• Imagine that you are cell phone manufacturers and that the price consumers are willing and able to pay for cell phones begins to rise. • How would this affect your production of cell

phones? Would you make more or fewer cell phones? – You would want to make more.

• Why would you want to make more? – To cash in on the rise in prices and make more profit.

THE QUANTITY SUPPLIED

Profit is the total revenue a firm receives from selling its product minus the total cost of producing it.

The quantity supplied is the amount of a good that firms are willing to supply at a particular price over a given period of time.

THE LAW OF SUPPLYAccording to the law of supply, an increase in the price of a good leads to an increase in the quantity supplied.

•Price increases the QUANTITY supplied not the supply.•Why are firms willing to produce more of a good when its price increases?•Ceteris paribus.

THE SUPPLY SCHEDULE AND THE SUPPLY CURVE

The supply schedule for a good is a table listing the quantity of the good that will be supplied at specified prices.

THE SUPPLY SCHEDULE AND THE SUPPLY CURVE

A firm’s supply curve is a graphical representation of the supply schedule, showing the quantity the firm will supply at each price.

THE MARKET SUPPLY CURVE

THE MARKETS WITH SUPPLY CURVES

There is perfect competition in a market when there are many firms selling identical goods, firms are free to enter and exit the market, and consumers have full information about the price and availability of goods.

THE MARKETS WITH SUPPLY CURVES

1. Every unit of the good sold in the market is identical, regardless of which firm is selling it.

2. The good is produced by many firms, none of which is large enough to influence the price of the good.

3. New firms that want to supply the good are free to enter the market, and existing firms that want to stop supplying it are free to exit the market.

4. Consumers are aware of the price charged by the various firms and have the opportunity to buy from whichever firm they choose.

There is perfect competition among firms when:

WHEN OTHER FACTORS CHANGE

A shift of the supply curve is the result of a change in the quantity supplied at every price, not to be confused with a movement along the supply curve, which is the result of a change in the price.

Shifts of the Supply Curve

• The price of milk goes up 30 cents a gallon. Decrease in supply of ice cream at all prices (cost of inputs). • The government raises the minimum wage to $8 an hour.

Decrease in supply of ice cream at all prices (government regulation). • A hurricane wipes out the sugar crop in Hawaii. Decrease in

supply of ice cream at all prices (availability of inputs). • New regulations from the government mandate that they use

specific cleaning tools more often in the factory. Decrease in supply of ice cream at all prices (government regulations).

FACTORS THAT SHIFT THE SUPPLY CURVE

The cost of inputsGovernment policiesTaxesRegulationsSubsidiesThe number of firmsTechnological changeNatural disasters and weatherExpectations about future prices

The cost of inputsGovernment policiesTaxesRegulationsSubsidiesThe number of firmsTechnological changeNatural disasters and weatherExpectations about future prices

FACTORS THAT SHIFT THE SUPPLY

CURVE

UNDERSTANDING PRODUCTION

The short run is the period of time during which the quantity of at least one input is fixed.

The long run is the period of time in which the quantities of all inputs are variable.

Short Run verses Long Run

• This is important because it determines the use of space in the short run.

• If a restaurant wants to serve more people in the short run, it buys more advertising, and more food to prepare. More labor is hired. In the long run, if business is good, they can build a bigger restaurant or more locations. They can add more stoves, and tables. Long run means that capital purchases can increase production, but short run means only labor, and materials.

Short Run versus Long Run

• Don’t be confused by the terms short run and long run.

It boils down to this:• in the short run, the quantity of at least one input is

fixed, whereas in the long run the quantities of all inputs are variable. • The inputs with fixed quantities in the short run are

called fixed inputs. In the long run, even fixed inputs become variable inputs.

UNDERSTANDING PRODUCTION

A production schedule indicates the inputs needed to produce different quantities of output.

Ask at what point do we stop hiring workers?

UNDERSTANDING PRODUCTION

The marginal product of labor is the amount by which total output increases when one more worker is hired.– Increasing marginal return is usually high in the beginning

due to specialization of resources.

Diminishing marginal productivity describes the decrease in the marginal product of a variable input, such as labor, as more and more of it is combined with a fixed input, such as equipment.

Diminishing Marginal Productivity

• Too many workers can actually reduce output. – volunteers clogging up a kitchen– each additional worker contributes less to total output

than the worker before because additional workers have less equipment to work with.

• visually that the point of diminishing returns is a downturn in the graph.

05/14/23 Chapter 5-Mods 13, 14 & 15

Negative Marginal Product

• It’s easy to confuse diminishing marginal product with a negative marginal product, but they are very different. • When marginal product is decreasing but still

positive, hiring additional workers causes total out to rise.• But when marginal product is negative, employing

more workers actually causes total output to fall.

THE COST OF PRODUCTION

Fixed cost is the cost of inputs that do not vary with the amount of output produced.

Variable cost is the cost of inputs that do vary with the amount of output produced.

Fixed Cost versus Variable Cost

• Fixed cost: (short run) include rent paid for buildings, the cost of equipment, and fees for operating licenses. Does not increase as output increases. Ex. Stays the same regardless of the number of lawn that are mowed..• Variable cost changes with the number of units of

output produced. • Variable costs: payments for wages, electricity, and

raw material.

Variable Cost and Total Cost Calculation

• In the table 15.1, the daily wage of each worker is $60, so the variable cost is $ 60 X ( the number of workers hired)

• Example: to mow 21 lawns, Blade Runner hires 4 workers, so the variable cost is $ 60 X 4 = $240

• Total Cost: is the entire amount the firm must spend to produce a specified amount of output.– Add Fixed Cost + Variable Cost

THE COST OF PRODUCTION

Marginal cost is the additional cost of producing one more unit of output. Marginal cost is calculated as the change in total cost divided by the change in output.

PROFIT MAXIMIZATION AND MARGINAL ANALYSIS

The profit maximizing output level is the amount of output that gives a firm as much profit as possible.

Marginal revenue is the additional revenue a firm receives from selling another unit of output.

PROFIT MAXIMIZATION AND MARGINAL ANALYSIS

Firms will produce where MR=MC. That is the profit maximizing output.