Supply

Chapter 5

Whats the Difference?

The information is VERY similar to the chapter on
demand but with a few changes
One major difference is that you must think like a

business, not a consumer.

You must think about making money rather than

spending money.

You are already a supplier. What do you supply?

Your labor

Whats the Difference?

As a reminder, DEMAND is the willingness and

ability to purchase goods/services

Supply is the willingness and ability to

produce and sell

Different Laws
The Law of
Demand

The Law of
Supply

P Qd
P Qd

P Qs
P Qs

What Type of Relationship is

this?

What Type of Relationship is

this?

Inverse

Direct

Schedule and Chart

Schedule
Price

QS

1
2
3
4

1
2
3
4

P
r
i
c
e

QS

Different Supply Curve

What is quantity supplied?
The number of units produced and offered for
sale at a specific price
Can the supply curve ever be completely vertical?

When?
Yes
When no more can be

P
r
produced
i
c
e

Give an example.
Concert Tickets and Old Cars

QS

Shifting the Curve

When supply increases, the supply curve

SHIFTS to the right!

P
r
i
c
e
Quantity
Supply

Shifting the Curve

When supply decreases, the supply curve

SHIFTS to the left!

P
r
i
c
e
Quantity
Supply

Change in Supply Vs. Change in

Quantity Supplied
P
r
i
c
e

C
A
B

Quantity
What is changing when there is movement along a
Supply
curve?

PRICE When the producer offers it to the consumer

7 Factors that Shift Supply Curve

1. Resource prices
Land, Labor, and Capital
Ex. Wages, Price of raw materials

2. Technology Improvements
Advancements make materials cheaper
Ex. Tractors and farming

7 Factors that Shift Supply Curve

3. Taxes
Increase = More expensive
Decrease = Cheaper

4. Subsidies
Payments by the government for certain actions
Ex. For every bushel of corn a farmer produces, they
get $2
Why might the U.S. government want to give subsidies

to farmers?

So they produce more food

7 Factors that Shift Supply Curve

5. Government Regulation
Government can increase or decrease supply
indirectly
Example: The government forces factories to

install pollution regulators on the top of all of

their smoke stacks and the business has to pay
for it.

Positive Aspects
Lower pollution

???

Negative Aspects
Business loses
money
- Raise prices
- Fire employees

???

7 Factors that Shift Supply Curve

6. Number of Sellers
More sellers More products = Cheaper
Less sellers Less products = Expensive

7. Weather
Bad Weather = Decrease Supply
Good Weather = Increase Supply

Ex. Oranges

e
R
d
n
a
t
s
o
C

e
u
n
e
v

Different Types of Costs

For everything we do there are always costs
and benefits.
Two types of costs
1. Fixed- Costs that stay the same no matter
how many units are produced
Ex.

Rent, Insurance, Taxes, Salary

Employees, etc

2. Variable- Costs that change with the

number of units produced
Ex.

etc

Materials, Utilities, Hourly Employees,

What is the Equation?

These are the equations
Total Cost= Fixed Cost + Variable Cost
TC

= FC + VC

Example: Calculate the total fixed cost, total

variable cost, and total cost for Billy Bobs
pizzeria. His costs are as follows: rent $225,
electric bill $100, hourly employee salary $300, a
new oven $400, and his salary (set) $475.
Fixed Rent, Oven, Set Salary- $1,100
Variable Bill, Hourly Salary- $400

Total Cost = $1,500

What is the Equation?

Average Total Cost = Total Cost/

Quantity
ATC = TC/Q

Example: Using the information above,

calculate the average total cost for Billy

Bobs pizzeria if he made 1,000 pizzas?
ATC = $1,500 = $1.50

1,000

Very Important Concept

Marginal Cost- The additional cost of

producing an additional unit of a good

In economic terms, marginal is another word for

additional.

The equation is
Marginal Cost = Change in Total Cost

Change in Quantity
MC = TC/Q

Example
Example: A business currently produces

50,000 cases of Mountain Dew and its total

cost is $3,000. The company then decides
to produce two more cases and the total
cost rises to $3,010. What is the marginal
cost of those two more cases?
MC = $10 / 2 = $5

Revenue

When dealing with revenue we must remember

TWO past equations
Total Revenue = Price * Quantity
Profit or Loss = Total Revenue Total Cost

Revenue
Example: Your firm has $400 in fixed costs

and $200 in variable costs and you

produce jeans for $20 and you sold 50 of
them what is your total cost, total revenue,
and do you make a profit of a loss?
Total Cost = $400 + $200 = $600
Total Revenue = $20 * 50 = $1,000
Profit/Loss = $1,000 - $600 = +400

Revenue
Marginal Revenue- The additional

revenue from selling an additional

good
The equation is
Marginal Revenue= Change in Total Revenue

Change in Quantity
MR = TR / Q

Very Important Concept

The concepts of MARINGAL COST and MARGINAL

REVENUE are crucial for business because they tell a

business
HOW MUCH OF A GOOD/SERVICE TO PRODUCE!!!
To

maximize profits, a business will produce until

marginal revenue equals marginal cost.

The RULE is
MR

MC = Produce

MR

MC = Dont Produce

?
?
?

A New Law
The Law of Diminishing Marginal

Return states that if additional units of a

resource are added to another that is fixed
in supply, then eventually the
Additional output produced will decrease

Lets do an Example

The additional output obtained by adding an additional

worker is 50 units. Each unit can be sold for $2. Is it
worth hiring the additional worker if she has to be paid
$150 a day? Why or why not?
No, because $50*2= $100, which is less than $150

Lets change the amount each unit can be sold for to

$3, is it worth it? Why or why not?

Yes, because $150=$150, which is the same

Lets change the amount each unit can be sold for to

$4, is it worth it? Why or why not?

Yes, because $200 is greater than $150