Notes: Chapter 5

Defining Supply

• When discussing supply, we are thinking

about​ ( ​producers​)​, or the firm’s, point of
view.
• What is ​supply​?
• Supply is the quantities of goods sellers are
( ​willing and able​)​at different prices.
• What is the ​Law of Supply​?
• When the​ ( ​price rises​)​, supply ​increases​ and
when the ​ ( price decreases​)​, producers will
(​produce less​)
•

Directions: Draw the Law of Supply.

How does the Law of Supply work?

• Quantity supplied​ ​– describes how much of a good is offered for sale at a specific price
• The promise of increased revenues when​ ( ​prices are high​)​ ​encourages firms (​ ​to produce more​)​.
• Rising prices draw new firms into the market and add to the quantity supplied of a good.
Elasticity of Supply
• Elasticity of Supply​ ​- a measure of the way quantity supplied reacts to a ​ (​change in price​)​.
• If supply is ​ ( ​not very responsive to changes​)​ i​ n prices, it is considered ​inelastic
• A firm can’t easily change output levels
• ( ​Elastic​)​ supply is ​very sensitive to changes ​in price
• Firms are more flexible
• What affects elasticity of supply? ​Time
• Short run​ ​– a firm cannot easily change output levels = inelastic
• Example: ​ ( ​growing apples in inelastic ​)
• Long run​ ​– firms are more flexible = elastic
• Example: ​ ( ​oil change for ​)

Graphing Supply

1
Notes: Chapter 5

Labor Decisions
• Business owners have to consider how the number of workers they hire will affect their​ ( ​total,
production​).
• Marginal product of labor ​– the change in output from hiring ​ ( ​one additional unit​) ​of labor or
worker.
Marginal Returns
• Increasing marginal returns​ – occur when marginal production levels increase with new
investment
• Diminishing marginal returns​ – occur when​ ( ​marginal product levels decrease with new investment​)

• Negative marginal returns​ – occur when the marginal product of labor becomes negative
What influences supply?
1. Production cost and inputs ​- To determine the best output levels, firms determine the output
level at which​ ( ​marginal revenue is equal to marginal cost​)

•Fixed cost​ ​– cost that does not change, regardless of how much of a good is
produced. ​Examples: rent and salaries
• Variable costs​ ​– costs that rise or fall depending on how much is produced.
Examples: cost of raw materials, some labor costs
• Total cost​ –​ equals
• Marginal cost​ ​– cost of producing one more unit of a good
• Input Costs and Supply – ​change in input costs affect supply
• Ex.) raw materials, machinery or labor
• Input costs increase -> decreasing profitability and supply
• Input costs decrease -> new technology can greatly decrease costs and increase
supply
2. Government action​ - the government can encourage or discourage an entrepreneur or industry.
• Subsidies​ – ​a government payment to support a business or market. Subsidies
cause the .
• Taxes​ ​– government can​ (​reduce the supply​ )​ of some goods by placing an excise
tax on them. An excise tax is a tax on the production or sale of a good.
• Regulation​ ​– occurs when the government steps into a market to affect the
price, quantity or quality of goods. Regulation usually ( ​raises cost​)
3. Number of Suppliers ​– as companies see potential profits in an industry, the number of
producers will increase.
4. Future Expectations of Price ​– Increasing prices draws firms to the market
5. Global Economy ​– increased number of markets to sell goods, more products available at
various price points

One sentence summary:​ Summarize the lecture notes in ​one ​sentence.

When the price rises, supply increases and when the price decreases, producers will produce less.

2
Notes: Chapter 5