Understanding SupplyUnderstanding SupplyUnderstanding SupplyUnderstanding Supply

Supply side or producer side of Supply side or producer side of the marketthe market

Defined as….

•The willingness and ability of seller to produce and offer to sell different quantities of a good at different prices during a specific time period.

•Amount of goods available.

•The supply of a good or service requires both a supplier’s willingness and ability to produce and sell

•Willingness – a person (group) wants or desires to produce and sell a good.

•Ability – a person (group) is capable of producing and selling the good

Law of Supply• Producers offer more of a good as its price increases

and less as its price falls. • As the price of a good increases, the quantity supplied

of the good increases.• As the price of a good decreases, the quantity supplied

of the good decreases. • Thus, price and quantity supplied move in the same

direction.

• IF P↑ then Q↑• IF P↓ then Q↓

Benefits of rising prices• Existing firms will produce more in

order to earn additional revenue.• An incentive for new firms to enter

the market.

Example

•A supply of new houses in the housing market means that firms are currently willing and able to produce and offer to sell new houses.

Quantity Supplied

•Refers to the number of units of a good produced and offered for sale at a specific price.

•Iphone = $

Creating the Law of Supply

• The two movements of individual firms changing their level of production and firms entering or exiting the market.

Higher Production• The promise of higher revenue for

each sale encourages the firm to produce more.

• The search for profit drives the supplier’s decision.

Market Entry• If a type of business is making

money, draws others into that business.

• Musicians joined the market pertaining to the music that was popular at the time.

Supply schedule• Shows the

relationship between price and quantity supplied for a specific good, or how much of a good a supplier will offer at various prices.

Market Supply Schedule

• Shows the relationship between prices and the total quantity supply by all firms in a particular market.

Supply Curve

•Slopes upward from left to right, shows the amount of a good sellers are willing and able to sell at various prices.

Elasticity of Supply• Measures how firms will respond to

changes in the price of a good. • Elastic – big response to change• Inelastic – small response to change• Elasticity can also be dependant on

the type of business and long-term v. short-term changes.

Costs of ProductionCosts of ProductionCosts of ProductionCosts of Production

Labor and Output• One question to ask is how many

workers do I hire?• When a new person is hired, production

does go up, but also need to consider wages and other benefits.

• At some point, you become less profitable.

Marginal Production of Labor

• Defined as the change in output from hiring one more worker.

Increasing Marginal Returns

• A rising marginal product of labor

Diminishing Marginal Returns

• New workers increase output but at a diminishing rate.

Negative Marginal Returns

• Adding additional workers actually decreases output.

Production Costs• Two main costs: fixed and variable• Fixed – does not change no matter how

much is produced. Rent, cost of loans, property taxes.

• Variable – costs that rise or fall depending on the quantity produced. Material, some wages, taxes, electricity

Total Cost• Sum of fixed and variable costs.

Marginal Cost• Cost of production at each level.

Additional cost of producing one more unit.

Marginal Revenue• Additional income form selling one

more unit of a good.

• Business firms need to know marginal cost and marginal revenue to make decisions regarding production.

• The ideal level is where marginal cost meets marginal revenue.

Changes in SupplyChanges in SupplyChanges in SupplyChanges in Supply

Input Costs• Any changes in the cost of an

input used to produce a goods• An input will cause a fall in supply

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

Effects of Rising Costs• Cost of labor or raw materials will

result in a higher marginal cost• Firm may not be as profitable• May pass costs along to consumer

Technology• Advances in technology can lower

production costs in many industries.

• Robotics

Government Influence on Supply

• By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or an industry within the country or abroad.

Subsidy• A government payment that supports

a business or market (farms)• Governments in developing countries

often subsidize manufacturers to protect young, growing industries from foreign competition.

Taxes• Excise tax – tax on the production

or sale of a good. • Cigarettes, alcohol

Regulation• Government intervention in a

market that affects the price, quantity, or quality of a good.

Secretary Paulson:• “Excessive regulation slows

innovation, imposes needless costs on investors, and stifles competitiveness and job creation”.

Other influences on supply

• Changes in global economy• Import restrictions• Future expectation of prices• Number of suppliers in market• Where firms produce?????