Supply

What is Supply?

Supply =  the amount of a product that would be offered for sale at all possible prices in the market

•          Law of Supply  = states that suppliers will normally offer more  as price goes up and less as the price goes down.     (Why?  You can make more selling expensive shirts than you can selling cheaper ones)

•          Quantity supplied:   the # of goods a producer is willing & able to sell at a certain price

•          When the price goes up, producers want to make more goods so they can make more $$; new businesses also want to start because they see the potential for making the big bucks

•          How does this work?  We make “I love Monkey” t-shirts. They cost $8 to make.  If that price doesn’t change, we can make way more profit if we sell our shirts for $20…if we have to cut the price down, we lose profits.  If we have to sell them for less than they cost to make, we lose $$

individual supply curve illustrates how the quantity that a producer will make varies depending on the price that will prevail in the market

it’s created by creating a supply schedule (just like the demand schedule) , then graphing it.

(draw an example:  We make “I love Monkey” tshirts.  I make  100 @$10, 150 @20, 200@30, 205@40, and 300@50.  The Y axis (vertical) is price, X axis (horizontal) is # of goods produced)

market supply curve illustrates the quantities and prices that all producers will offer in the market for any given product or service.   

                Made by adding together all the individual supply curves

 Supply curves always slope UPWARD;  demand curves slope down.

change in quantity supplied - the change in amount offered for sale in response to a change in price.

•          Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. 

•          If the price rises, the producer can step up production levels.

change in supply  - when suppliers offer different amounts of products for sale at all possible prices in the market.

•          Factors that can cause a change in supply: 

•          the cost of inputs;

•          productivity levels;

•          technology;

•           taxes or the level of subsidies;

•           expectations;

•           government regulations.

  

Theory of Production

deals with the relationship between the factors of production and the output of goods and services

                -based on the short run

Short run –  a period of time when a producer only has time to change one factor of production(like labor)  (ex.  Monkey Emporium hires 10 new workers)

 Long run - a period of time when a producer has time to change all factors of production  (ex.  Monkey Emporium opens new stores in Sherman Oaks and New York)

The Production Function 

•           describes the relationship between changes in output to different amounts of a single input while others are held constant.

•          Total product is the total output the company produces:

•           a production schedule shows that, as more workers are added, total product rises until the point when hiring more people will hurt business

•          Marginal product is the extra output or change in total product caused by adding one more unit of variable input.

STAGES OF PRODUCTION

Stage One  (increasing returns)

 marginal output increases with each new worker. 

Companies are tempted to hire more workers, which moves them to Stage II.

Stage Two (diminishing returns)

total production keeps growing but the rate of increase is smaller;

each worker is still making a positive contribution to total output, but it is diminishing.

Stage Three  (negative returns)

 marginal product becomes negative,

decreasing total plant output.

Cost, Revenue, and Profit Maximization

Measures of Cost

Fixed costs  - costs a  business has to pay even if it has no output.  These include management salaries, rent, taxes, and depreciation on capital goods.

Variable costs = costs that change when the rate of operation or production changes, including hourly labor, raw materials, freight charges, and electricity.

Total cost is the sum of all fixed costs and all variable costs.

Marginal cost is the extra (variable) costs incurred when a business produces one additional unit of a product.

A self-service gas station is an example of high fixed costs with low variable costs.  The ratio of variable to fixed costs is low.

E-commerce is an example of an industry with low fixed costs.

Measures of Revenue

Total revenue is the number of units sold multiplied by the average price per unit.

Marginal revenue is the extra revenue connected with producing and selling an additional unit of output.

Marginal Analysis -  comparing the extra benefits to the extra costs of a particular decision.

The break-even point is the total output or total product the business needs to sell in order to cover its total costs.

•          Businesses want to find the number of workers and the level of output that generates maximum profits.  The profit-maximizing quantity of output is reached when marginal cost and marginal revenue are equal.