produce

7. Number of sellers, the more suppliers the more supply pushes the curve to the right

Fat Pants AgainSupply elasticity- measures the way in which

quantity supplied responds to a change in priceA small change in price leads to relatively large

increase in output than the supply is elastic

Determinants of elasticityCan businesses adjust quickly to new prices

As long as consumers are willing to pay more money

How different is supply different from demand elasticity?

1. number of substitutes has no bearing on supply

2. ability to delay the purchase or a portion of has no bearing

Theory of ProductionThe relationship between the factors of

production and the output of goods and services

It looks at how output changes when input changes

It is based on the short run where inputs such as labor change

Law of Variable ProportionsIn the short run, output will change as one

input is varied, while the others are held constant

For example: make chiliAdd a pinch of chili powderTaste betterAdd moreTaste betterAt some point it will not taste good

Production FunctionWhen we want to see the effect a change in

input has on output Relates the changes in output with changes

in input while everything else remains the same

Production schedule- create when you want to know what varying amounts of labor will have on your output

Columns- FIX ON YOUR OUTLINEFirst Column is the varying number of input, for

example: workersSecond Column is the varying numbers of total

production based on the changing number of input

Total production- it id the total output produced by that business

Third Column is marginal product- it is the extra output produced by adding another input

It is a change in total production caused by an addition of an input

Three Stages of ProductionStage 1- each new input contributes

positivelyMarginal product increasesProducers normally don’t stay here because

they want MORE production

Stage 2Total production keeps growing but by

smaller and smaller incrementsEach worker makes a diminishing but

positive contribution to the total output

Diminishing returns- as more input is added, for example, labor, total output rises but at smaller and smaller amounts

Stage 3Negative returns, at this point the producers

start to lose money as they add more inputMarginal product is negative and total output

decreases

Section 3

Making Production ChoicesObviously producer want cheap productsConsumers want cheap prices but qualityHow do we make everyone happy?

Pay attention to productivity and cost

Cost is divided1. fixed cost- cost a business incurs regardless of

how busy or not they areThis includes salaries paid executives, rent, taxesAlso includes depreciation- the gradual wear and

tear on capital goods

2. variable costs- a cost that changes when the business rate of operation changes or output changes

Example: labor, raw materials

continued3. total cost- it is the sum of the fixed cost

and variable costTakes in all costs of a business during

operation

4. marginal cost- extra cost incurred when a business produces one additional unit

Revenue Businesses measure their revenue to find out profit

Total revenue- is number of units sold multiplied by the average price per unit

Example: if 42 units are sold at $2 than the total revenue is……….

Marginal revenue- extra revenue associated with the production and sale of 1 additional unit of output

Determined by dividing the change in total revenue by the marginal product

Let’s figure it outMarginal analysis- decision making that compares

the extra benefits to the extra cost of actionAll businesses are in it to make money!!All business want to reach the break-even point,

which is the total output or total product the business needs to sell in order to cover its total costs

However, business want to MAKE money so they go beyond

Profit-maximizing quantity of output- is reached when marginal cost and marginal revenue are equal