Transcript Chapter 5 notes - Waterford Union High School

Supply
Supply
• The analysis of the supply of produced goods
has two parts:
– An analysis of the supply of the factors of
production to households and firms.
– An analysis of why firms transform those
factors of production into usable goods and
services.
The Law of Supply
• There is a direct relationship between price
and quantity supplied.
– Quantity supplied rises as price rises, other things
constant.
– Quantity supplied falls as price falls, other things
constant.
Law of Supply
• Law of Supply
– As the price of a product rises, producers will be willing to
supply more.
– The height of the supply curve at any quantity shows the
minimum price necessary to induce producers to supply
that next unit to market.
– The height of the supply curve at any quantity also shows
the opportunity cost of producing the next unit of the
good.
The Law of Supply
• The law of supply is accounted for by two
factors:
– When prices rise, firms substitute production
of one good for another.
– Assuming firms’ costs are constant, a higher
price means higher profits.
Price of soybeans per bushel ($)
The Law of Supply
6
5
4
3
2
1
0
0
10
20
30
40
Thousands of bushels of soybeans
produced per year
50
• The law of supply
states that there is a
positive relationship
between price and
quantity of a good
supplied.
• This means that
supply curves
typically have a
positive slope.
Supply Schedule
• A supply schedule
shows how much of
a good or service
would be supplied
at different prices.
Supply Schedule for Coffee Beans
Price of
coffee beans
(per pound)
Quantity of
coffee beans
supplied
(billions of
pounds)
$2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00
10.0
0.75
9.1
0.50
8.0
Supply Curve
Price of coffee
beans (per pound)
A supply curve shows
graphically how much of a
good or service people are
willing to sell at any given
price.
Supply
curve, S
$2.00
1.75
1.50
As price rises, the
quantity supplied rises.
1.25
1.00
0.75
0.50
0
7
9
11
13
15
17
Quantity of coffee beans (billions of pounds)
What Causes a Supply Curve to Shift?
1. Changes in input prices (Cost of Resources)
– An input is a good that is used to produce another good.
2. Change in productivity
-more output using the same amount of input
3. Changes in technology
4. Taxes and Subsidies/government regulations
5. Changes in expectations
6. Changes in the number of sellers
7. Nature
8. Price of Related Goods
An Increase in Supply
• The entry of Vietnam
into the coffee bean
business generated an
increase in supply—a
rise in the quantity
supplied at any given
price.
• This event is
represented by the two
supply schedules—one
showing supply before
Vietnam’s entry, the
other showing supply
after Vietnam came in.
Supply Schedule for Coffee Beans
Quantity of beans supplied
Price of
coffee beans
(billions of pounds)
(per pound) Before entry After entry
$2.00
11.6
13.9
1.75
11.5
13.8
1.50
11.2
13.4
1.25
10.7
12.8
1.00
10.0
12.0
0.75
9.1
10.9
0.50
8.0
9.6
An Increase in Supply
Price of coffee
beans (per
pound)
S
$2.00
S
1
2
A movement
along the supply
curve…
1.75
1.50
1.25
1.00
… is not the
same thing as a
shift of the
supply curve
0.75
0.50
0
7
9
11
13
15
17
Quantity of coffee beans
(billions of pounds)
A shift of the supply curve is a change in the quantity supplied of a good at any given
price.
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve).
Change in costs, input prices, technology, or prices of
related goods and services
leads to
Change in supply
(Shift of curve).
From Individual Supply
to Market Supply
• The supply of a good or service can be
defined for an individual firm, or for a group
of firms that make up a market or an industry.
• Market supply is the sum of all the quantities
of a good or service supplied per period by all
the firms selling in the market for that good
or service.
Market Supply
• As with market demand, market supply is the
horizontal summation of individual firms’
supply curves.
Elasticity of Supply
• Elasticity of Supply: a measure of the way
suppliers respond to a change in price
Elasticity of Supply
•
A supplier’s responsiveness to a price change is
called _________________
Elasticity of Supply
• (think like a supplier/seller)
• 3 Factors that will determine a product’s elasticity
1. Availability of resources required to make the
product
2. Amount of time required to make the product
3. Skill level of the worker needed to make the
product
Elastic Supply
•
A product has elastic supply when a price change
causes a significant change in the quantity
supplied. (What would have to be true (of a
product) to allow a seller to quickly increase
production if the market price goes up?)
1. Abundance of resources required to make the
product
2. Product can be made quickly
3. Low skill level of workers required
Inelastic Supply
• A price change causes very little change in the
quantity supplied= Inelastic. This happens because…
• 1.The product requires scarce resources
• 2. It takes a long time to make
• 3. It requires a high skill level of workers
• examples?
• Hand crafted furniture
• diamonds
Supply, Demand and Equilibrium
• Equilibrium in a competitive market: when the
quantity demanded of a good equals the quantity
supplied of that good.
• The price at which this takes place is the equilibrium
price (a.k.a. market-clearing price):
– Every buyer finds a seller and vice versa.
– The quantity of the good bought and sold at that price is
the equilibrium quantity.
Market Equilibrium
• Only in equilibrium
is quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
Surplus
Price of coffee
beans (per pound)
There is a surplus of a
good when the quantity
supplied exceeds the
quantity demanded.
Surpluses occur when
the price is above its
equilibrium level.
