Transcript SUPPLY

SUPPLY
Chapter 5
What is Supply?
• Supply is the quantities that would be
offered for sale and all possible prices
that could prevail in the market.
Figure 5.1
The Law of Supply
• The quantity supplied, or offered for sale,
varies directly with its price.
• If prices are high, suppliers will offer greater
quantities for sale. If prices are low, suppliers
will offer smaller quantities for sale.
• A change in overall supply will cause the
Demand curve to shift.
• A change in quantity demanded will move
along the original curve.
Supply Curve
• Individual Curve
– Illustrates how the quantity that a producer makes
varies depending on the price that will prevail in
the market
• Market Curve
– Illustrates the quantities and prices that all
producers will offer in the market for any given
product or service
• Economist analyze supply
– by listing quantities and prices in a supply
schedule
– Forms supply curve with and UPWARD slope
Figure 5.2
Change in Quantity Supplied
• Quantity supplied:
– The amount that producers bring to the
market at any given price
• Change in Quantity Supplied;
– The change in the amount offered for sale
in response to a change in price
Quality Supplied
Figure 5.1
• Illustrates a change
in quantity supplied
– Shows as a
movement along the
line
– Can increase or
decrease amount of
the product
(movement from a to
b)
Change in Supply
• Situation where suppliers offer different
amounts of products for sale at all
possible prices
Figure 5.3
Change in Supply(cont)
• Supply Curves can also shift in response to the
following factors:
– Resource costs: cost to purchase factors of
production will influence business decisions
– Productivity: increases whenever more output is
produced with the same amount of inputs
– Technology: improvements in production increase
ability of firms to supply
– Taxes: firms view taxes as a cost of production and
lobby for lower taxes
Change in Supply (cont)
– Subsidies: government subsides encourage
production, while taxes discourage production
– Government regulations: if government decides to
reduce its regulations on business, production
costs go down and firms produce more output at
all possible prices
– Number of sellers: how many firms are in the
market
– Expectations: businesses consider future prices
and economic conditions
Elasticity of Supply
• Supply Elasticity: a measure of the way in
which a quantity supplied responds to a
change in price
• Elastic
– Small increase in price leads to a larger increase
in output—supply
• Inelastic
– Mall increase in price causes little change in
supply
• Unit Elastic
– A change in price causes a proportional change in
supply
Figure 5.4a
Figure 5.4b
Figure 5.4d
Figure 5.4c
Determinants of Supply
Elasticity
• How quickly a producer can act when a
change in price occurs:
– Adjust quickly = elastic
– Complex/advance planning = inelastic
• Factor of Substitution:
– Easy = elastic
– Difficult = inelastic
The Law of Variable Proportions
• Short Run:
– Output will change as one variable input is
altered, but other inputs are kept constant
– i.e.: salting a meal (amount of input –salt- varies;
so does the output – quality of the meal)
• Final Product is affected
– How is the output of the final product affected as
more units of one variable input or resources are
added to a fixed amount of other resources?
– i.e.: farmer may have all the land, machines,
workers, and other items needed to produce a
crop, but may have questions about the use of
fertilizers ,
The Production Function
• Concept that describes the relationship
between changes in output to different
amounts of a single input while others
are constant
The Law of Variable
Proportions
• Possible to vary all the inputs at the
same time
– Economist prefer only a single variable be
changed at a time
– b/c more than one = harder to gauge the
impact of a single variable
The Production Function
• Total product is the total output the
company produces
– Total Product Rises
• As more workers are added, total product rises
until a point that adding more workers causes
a decline in total product
– Total product Slows
• As more workers are added output continues
to rise = it does so at a slower rate until ti can
grow no further
– More workers “get in the way”
The Production Function
• Marginal Product is the extra output or
change in total product caused by
adding one more unit of variable output
– i.e.: worker 1’s output is 7; worker 2’s
output is 13 together their output is 20
(figure 5.5)
Figure 5.5a
Figure 5.5b
Three Stages of Production
• Stage I: increasing returns
– Marginal output increases with each new worker
– Companies are tempted to hire more workers
(moves them to stage II)
• Stage II: diminishing returns
– Total production keeps growing but the rate of
increase is smaller
– Each worker is still making a positive contribution
to total output (but diminishing)
• Stage III: negative returns
– Marginal product becomes negative
– Decreasing total plant output
Cost, Revenue and Profit
Maximization
What kinds of cost do you
have to consider?
• Fixed Cost – the cost that a business incurs
even if the plant idle and output is zero.
–
–
–
–
Salaries
Rent
Property Taxes
Variable Cost – cost that does change when the
business rate of operation or output changes
– Electric power
– Shipping charges
What kinds of cost do you
have to consider?
• Variable Cost – cost that does change
when the business rate of operation or
output changes
– Electric power
– Shipping charges
• Total Cost – Sum of the fixed and
variable costs
• Marginal Cost – Extra cost incurred
when a business produces one
additional unity of a product.
Figure 5.6
Measure of Revenue
• Average Revenue=
-The average price that every unit of
output sells for
Total revenue =
– Number of units sold multiplied by the average
price per unit
• Marginal Revenue =
– The extra revenue connected with producing
and selling an additional unit
Marginal Analysis
• Profit maximization quantity of output
is reached when marginal cost and
marginal revenue are equal
• Break-even point is the total output or
total product the business needs to sell
in order to cover its total cost
Applying Cost Principles
• Self-service Principles
– Gas station is an example of high fixed
cost with low variable cost
– Ration of variable to fixed cost is low
• E-Commerce
– An industry with low fixed cost