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.