Supply
$2.00
1.75
Surplus
1.50
1.25
E
1.00
0.75
0.50
0
Demand
7
8.1
10
11.2
13
15
17
Quantity of coffee beans
(billions of pounds)
Quantity
demanded
Quantity
supplied
Shortage
Price of
coffee beans
(per pound)
Supply
$2.00
1.75
1.50
1.25
There is a shortage of a
good when the quantity
demanded exceeds the
quantity supplied.
Shortages occur when
the price is below its
equilibrium level.
E
1.00
0.75
Shortage
0.50
0
7
9.1
10
Quantity
supplied
11.5
Quantity
demanded
Demand
13
15
17
Quantity of coffee beans
(billions of pounds)
Technology ShiftsS1of the Supply Curve
Price
An increase in
supply …
S2
E1
Price
falls
P1
P2
E2
… leads to a movement along
the demand curve to a lower
equilibrium price and higher
equilibrium quantity.
Technological innovation: In the early 1970s,
engineers learned how to put microscopic
electronic components onto a silicon chip;
progress in the technique has allowed ever
more components to be put on each chip.
Demand
Q1
Q2
Quantity increases
Quantity
Market Equilibrium
Price of
coffee beans
(per pound)
Supply
$2.00
1.75
1.50
Market equilibrium
occurs at point E,
where the supply
curve and the demand
curve intersect.
1.25
Equilibrium
price
E
1.00
Equilibrium
0.75
0.50
0
Demand
7
10
Equilibrium
quantity
13
15
17
Quantity of coffee beans
(billions of pounds)
Equilibrium and Shifts of the Demand Curve
Price of coffee
beans
An increase in
demand…
E
P
Price
rises
… leads to a
movement along the
supply curve due to a
higher equilibrium price
and higher equilibrium
quantity
2
2
E
P
Supply
1
1
D
D
Q
1
Q
Quantity rises
2
2
1
Quantity of coffee beans
Simultaneous
Shifts of Supply and Demand
(a) One possible outcome: Price Rises, Quantity Rises
Price of coffee
Small decrease
in supply
E
P
2
E
P
2
S
2
S
1
The increase
Two
opposinginforces
demand
determiningthe
dominates
thedecrease
equilibrium
in
supply. quantity.
1
1
D
D
2
1
Large increase
in demand
Q
1
Q2
Quantity of coffee
Simultaneous
of Supply
and
(b) Another PossibilityShifts
Outcome: Price
Rises, Quantity
Falls Demand
Price of coffee
Large
decrease
in supply
S
2
S
E
P
2
Two opposing forces
determining the
equilibrium quantity.
2
E
P
1
Small increase
in demand
1
1
D
D
Q
2
Q
1
2
1
Quantity of coffee
Simultaneous Shifts of Supply and Demand
We can make the following predictions about the outcome when
the supply and demand curves shift simultaneously:
Simultaneous
Shifts of
Supply and
Demand
Supply Increases
Supply Decreases
Demand
Increases
Price: ambiguous
Quantity: up
Price: up
Quantity: ambiguous
Demand
Decreases
Price: down
Price: ambiguous
Quantity: ambiguous Quantity: down
Demand and Supply Shifts at Work in the Global Economy
• A recent drought in Australia reduced the amount of grass on
which Australian dairy cows could feed, thus limiting the amount
of milk these cows produced for export.
• At the same time, a new tax levied by the government of
Argentina raised the price of the milk the country exported,
thereby decreasing Argentine milk sales worldwide.
• These two developments produced a supply shortage in the
world market, which dairy farmers in Europe couldn’t fill because
of strict production quotas set by the European Union.
Demand and Supply Shifts at Work in the Global
Economy
• In China, meanwhile, demand for milk and milk
products increased, as rising income levels drove
higher per-capita consumption.
• All these occurrences resulted in a strong upward
pressure on the price of milk everywhere in 2007.
• Whether they are film producers of
multimillion-dollar epics or small firms that
market a single product, suppliers face a
difficult task. 
• Producing an economic good or service
requires a combination of land, labor,
capital, and entrepreneurs. 
• The theory of production deals with the
relationship between the factors of
production and the output of goods and
services.
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)
• The theory of production generally is based
on the short run, a period of production that
allows producers to change only the
amount of the variable input called labor. 
• This contrasts with the long run, a period of
production long enough for producers to
adjust the quantities of all their resources,
including capital.
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• For example, Ford Motors hiring 300 extra
workers for one of its plants is a short-run
adjustment. 
• If Ford builds a new factory, this is a longrun adjustment.
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• Total product is the total output the
company produces: a production
schedule shows that, as more workers
are added, total product rises until a point
that adding more workers causes a
decline in total product. 
• Marginal product is the extra output or
change in total product caused by adding
one more unit of variable input.
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• In Stage I, (increasing returns), marginal
output increases with each new worker.
Companies are tempted to hire more
workers, which moves them to Stage II. 
• In 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 it is
diminishing.
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• In Stage III (negative returns), marginal
product becomes negative, decreasing total
plant output.
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Figure 5.5b
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Figure 5.5a
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• Overhead is one of many different
measures of costs.
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• Fixed costs are those that a business has
even if it has no output. These include
management salaries, rent, taxes, and
depreciation on capital goods. 
• Variable costs are those that change when
the rate of operation or production
changes, including hourly labor, raw
materials, freight charges, and electricity.
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• Total cost is the sum of all fixed costs and
all variable costs. 
• Marginal cost is the extra (variable) costs
incurred when a business produces one
additional unit of a product.
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