Chapter 5 SUPPLY .

Chapter 5SUPPLY

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SupplySupply – the amount of goods available

Law of Supply – the higher the price, the larger the quantity produced

Quantity Supplied – how much of a good is offered for sale at a specific price

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Supply Schedule

Supply Schedule – table that demonstrates a relationship between price and quantity supplied for a specific good

Market Supply Schedule

All the supply schedules of individual firms add together

Shows relationship between prices and total quantity supplied by all firms in a particular market

Supply Graph

Graphical representation of a supply schedule

Illustrates the law of supplyAny change in

price moves you along the curve

Changes in SupplyAny factor other than price affects a firm’s ability to supplyCurve will shift

Bad for business, supply curve shifts leftIncreased costs

Good for business, supply curve shifts right Decreased costs

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Factors Affecting Supply

1. Number of sellers : more sellers means greater supply

2. Expectations - will the economy

grow or weaken?3. Technology – lowers costs

4. Input prices –if input costs rise, supply decreases as profits fall

Government Intervention

Gov’t can affect costs and supply through policySubsidies : gov’t payment to support a business or market

Taxes: increase or lower costsRegulation: increases costs

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Supply in the Global Economy

Global supply depends on the policies and stability of foreign countriesExternal situations in other countriesDisrupt supply chains

Import restrictions reduce supply

Elasticity of Supply

Measure of how suppliers respond to a price change

Elasticity – supply is very sensitive to price changes

Inelastic – supply is NOT sensitive to price changes

Elasticity of SupplyA supplier’s elasticity is typically dependant upon their ability to react, not so much their willingness.

The greatest factor that affects a producer’s elasticity is time horizonAccording to the law of supply a producer wants to

supply more if prices rise, but can they?

Costs of Production

How many workers should a firm hire?

How much should a firm produce?

How productive is each worker? Marginal Product of Labor – change in

output per workerIncreasing Marginal Returns – more output per worker (specialization)

Decreasing Marginal Returns – the point at which adding more workers decreases returns

Production CostsFixed costs –

have to be paid no matter whether a firm produces or not rent, a loan

Variable costs – may change with the amount produced(electric bill) – raw materials/labor

Total Cost – fixed + variable costsOperating Cost - the daily cost

running a business

OutputProfit = total revenue minus total costs

MR=MC Optimal level of output to ensure profit

Firms will produce until the marginal cost equals the marginal revenue guaranteeing that no more profit can be made

Marginal revenue – additional income from producing one more unit

Marginal cost – additional cost from producing one more item.

MR=MCBecause costs rise as firms increase

output, a firm must find where the curves meet

Equilibrium & StabilityWhen the supply and demand curves meet or intersect the market reaches a clearing price or equilibriumIt is considered stable and balanced At this point the quantity that buyers

demand is equal to the quantity producers supply

Ceilings and FloorsPrice ceiling is a legal

maximum price that can be chargedControls on Rent Binding is below equilibrium

Price Floor is a legal minimum priceMinimum wageBinding is above equilibrium

Are these tactics beneficial?

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