Economics

Unit 4

Supply

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Section 1: Nature of Supply

• To meet consumer’s demand, producers

deliver goods and services to the

marketplace

• Producers make things in time to meet the

demand for them

• Ex. Factories make winter coats in the

summer and swim suits in the winter so

stocks can be in stores at the right time

Supply

• Supply is the quantity of goods and

services that producers are willing and

able to offer at various possible prices

during a given time period

• Quantity supplied is the amount of a good

or service that a producer is willing to sell

at each particular price

Law of Supply

• In our free enterprise system, price is the key factor affecting not only the quantity demanded but also the quantity supplied

• Quantity supplied is directly related to the prices that producers can charge for their goods and services

• The 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

Mixed Signals

• Signals to producers are the opposite of

the signals to consumers

• Low prices signal consumers to buy more

while low prices signal producers to

produce less

• High prices signal consumers to buy less

while high prices signal producers to

produce more

Money, Money, Money

• Higher prices will encourage producers to

produce more

• Lower prices will encourage producers to

produce less

• Why do they do this?

• Their actions are based on a profit motive,

the desire to make money

Profit Motive

• The amount of money remaining after producers have paid all of their costs is called profit

• A business makes a profit when revenues are greater than costs of production

• Costs of production include wages and salaries, rent, interest on loans, electricity, raw materials and anything else it takes to make a product or provide a service

• Revenue – Costs of Production = Profit

Signals in the Marketplace

• High demand for a good or service signals

other producers to get in the market to

produce similar products/services

• Low demand for a good or service signals

producers to get out of the market and/or

cut production

• Remember, low demand is typically

followed by prices going down

• Profits go down at the same time

What follows low demand?

• Remember, low demand is typically

followed by prices going down

• Profits go down at the same time

• Low demand, and therefore low profit

causes producers to cut production

• It also signals others who produce a

similar product (the competition) to cut

production levels too

Supply Schedules

• High Prices! I think I will produce more…

This supply

schedule lists

the quantity of

a product that

producers are

willing to

supply at

various market

prices

Observe

that the

higher the

price, the

more

producers

are willing

to make

(profits

increase)

The supply

curve plots

on a graph

the

information

from a

supply

schedule

Elasticity of Supply

• Elasticity of supply is the degree to which

price changes affect the quantity supplied

• A products supply, like demand, can be

either elastic or inelastic

Elastic Supply

• Elastic supply exists when a small change

in price causes a major change in quantity

supplied

• Products with elastic supply usually can be

made….

• Quickly

• Inexpensively

• Using a few, readily available resources

Elastic Supply Curves

• T-shirts, posters & other sports memorabilia are good examples of goods with elastic supply

• When a team wins, within hours or days stores are flooded with souvenir merchandise

• Remember: – Quick to produce

– Inexpensive

– Using readily available resources

Inelastic Supply

• Inelastic supply exists when a change in a

goods price has little impact on the

quantity supplied

• A product usually has an inelastic supply if

production requires a great deal of…

• Time

• Money

• Resources that are not readily available

Examples of Inelastic Supply

• Gold-Rare, expensive to mine, requires

lots of time to refine or purify

• Fine Art

• Space Shuttles

• Labor intensive, expensive. Costs for

these items tends to be expensive

Dreamliner

Perfectly Inelastic Supply Curve

• Example: A builder has

only 10 lots in a subdivision

• No new lots can be created

(zoning laws)

• If demand is high the

builder can charge a higher

price for each lot

• If demand is low the builder

might lower the price of

each lot, however…..

• No new lots can be created

so supply is inelastic

Sect. 2: Changes in Supply

• Like demand curves,

supply curves illustrate a

products market at a

specific period of time

(snapshot)

• Because the snapshot is

taken at a specific period

in time the only factor

affecting quantity

supplied is price

• Notice that only price and

quantity supplied is

graphed

Supply Curves Shift Too

• Supply curves examine only price &

supply at a given time (snapshot)

• However supply is affected by other non-

price factors over time

• Over time a new snapshot needs to be

taken

• The new snapshot can show a shift in the

entire supply curve (up or down)

Shift In The Supply Curve

Supply can

increase or

decrease at

every level

over time

The red curve

is the original

curve

Non-Price Factors

• Over time non-price factors can affect supply

• These are called determinants of supply

• Prices of resources

• Government tools

• Technology

• Prices of related goods

• Producer expectations

• A change in one of these can cause a change in

the overall supply of a product

Price of Resources

• A resource is anything used in the production of a good or service

• Examples are:

• Workers wages/benefits

• Raw materials

• Rent/mortgage payments

• Utilities

• Much more….

