Transcript Chapter 5

Chapter 5
Law of Supply
• Because the producer is receiving
payment more will be offered at higher
• Suppliers will normally offer more for sale
at high prices and less at lower prices.
The Supply Schedule
• The only real difference between a supply
schedule and a demand schedule is that
prices and quantities now move in the
same direction for supply
• can also be illustrated graphically as an
upward-sloping line
Change in Quantity Supplied
• Suppliers have some control over the price
• Ultimately the final interaction between
supply and demand determines the price.
• Again if the price changes then it is a
movement along the supply curve.
Change in Supply
• Appears as a SHIFT in the Supply curve.
• Decrease in Supply – Shift to the Left
• Increase in Supply – Shift to the Right
Cost of Inputs
• A change in the cost of inputs can cause a
change in supply
• If the price of the inputs drops, producers
are willing to produce more at each price
• If workers work more efficiently,
productivity should increase
• The result is more is produced at every
– supply shifts right
• if workers are unmotivated, untrained, or
unhappy, productivity could decrease
– Supply shifts left
• New technology tends to shift the supply
curve to the right
• New Technology can affect supply by
lowering the cost of production or by
increasing productivity
Taxes and Subsidies
• Firms view taxes as costs
• If the producer’s inventory is taxed or if
fees are paid the cost of production goes
• Taxes shift supply left
Taxes and Subsidies
• A subsidy is a government payment to
encourage or protect a certain type of
economic activity
• Subsidies lower the cost of production
• Subsidies shift supply right
• Expectations about the future price can
affect the supply curve
• If producers think the price of their product
will go up, they may withhold some of the
• If producers may expect lower prices they
may try to produce and sell as much as
possible right away
Government Regulations
• When the government establishes new
regulations, the cost of production can be
• Increased government regulations restrict
– supply curve to shifts to the left
• Relaxed regulations allow producers to
lower the cost of production
– Shift to the right
Elasticity of Supply
• If a small increase in price leads to a large
increase in output, supply is elastic.
• If the quantity supplied changes very little,
supply is inelastic
Determinants of Supply Elasticity
• If a firm can adjust to new prices quickly,
then supply is likely to be elastic.
• If adjustments take longer, then supply is
likely to be inelastic.
Theory of production
• The relationship between the factors of
production and the output of goods and
• Short run vs Long run
• Some things take longer to change and
can only be changed in the long run.
Short run vs Long run
• Short run – only the variable inputs can be
• Long run – any input, fixed or variable, can
be changed
• hiring 300 extra workers is a short-run
• building a new factory, this is a long-run
Stage 1 - Increasing
• With only a couple of
workers not all
resources are used
• Some machines are
• Each extra worker
adds more than the
Stage 1 - Increasing
• Workers begin to
specialize and work
as a unit
• This stage is
characterized by
increasing marginal
Stage 2 - Decreasing
• Eventually the plant is at
full employment
• All resources are
• Adding more workers
still increases production
• But each work adds less
than the previous
• This is called decreasing
marginal production
Stage 3 - Negative
• Finally there are just too
many workers
• They get in the way and
slow down production
• Each worker actually
subtracts from total
• This is call negative
marginal product