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.
WHY DO PRODUCERS PRODUCE?
Two Words.
Profit
Motive.
**Remember the invisible hand? Demand drives
Supply…
LAW OF SUPPLY
• As P ↑, QS ↑
• As P ↓, QS ↓
• Opposite of the law of demand
• Why? Example…
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?
SUPPLY SCHEDULE/CURVE
• Notice…
opposite of
Demand curve
• Upsloping
• Individual
Supply vs.
Market Supply
THE LAW OF SUPPLY
Reasons for a Change in Quantity
Supplied:
(Always associated with a change in a product’s own price)
1. 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.
Change in Quantity Supplied: Movement
along the Supply Curve
Price (per unit)
S0
B
$15
A
Change in quantity
supplied (a movement
along the curve)
1,250
2,300
Quantity supplied (per unit of time)
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.
Shift in Supply
S0
Price (per unit)
S1
$15
A
B
Shift in Supply
(a shift of the curve)
1,250
2,300
Quantity supplied (per unit of time)
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.
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
“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
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: 1979
2011
FACTORS AFFECTING
ELASTICITY OF SUPPLY
1. Ease of Production
easier = more elastic
2. Responsiveness to price
change
quicker adjustment = more
elastic
3. Time
more time to adjust =
more elastic
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
PROFIT MAXIMIZATION
• Profit =
Total Revenue - Total Cost
• 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!!!!
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
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