Changes of Resource Costs

• When resource costs go down,

businesses can produce more with the

same costs

• Producing more with the same costs

increases a businesses profit

• This encourages businesses to expand

supply even more

• Opposite is true if resource costs go up

Government Tools

• A tax is a required payment of money to the government to help fund government services

• Businesses must pay taxes on materials they use, the property they own, and the profits they make

• Taxes increase production costs just like rent or raw materials do

• Taxes make production less profitible

Another Government Tool

• Payments to private businesses by the

government are called subsidies

• Ex: The government might want to

encourage farmers to grow more wheat so

food supplies will remain at a certain level

• Farmers grow more wheat (to get the

subsidy) instead of another unsubsidized

crop

Another Government Tool

• To protect the public the government

passes many kinds of regulations, or rules

about how companies conduct business

• Ex. Strict pollution control, discrimination

• Following regulations can increase costs

of production

• Loose regulations tend to increase supply

• Strict regulations tend to decrease supply

Technology

• Using technology can make production more efficient and less expensive

• Think Fords assembly line

• Lower production costs created by using technology encourages producers to supply more

• Technology is not FREE

• Initial costs can be high (research and development) but eventually savings occur

Competition

• Competition tends to increase supply

• Lack of competition tends to decrease supply

• Popularity of some items (video games) makes other businesses produce similar products so they can make a profit too

• Supply increases

• Each producer competes for a share of the market

• Sometimes too much is produced resulting in an oversupply and some producers leave the market

Prices of Related Goods

• The supply of one good can be connected

to the supply for its related good

• If the price of wheat drops because

subsidies cause an oversupply in the

market a farmer growing wheat might

switch to corn which suddenly becomes

more profitable

Producer Expectations

• Producers make production decisions

based on their expectation that sales

prices of their products will rise or fall

• If they expect prices will rise they will

increase production to make more profit

• If they expect prices will fall they will

decrease production to limit their losses

Sect. 3: Making Production

Decisions• The amount of goods/services that

companies are willing to produce is

affected by…

• The laws of demand and supply

• The elasticity of demand and supply

• Shifts in the demand and supply curves

Productivity

• Productivity is the amount of goods and services produced per unit of input

• Productivity tells business owners how efficiently their resources are being used in production

• Business owners examine the inputs to production to see if they can get more production by remixing inputs

• Ex. More automation less manual labor

Total Product

• All of the product a company makes during a given period of time is called its total product (total output)

• Marginal product is the change in output generated by adding one more unit of input

Law of Diminishing Returns

• The Law of Diminishing Returns states that when one input is added to a fixed supply of other resources, productivity increases up to a point

• At some point marginal return begins to diminish

• Eventually, it will result in a negative marginal product

Examining Diminishing Returns

At some point

production goes

down as new

inputs are

introduced

Observe what

happens with the

introduction of

the 12th worker

Also notice that

this schedule

examines only

one input, labor

Good managers

would look at more

than one input to

maximize

production

3 Stages of Productions

Increasing Marginal Returns:

Production increases with the

addition of each additional unit of

input

Diminishing Marginal Returns:

Production continues to increase,

but at a lower rate than previous

additional inputs added

Negative Marginal Returns:

Production begins to decrease as

each additional input in added

Two Categories of Costs of

Production• Fixed Costs—(also called Overhead) Those

costs that do not change no matter how many

goods are made• Rent, interest on loans, insurance premiums, property taxes,

salaries, depreciation on equipment (depreciation is the

lowering of the value of an asset due to time and use)

• Even if the company produces nothing, these costs continue

• Variable Costs—Those costs that increase as

production increases• Wages, raw materials, utilities

• These costs are zero until production begins and increase as

production increases

• Fixed Costs + Variable Costs = Total Costs

How much can 1 more cost?

• Marginal Costs—the additional costs of

producing one more unit of output

• Being able to calculate marginal costs

allows businesses to determine the

profitability of increasing or decreasing

production levels

References

• Economics: Texas Edition: 2016. McGraw Hill Education

• Holt Economics; Texas Edition: 2003, Holt, Rinehart and

Winston