Chapter 5
Supply
Definition of Supply
• Supply – the willingness and ability of
producers to offer goods and services for sale.
Law of Supply
• Law of Supply – producers are willing to sell
more of a good or service at a higher price.
• If the price of a product falls producers will
want to supply less of it.
• This is a direct relationship.
Supply Schedule
Shows the law of supply in
chart form.
Individual Supply Schedule
Price Per Pound of Tomatoes
Quantity Supplied
2.00
50
1.75
40
1.50
30
1.25
20
1.00
10
.75
0
Supply Curve
Shows the supply schedule in a
graph form.
Factors Affecting Supply
• Input costs – the price of the resources used to
make products
• Labor Productivity – the amount of goods and
services that a person can produce in a given
time.
• Technology – new discoveries in the production
process means new manufacturing techniques.
• Government Action (excise tax) – a tax on the
production or sale of a specific good or
service.
• Producer Expectations – the expectation of a
products price rising or falling will affect how
much that producer is willing to produce.
• Number of Producers – an increase in the
number of producers of a certain product will
increase demand.
Costs of Production
• At my pizzeria I charge 12.00 for a large pizza.
• It cost me (overhead, fixed + variable costs)
4.00 to make a large pizza.
• What is my overhead?
Production Cost Schedules
• Remember schedules in economics are charts.
• Product Cost Schedule will show you the
relationship between labor and production.
Terms to Know
• Marginal Product – the change in total
product that results from hiring one more
worker.
• Specialization – each worker being hired
focuses on a particular part of production
• Diminishing returns – each new worker can
actually cause a decrease in marginal product
Product Schedule for making Pizza
Number of workers
Total Product
Marginal Product
0
0
0
1
3
3
2
7
4
3
12
5
4
19
7
5
23
4
6
21
-2
As an owner what are your costs?
• Fixed costs – examples include mortgage,
insurance, utilities
• Variable costs – wages, more material or
overhead if production goes up
• Total costs – the sum of fixed and variable
costs
Terms to Know
• Marginal Costs – additional costs of producing
one more item
• Marginal Cost is calculated by dividing the
change in total cost by the change in total
product.
Production Costs Schedule
# of
Workers
Total
Product
Fixed Costs
Variable
Costs
Total Costs
Marginal
Costs
0
0
40
0
40
---
1
3
40
30
70
10
2
7
40
62
102
8
3
12
40
97
137
7
4
19
40
132
172
5
5
23
40
172
212
10
6
21
40
211
251
---
How do we earn the highest profit
• Since we can stand to lose money by
producing at a rate that is not efficient, we
have to calculate how much profit we can
make before we start to produce
Simple Math!!!
• Marginal revenue – the money made from the sale of each
additional unit of output. Basically the price of an item.
• Total revenue – a company’s income from selling its
products.
Total Revenue = P x Q
• P = price / Q = quantity sold
• Calculate by multiplying total product by marginal revenue
Simple Math!!!
• Calculating profit – total revenue minus total
cost
• Profit = total revenue – total cost
Production Costs and Revenue
Schedule
# of
workers
Total
Product
Total
Costs
Marginal
Costs
Marginal
Revenue
Total
Revenue
Profit
0
0
40
----
----
0
-40
1
3
70
10
12
36
-34
2
7
102
8
12
84
-18
3
12
137
7
12
144
7
4
19
172
5
12
228
56
5
23
212
10
12
276
64
6
21
251
----
12
252
1
$$$$$$$$$$$$$$$
• Profit Maximizing Output – level of production
at which business realizes the greatest
amount of profit.
• Marginal Revenue = Marginal Costs
• This is where you want to be and stay!!!!!!!!!
Elasticity of Supply
• Elasticity of supply – a measure of how
responsive producers are to price change.
• If a change in price leads to a change in
quantity supplied, the supply is elastic.
• If a change in price leads to a very small
change in quantity supplied, the supply is
inelastic.
Examples
Factors of Elasticity
• The ability of a company to change production
to respond to price changes.
• Given enough time most companies will make
their supply more elastic by expanding or
downsizing.