PRICE GOES DOWN

Quantity Of Supply Goes

Up

Price Goes Up

Quantity OF SUPPLY

Goes DOWN

LAW OF SUPPLY

UNDERSTANDING SUPPLY

Supply is the amount of goods available. Law of Supply – The higher the price the larger

the quantity produced. Example – When do parents buy kids the most?

Suppose that Cabbage Patch dolls sell for $10.00 ea. from January to August but the demand is low therefore producers make a small quantity.

For Christmas lots of children want Cabbage patch dolls. Christmas is a hot buying season therefore dolls now sell for $20.00 ea. Producers make more because the profit motive is higher.

Quantity Supplied describes how much of a good is offered for sale at a specific price. When the price of goods rise firms

produce more in order to earn more profit.

The key to profit is that they utilize almost the same labor & output cost.

The rise in the price of goods causes new firms to enter into the market.

Firms changing their level of output and new firms entering into the market combine to create the Law of Supply.

Bottom Line – The more money to be made the higher the supply becomes.

If a firm is making a profit an increase in price will automatically bring an increase in profit.

A Supply Schedule shows relationship between a price increase of a good and the quantity supplied. (individual firm) Variables are the factors that can

change. See Figure 5.2 A supply schedule only deals with price.

It shows how the price affects the producer’s output.

A Supply Curve – is a graph of the data in a supply schedule.

A Market Supply Schedule lists how much of a good all suppliers will offer at different prices. (all makers of cell phones)

A Market Supply Curve – is a graph of the quantity supplied of a good by all suppliers at different prices.

Price of Snickers

Snickers supplied per week

.50 50

.75 100

1.00 150

2.00 200

2.50 300

SUPPLY SCHEDULE

0 50 75 100 150 200 250 300 350

Quantity of Goods supplied

100

9

8

7

6

5

4

3

2

1

0

SUPPLY CURVE

PR

I

CE

1 2 3 4 5 6 7 8 9 10

Amount of demand 1 2 3 4 5 6 7 8 9 10

Amount Supplied

100

90

80

70

60

50

40

30

20

10

0

Supply CurveSupplyCurve

UNDERSTANDING ELASTICITY OF SUPPLY

Unlike consumers, suppliers have to make their products. Their ability to make more products during the time when prices increase determines whether or not a supplier is elastic or inelastic. Time is the main factor to determine whether or not a producer is elastic or inelastic.

• Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic. • A Baker can increase or decrease the amount

of cakes baked in a day. • His supply is elastic.

Marriott hotel wants to take advantage of three straight months of large conventions being held in Macon starting in May.

Do they have time to add more rooms to their hotel?

If a producer cannot change his supply in a short period of time the supply is inelastic.

• Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic. Marriott hotel wants to take advantage of

three straight months of large conventions being held in Macon starting in September 2011.

Do they have time to add more rooms to their hotel?

If a producer can change his supply in a period of time to take advantage of the price increase the supply is elastic. Olympics in Atlanta

Elasticity of Supply measures the way SUPPLIERS respond to a change in prices. If elasticity is greater than one supply is

considered ________ If Elasticity is less than one supply is

considered ________ If Elasticity is equal to one supply is said to

be ___________.

The change in quantity supplied

Change in price

Bridge section 1& 2

Quantity supplied only takes into account prices. All other factors remain constant. The producer does not hire any new

workers. The producer does not buy any more

capital. The cost factor of producing more products

are basically constant. In reality producing products there are

numerous variables that go along with production.

COSTS OF PRODUCTION Entrepreneurs consider marginal

benefits and costs when deciding how much output to produce.

Firms earn their highest profit when the cost of making one more unit is the same as the market price of the good.

COSTS OF PRODUCTION Why do you suppose that some

employers increase the work load on its employees instead of hiring help?

Labor & Output – how does the number of workers affect production? Marginal Product of Labor – the change

in output from hiring one more worker – Why would an employer pay an employee

overtime instead of hiring another employee?

COSTS OF PRODUCTION Labor & Output – how does the number

of workers affect production? Marginal Product of Labor – the change in

output from hiring one more worker – Recall THINKING AT THE MARGIN!!!

Deciding whether to do or add one unit of resource.

The marginal product of labor measures the change of output at the margin.

How much more will the producer get by hiring one more worker?

Increasing Marginal Returns –a level of production in which the marginal product of labor (what is being made) increases as the number of workers increase. More workers equal greater production More workers can specialize thereby

creating EFFICIENCY. Diminishing Marginal Returns - a

level of production in which the marginal product of labor decreases as the number of workers increase. More workers equals less production.

Production Costs Fixed costs – a cost that does not

change no matter how much goods are produced.

Variable Costs – costs that rise or fall depending on the quantity produced.

Total costs – the fixed costs and variables costs added together find the total cost.

Marginal cost - is the additional cost to produce one more unit.

Production Costs Marginal revenue – the additional

income from selling one more unit; sometimes equal to the price

Operating Costs – the cost of operating a facility

CHANGES IN SUPPLY

Changes in the costs of Inputs can raise or lower the supply of a good at all prices.

The number of firms in a market and the price and supply of other goods can also have an effect on the supply of a good.

Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply. A rise in the cost of an input will cause a fall

in supply at all levels because the good has become more expensive to produce.

A fall in the cost of input will cause an increase of supply at all levels.

Effect of Rising costs – Rising costs affect the relationship between

marginal revenue & marginal cost. Marginal costs includes the cost of the inputs

that go into production.

Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply. Effect of Rising costs –

Rising costs affect the relationship between marginal revenue & marginal cost.

Marginal costs includes the cost of the inputs that go into production.

If the cost of an input increases marginal cost increases so firms decrease the supply in order to MAXIMIZE PROFITS, to get the marginal cost to equal the marginal revenue.

Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply. Technology – can lower costs of production

by simplifying tasks, performing jobs more efficiently, and cutting the costs of salaries.

Government’s Influence on Supply – the government can raise or lower supplies by … Raising or lowering the costs of producing

goods

Government’s Influence on Supply – the government can raise or lower supplies by … Raising or lowering the costs of producing

goods through… Regulations – a government intervention in a

market that affects price. Subsidies – a government payment that

supports a business or market. Taxes – a government can reduce or raise the

supply of good by placing or removing an excise tax, a tax on the production or sale of a good.

Other Influences on Supply – Future expectations of prices – if prices are

expected to increase a firm will decrease the supply. If prices are expected to decrease firms will increase the supply.

Number of suppliers – if more suppliers enter the market the quantity of the supply of goods will rise.