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SUPPLY

Supply refers to the quantities of goods or services producers are willing to sell at different prices over time. The profit motive drives producers to adjust supply based on potential earnings. The Law of Supply indicates that as prices rise, quantity supplied also increases, while a decrease in prices leads to lesser quantities supplied. Various factors, such as production costs, technology, and government regulation, can shift the supply curve. Additionally, supply elasticity measures how responsive the quantity supplied is to price changes. Understanding these concepts is crucial for analyzing market behavior.

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SUPPLY

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  1. SUPPLY Definition: The various quantities of a good or service that producers are willing and able to sell at all prices at a particular time.

  2. Why do producers produce? Two Words. Profit Motive. **Remember the invisible hand? Demand drives Supply…

  3. Law of Supply • As P ↑, QS ↑ • As P ↓, QS ↓ • Opposite of the law of demand • Why? Example…

  4. Mr. Bull’s Soccer Lessons How many lessons might I give if I was able to charge….. $5/hr? $15/hr? $40/hr? As I am able to charge more, production becomes more valuable relative to other tasks. What is my opportunity cost of soccer lessons?

  5. Supply Schedule/Curve • Notice… opposite of Demand curve • Upsloping • Individual Supply vs. Market Supply

  6. The Law of Supply • Reasons for a Change in Quantity Supplied: (Always associated with a change in a product’s own price) • Assuming firms’ costs are constant, at higher prices, producers make more profits. • - Economies of Scale • 2. When prices rise, firms substitute production of one good for another.

  7. B Change in quantity supplied (a movement along the curve) A Change in Quantity Supplied: Movement along the Supply Curve S0 Price (per unit) $15 1,250 2,300 Quantity supplied (per unit of time)

  8. Shifts in Supply Versus Movements Along a Supply Curve • If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

  9. S1 Price (per unit) A B Shift in Supply (a shift of the curve) Quantity supplied (per unit of time) Shift in Supply S0 $15 1,250 2,300

  10. 7 Reasons for a change in supply 1. Change in the cost of inputs • Land, labor, capital 2. Change in Productivity 3. Change in Technology • Ask Henry Ford… 4. Change in Number of Sellers • Duh.

  11. 7 Reasons for a change in supply • 5. Change in Taxes or Subsidies • 6. Change in Market Expectations • Future prices/demand/conditions • 7. Change in Government Regulation

  12. “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” -Ronald Reagan

  13. Elasticity of Supply • Elastic – easy/quick to produce – lower marginal cost for each additional unit produced • Inelastic – harder/slower to produce – higher marginal cost for each additional unit produced • Elasticity of supply increases as producers have more time to adjust to a price change • Ex: 19792011

  14. Factors Affecting Elasticity of Supply • Ease of Production easier = more elastic • Responsiveness to price change quicker adjustment = more elastic • Time more time to adjust = more elastic

  15. Elasticity Changes over time • Market Period – immediately after a change in price • Perfectly inelastic supply • Short Run – up to a few months after a change in price • Inelastic supply • Long Run – many months/years after a price change • Elastic supply

  16. Profit maximization Total Revenue - Total Cost • Profit = • Total Cost = Fixed Cost + Variable Cost • Fixed vs. Variable… examples? • Fixed – rent, loan payments, utilities • Variable – labor, raw materials • Firms want TR > TC… • But how do they maximize this profit? • MARGINAL ANALYSIS!!!!

  17. Profit maximization • Marginal Cost = ∆ Price of Inputs / ∆ Output MC = ∆ Variable Cost/∆ Quantity • Marginal Revenue = Price • Profit Maximization: As long as MR> MC, producers will continue to produce. Production Function.notebook

  18. Test Topics • Definition/Law of Supply • Supply Curve • Market Supply • Change in Supply • 7 factors • Elasticity of Supply • 3 factors • 3 Stages of Production • Profit Maximization • MR = MC

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