Transcript Supply - MathiasLink

Chapter 4
Supply
Supply
• The quantity of goods
and services that
producers are willing
to offer at various
possible prices during
a given period of time.
Quantity Supplied
• Amount of a good or
service that a producer
is willing to sell at
each particular price.
Law of Supply
• Producers supply
more of a good or
service when they can
sell them at higher
prices and fewer
goods and services
when they must sell
them at lower prices.
Why does the law of supply work
the way it does?
• PROFIT MOTIVE!!!!
– Profit: Amount of
money left after
producers have paid all
their costs.
– Profit happens when
revenues are greater
than the COSTS OF
PRODUCTION.
Costs of Production
•
•
•
•
Wages and salaries
Rent
Interest on loans
Bills for electricity,
raw materials, and
other goods used in
manufacturing and
selling.
Profits and Markets
• Not only governs how
individual companies
make decisions.
• Helps direct the use of
resources for the entire
market.
Profits and Markets
• Twin Wheels Co.
notices high demand
for bikes.
• Offers more bikes.
• BUT, seeing profit,
more competition
enters the market
place.
Profits and Markets
• Twin Wheels finds
demand low because of
competition.
• Profits are down.
• Twin Wheel Co. needs to
use their resources to
make products that earn
higher profits.
• Discourages other
companies from entering
the field.
REMEMBER!
• This is what Adam
Smith meant by the
Invisible Hand.
– Tells what needs to be
produced and what
needs to change.
Supply Schedules
• Schedule lists each
quantity of a good or
service and the price
they could get.
Supply Curves
• Show the relationship
between the price of a
good or service and
the quantity supplied.
Elasticity of Supply
• Degree to which price
changes affect the
quantity supplied.
Elastic Supply
• Exists when a small
change in price causes
a major change in
quantity supplied
Elastic Supply
• Products are
considered ELASTIC
if they can be made:
– Quickly
– Inexpensively
– Using a few, readily
available resources.
Goods with elastic supply
• Sports teams’
souvenirs
• T-shirts
• Posters
Inelastic Supply
• Goods that when a
change in a good’s
price has little impact
on the quantity
supplied.
Inelastic Supply
• A product usually has
inelastic supply IF
production requires a
great deal of:
– Time
– Money
– Resources that are
NOT readily available.
Goods with Inelastic Supply
• Gold
• Space shuttles
• Fine art
Perfect Inelasticity
• Exists when
producers, regardless
of price, cannot
increase the quantity
supplied.
– Beach-front property if
there are zoning
restrictions.
– Money
Changes in Supply
• Supply curves show in
a period of time, if
price is the only thing
changing, what will be
supplied.
• BUT – what if other
things happen?
Supply Shifts
• Supply stays constant as
long as
DETERMINANTS OF
SUPPLY are constant:
–
–
–
–
–
–
Price of resources
Government tools
Technology
Competition
Price of related goods
Producer expectations.
Supply Shifts: Price of Resources
•
•
•
•
Raw materials
Electricity
Workers’ wages.
Any change to prices
for resources
increases or decreases
the business’s
production costs.
Supply Shifts: Government tools
• TAXES!
• Subsidies
• Regulation
Government Tools
• Taxes
– Required payment of
money to govt. to help
fund govt. services.
– Higher taxes – higher
costs.
Government Tools
• Subsidies
– To ensure consumers
an affordable supply,
government may give
money to suppliers to
make sure there is a
supply.
– Subsidies REDUCE
costs.
– Lower costs of
production means
higher profits.
Government Tools
• Regulation: - laws about
how companies conduct
business to protect the
public.
– Pollution laws
– Discrimination.
– Less regulation USUALLY
means greater supply.
– More regulation USUALLY
means less supply.
Technology as a cause of Supply
Shifts
• Usually new
technology makes
production MORE
efficient and LESS
expensive.
Technology
• BUT: Technology has
a cost.
– Pay to have research
done.
– New technology often
costs more at the start
up.
Competition
• Competition tends to
increase supply.
Price of Related Goods
• Supply for one good
often is connected to
the supply for its
related goods.
– If a farmer were to find
corn more profitable
than wheat – he’ll
switch from wheat to
corn farming.
Producer Expectations
• Suppliers make
production decisions
based on expected
future income.
• IF producers expect
prices for the products
to fall, they might shift
their supply curve to
the left.
REMEMBER!
• Supply INCREASES
always moves the
curves to the RIGHT.
REMEMBER!
• Supply DECREASES
always move the
curves to the LEFT
Making Production Decisions
• Total Product – All the
product can make in a
given period of time.
Marginal Product
• The change in output
generated by adding
one more unit of input.
Law of Diminishing Returns
• The more input added
to a fixed supply of
other resources –
productivity only
increases UP TO A
POINT.
– Eventually marginal
product will diminish.
– Negative Marginal
Product
Three Types of Returns
• Increasing Marginal
Returns
• Diminishing Marginal
Returns
• Negative Marginal
Returns
Costs of Production
• FIXED COSTS –
Costs that don’t
change month to
month.
–
–
–
–
–
Rent
Loan payments
Salaries
Taxes
Insurance premiums
Costs of Production
DEPRECIATION –
lessening in value of
items over time.
OVERHEAD – Another
term for total fixed
costs
Costs of Production
• VARIABLE COSTS –
Costs that change as
the level of output
changes.
– Wages
– Electricity
COSTS OF PRODUCTION
• TOTAL COSTS – sum
of fixed and variable
costs.
• MARGINAL COSTS
– Additional costs of
producing one more
unit of output.