Elements of Microeconomics

Chapter 4: Supply

Section 1: Nature of SupplySupply: quantity of goods and services that

producers are willing and able to offer at various possible prices during a given time period.

LAW OF SUPPLY: states that producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices…Based on profit motive - producers want a profitThe amount of money remaining after producers have

paid all of their costs is called profitIncludes wages, salaries, rent, interest on loans, bills, etc…Profit drives market - little profit, little production What is happening now? Is it because of demand or supply?

Just like with demand, there is a supply schedule - lists quantity of product that producers are willing to supply at various market prices

Supply Curves: plots info from supply schedule - movement upward = greater quantity that producers will supply at higher prices

Elasticity of Supply - degree to which price changes affect the quantity supplied. Elastic supply: exists when a small change in price causes a

major change in quantity supplied; based on if products can be made quickly, inexpensively, using few resources (think about Super Bowl winning souvenirs)

Inelastic supply: exists when a change in a good’s price has little impact on the quantity supplied; based on if production requires a great deal of time, money, and resources (gold, oil?)

Section 2: Changes in Supply

Determinants of supply can shift supply curve Prices of resources - price change for resource will

increase or decrease business production costs (think about apple juice, if apples can’t be produced because of disease, producers can not supply as much product as before

Government tools: taxes - higher taxes, higher costs; subsidies - payments to private businesses by government (think farming - gov’t offers subsidy grant for particular crops); regulation - prevent pollution, discrimination, how does this affect supply?

Technology: usually can make production (and supply) more efficient and less expensive (think about the automobile and automobile production)

Competition: more comp, increase supply; less comp, decrease supply (each company wants a larger piece of the profit)

Prices of related goods: supply for one good often is connected to the supply for its related goods - (if corn is dropping, but wheat is going up, farmer will plant wheat = drop in corn will equal increase in wheat

Producer Expectations: just like consumer expectations affect demand, if a company expects one thing, they act

Section 3: Making Production Decisions

Productivity: amount of goods and services produced per unit of inputTotal Product - all of the product a company

makes in a given period of timeMarginal Product - change in output generated by

adding one more unit of input

Law of Diminishing Returns: as more of one out input is added to a fixed supply of other resources, productivity increases up to a point, but then diminish (continually moving)Increasing marginal returns - more workers, more

productDiminishing marginal returns - at some point it

must diminish - perhaps not enough machineryNegative marginal returns - overcrowding in

workplace (think about group projects - what is the ideal number to produce quality work)

Costs of Production: Manufacturers must look at costs of production when deciding how much to supply to the market. They analyze fixed costs, variable costs, total costs, marginal costs.Fixed costs - costs that do not change (even as

level of output does change) - wear and tear on machinery

Variable costs - costs that change as level of output changes (workers wages and salaries)

Total costs - sum of fixed and variable costsMarginal costs - additional costs of production one

more unit of output - (think pre-planning - companies can determine profitability of increasing or decreasing production by a few units