Producing Goods & Services

Supply is the quantities of a product

or service that a firm is willing and

able to make available for sale at all

possible prices.

The Law of Supply states that the

quantity of goods supplied will be

greater at a higher price than it

will at a lower price.

A supply schedule is a table that shows

the quantities of a good or service that

would be supplied by a firm at different

prices.

A supply curve is a graphic

representation of the quantities

that would be supplied at each

price.

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

0 5 10 15 20

Pri

ce

Quantity Supplied

Supply Curve for Bananas

Price Quantity

$0.99 18

$0.89 16

$0.79 14

$0.69 12

$0.59 10

$0.49 8

$0.39 6

$0.29 4

$0.10 2

$0.09 0

A market supply curve shows

the quantities offered at various

prices by all firms that offered

the product for sale in a given

market.

The Quantity Supplied is the amount that producers bring to market at any given price.

A Change in Quantity Supplied is the change in amount offered for sale in response to a change in price.

Change in Quantity Supplied

The movement along the curve represents how supply changes

based on price. The higher the price, the more will be produced and

visa versa.

A Change in Supply is

where suppliers offer

different amounts of

products for sale at all

possible prices in the

market.

Anything that is viewed as

increasing or decreasing

the cost(s) to supply the

good or service will

change supply. This will

shift the curve to the left or

to the right.

Changing Supply

Changes in supply can be caused by a number of

factors. The three most common causes are and a

change in the cost of inputs, productivity, and

technological change

1. Costs of Inputs – labor, raw materials, etc.

2. Productivity by working more efficiency the workers

produce more

3. Technology – improving productivity

4. Subsidies – government payments

5. Expectations – future prices will affect production

6. Regulations – rules, standards & requirements

7. Number of Sellers – more sellers offering or

producing the product

Labor, raw materials and shipping

costs can increase or decrease

supply.

Productivity – when workers decide

to work more efficiently more

products are produced thus

increasing productivity.

New technology tends to shift the supply

curve to the right. A new machine, process,

or chemical, lowers costs thus shifting the

curve to the right.

Government – can affect supply through increasing or decreasing product costs. Taxes paid by the producer adds to costs which

raise prices, thus reducing supply.

Subsidies received by the producer reduce costs which lower prices, thus increases supply.

Regulations add to costs which raise prices, thus reducing supply.

Expectation about future price changes will

cause the producer to either withhold

products or sell products quickly to take

advantage of a change in price.

As firms enter or leave the market the

market supply will either increase or

decrease.

Price elasticity of supply

measures the responsiveness of

the quantity supplied to changes

in the product’s price.

Measuring Elasticity from the Supply Side

% Change in Quantity Supplied

Price Elasticity =

% Change in Price

1> Inelastic

1< Elastic

1=1 Unitary

Deals with the relationship between the factors of production and the output of goods and services.

The theory is generally based on the short run, the ability to change a single input, for example labor, versus the long run which allows for changing most if not all inputs.

States that in the short run, output will change as one input is varied (changed), while others are held constant.

The production function describes the relationship between changes in output to different amounts of a single input while all other inputs are held constant.

Total Product is all the units of a product

produced in a given period of time.

Average Product is the number of units of

output produced per unit of input.

Marginal Product is the

amount that total

product increases or

decreases as a result of

adding one additional

unit of an input.

Stage 1 The first workers hired cannot work efficiently because

there are too many resources per worker. As more workers

are added they increase productivity.

Stage 2 As more workers are added they add support functions and

may assist but not necessarily produce. Production

increases but at a diminishing rate.

Stage 3

As more and more workers are added

production begins to decrease as

workers get in each others way.

Diminishing Marginal Product is

the principle that as more of one

input is added to a fixed amount

of other inputs, the marginal

product decreases.

0

20

40

60

80

100

120

140

160

0 5 10 15

To

tal P

rod

uc

t

Workers

Production Function Product

0 0 0 Stage I

1 7 7

2 20 13

3 38 18

4 62 24

5 90 28

6 110 20 Stage 2

7 129 19

8 138 9

9 144 6

10 148 4

11 145 -3 Stage 3

12 135 -10

Number of Total Marginal Regions of

Workers Product Product Production

Increasing Diminishing Negative

Production Schedule

Number of

Workers

Total

Product

Marginal

Product*

0 0 0

1 7 7

2 20 13

3 38 18

4 62 24

5 90 28

6 110 20

7 129 19

8 138 9

9 144 6

10 148 4

11 145 –3

12 135 –10

Stages of The Production Function

Stage I

Stage II

Stage III

Increasing = Unit Costs

Decrease

Decreasing = Unit Costs

Increase

Constant = Unit Costs

Remains

the Same

Fixed costs cannot be changed in

the short run. These costs are

incurred even if the business is

idle and not operating. Mortgage

or rent payments, machinery,

Insurance etc.

Fixed costs are also known as

overhead.

Variable costs can be changed at any time.

Labor, raw materials, electricity, inventories,

etc.

Total Cost of production is the sum of fixed

costs and Variable costs.

Explicit costs are

payments made to

others as a cost of

running a business.

Opportunity costs are

lost revenues and/or

earnings given up that

one must take into

account when running a

business.

Total Revenue minus Total Cost

equal Profits

Revenues is the number sold

multiplied by the average

price per unit.

Total cost is Fixed Costs plus

Variable Costs.

Profit is the money available

for reinvestment.

Breakeven is the point

where a company’s total

revenue covers its total

costs. All additional

revenues begin to contribute

to profits.

Marginal Revenue is the extra

revenue associated with the

production and sale of one additional

unit of output.

Marginal Costs is the extra cost

incurred when a business produces

one additional unit of product.

Marginal Analysis – examines the

extra benefits of a decision compared

to the extra costs.

The profit-maximizing quantity of

output is reached when MC=MR.