Chapter 5: Supply

A supply curve relates the quantity supplied with changes in price

Upward sloping (positive slope)

Reflects the direct relationship between quantity supplied and price

Two reasons for upward slope:

1. Rising marginal costs as output increases

2. New suppliers are attracted by higher prices

Change in Quantity Supplied: Changes in price result in movement along the supply curve

Change in Supply: Changes in something other than price result in a shift in the supply curve

Δ$ => ΔQS (movement along)           Δ~$ => ΔS (shift)

Factors that Change Supply (shift the supply curve):

· Input costs change (resources and materials change in price)

Input costs go down, shift supply right

Input costs go up, shift supply left

· Productivity changes

      Productivity increases, unit costs decrease, shift supply right

Productivity decreases, unit costs increase, shift supply left

· Technology changes

New technology decreases unit costs, shift supply right

· Government regulation changes

Regulations increase production costs (tax), shift supply left

Regulations decrease production costs (subsidy), shift supply right

· Expectations change

If price is expected to rise in future, shift supply left now

· Number of sellers changes

Number of sellers increases, shift supply right

Number of sellers decreases, shift supply left

Elasticity of supply indicates how responsive quantity supplied is to price changes

Steep supply curves = inelastic supply

Flat supply curves = elastic supply

Factors that determine elasticity:

Elastic Inelastic

Ease of entry into market Barriers to entry

Time to adjust exceeds production cycle Time to adjust less than production cycle

Test for supply elasticity:

Percentage change in quantity supplied is greater than the percentage change in price, supply is elastic

Percentage change in quantity supplied is less than the percentage change in price, supply is inelastic

Percentage change in quantity supplied is equal to the percentage change in price, supply is unit elastic

THE FOLLOWING IS TESTED WITH CHAPTER 3

Production Function relates how various amounts of input (labor) affect total output (total product)

•     Stage 1: rising marginal product (need to expand production)
•     Stage 2: diminishing marginal product (should produce in this stage)
•     Stage 3: falling marginal product (producing too much)

Production Costs

 Fixed Costs + Variable Costs = Total Costs

Fixed: 

          Research and Development

          Plant

          Equipment

          Salaried Employees

          Borrowing

Variable:

          Production materials

          Utilities

          Hourly Wages

Law of Diminishing Returns: As variable resources are added to a fixed amount of other resources, the marginal rate of production decreases (diminishing marginal returns)

Marginal Cost: The cost of producing the next unit  

Marginal Revenue: The income received from selling the next unit

How much should a business produce?

Somewhere in Stage ___________

At the point where Marginal Revenue ______ Marginal Cost

This output is known as the _________________________ output.

The Firm

The Market