Chapter 5

Supply

Law of Supply

• Because the producer is receiving payment more will be offered at higher prices. • Suppliers will normally offer more for sale at high prices and less at lower prices.

The Supply Schedule

• The only real difference between a supply schedule and a demand schedule is that prices and quantities now move in the same direction for supply • can also be illustrated graphically as an upward-sloping line

Change in Quantity Supplied

• Suppliers have some control over the price • Ultimately the final interaction between supply and demand determines the price.

• Again if the price changes then it is a movement along the supply curve.

Change in Supply

• Appears as a SHIFT in the Supply curve.

• Decrease in Supply – Shift to the Left • Increase in Supply – Shift to the Right

Cost of Inputs

• A change in the cost of inputs can cause a change in supply • If the price of the inputs drops, producers are willing to produce more at each price

Productivity

• If workers work more efficiently, productivity should increase • The result is more is produced at every price – supply shifts right • if workers are unmotivated, untrained, or unhappy, productivity could decrease – Supply shifts left

Technology

• New technology tends to shift the supply curve to the right • New Technology can affect supply by lowering the cost of production or by increasing productivity

Taxes and Subsidies

• Firms view taxes as costs • If the producer’s inventory is taxed or if fees are paid the cost of production goes up. • Taxes shift supply left

Taxes and Subsidies

• A

subsidy

is a government payment to encourage or protect a certain type of economic activity • Subsidies lower the cost of production • Subsidies shift supply right

Expectations

• Expectations about the future price can affect the supply curve • If producers think the price of their product will go up, they may withhold some of the supply • If producers may expect lower prices they may try to produce and sell as much as possible right away

Government Regulations

• When the government establishes new regulations, the cost of production can be affected • Increased government regulations restrict supply – supply curve to shifts to the left • Relaxed regulations allow producers to lower the cost of production – Shift to the right

Elasticity of Supply

• If a small increase in price leads to a large increase in output, supply is elastic.

• If the quantity supplied changes very little, supply is inelastic

Determinants of Supply Elasticity

• If a firm can adjust to new prices quickly, then supply is likely to be elastic.

• If adjustments take longer, then supply is likely to be inelastic.

Theory of production

• The relationship between the factors of production and the output of goods and services.

• Short run vs Long run • Some things take longer to change and can only be changed in the long run.

Short run vs Long run

• Short run – only the variable inputs can be changed • Long run – any input, fixed or variable, can be changed • hiring 300 extra workers is a short-run adjustment • building a new factory, this is a long-run adjustment

Stage 1 - Increasing

• With only a couple of workers not all resources are used • Some machines are idle • Each extra worker adds more than the previous

Stage 1 - Increasing

• Workers begin to specialize and work as a unit • This stage is characterized by increasing marginal returns

Stage 2 - Decreasing

• Eventually the plant is at full employment • All resources are maximized • Adding more workers still increases production • But each work adds less than the previous • This is called decreasing marginal production

Stage 3 - Negative

• Finally there are just too many workers • They get in the way and slow down production • Each worker actually subtracts from total production • This is call negative marginal product