Chapter 5 - Supply

Law of Supply
Suppliers (Producers) will offer more goods and services for sale at higher prices and less at low prices.

Graphing Supply
Supply Schedule Listing of various quantities of a particular product supplied at all possible prices in the market. Supply Curve - Graph that illustrates the various quantities of a product offered at various prices - always slopes upward.

GRAPHING SUPPLY
Price of Corn

Plot the Points

S
CORN

$5

P QS $5 4 3 2 1
Q

Connect the Points

10 20 30 40 50 60 70 80 Quantity of Corn

60 50 35 20 5

The Effects on Supply

Determinants are factors that can effect suppliers in a particular market in both a positive and negative fashion. We express this on a graph by showing a shift of the entire curve. An increase in Supply shifts the curve to the right A decrease in Supply shifts the curve to the left

List of Supply Determinants

Cost of Inputs (Labor, Natural Resources, Capital Goods) Worker performance (Productivity) Number of Sellers Technology & Innovation Taxes & Subsidies Government Regulation Future Expectations

GRAPHING SUPPLY
Price of Corn

$5

CORN

If Supply increases, $5 4 what happens 3 to our curve? 2

4 3 2 1

P QS

60 50 35 20 1 5
Q

10 20 30 40 50 60 70 80 Quantity of Corn

GRAPHING SUPPLY
Price of Corn

$5

Increase in Supply

S
CORN

in Quantity Supplied
10 20 30 40 50 60 70 80 Quantity of Corn

P QS 80 $5 60 70 4 50 60 3 35 45 2 20 Increase 30 1 5
Q

Movement Along the Curve

As was just demonstrated, a price change has a different effect on Supply than a determinant would. Price changes do not shift the curve but rather move along it from point to point. Determinants = Change in Supply Price changes = Change in Quantity Supplied

GRAPHING SUPPLY
Price of Corn

$5

CORN

What if Supply Decreases?

10 20 30 40 50 60 70 80 Quantity of Corn

P QS $5 4 3 2 1
Q

60 50 35 20 5

GRAPHING SUPPLY
Price of Corn Decrease

$5

in Supply

S S
CORN

P QS 45 $5 60 30 4 50 20 3 35 Decrease 2 200 in Quantity 1 5-Supplied

Q

10 20 30 40 50 60 70 80 Quantity of Corn

Supply Elasticity
Just as for Demand, Supply also has 3 different elasticity levels. Elastic Production can easily increase due to a change in price (Candy, Toys, Textiles) Inelastic Production stays roughly the same even though prices are increasing (Oil, Natural Gas) Unit elastic Production increase is proportional to price change

Cost, Revenue, & Profit Maximization

Section 3

Measures of Cost
Fixed Costs (Overhead) Costs such as rent and interest. They do not change from month to month, or in some cases, year to year. Variable Costs Costs that fluctuate based on output or production. Total Costs Variable + Fixed

Revenue
Total Revenue - # of units sold multiplied by the average price per unit. 7units X $15 = $105 in Total Revenue