Supply

Complements in Production

goods that must be produced together

cost of production

marginal cost

Market supply with a small number of sellers

Lower Supply curve (Greater prices at a given quantity supplied)

height of supply curve

Marginal cost

Market supply with a large number of sellers

Greater Supply curve (Lower prices at a given quantity supplied)

The Law of Supply

Individual Supply Curve is Upward-Sloping; each item brings a higher price, selling more would bring more profit!

Substitute in Production

a good that can be produced in place of another good; if there are alternative uses of input, these inputs could be substituted for other goods

Example of shifter 4: expectations

-If we expect future prices to increase, we will decrease supply today so we can supply for higher price in the future. - If we expect the prices to decrease in the future, we will increase supply today to sell at a higher price.

Perfect Competition

1. All firms in the industry sell an identical good (same good) 2. There are many buyers and sellers, each of whom is small relative to to the size of the market (small) (not all markets are perfectly competitive but per competition is the base model)

Shifter 1: INPUT PRICES

1. Cost more to produce a product/service = decrease in supply 2. Cost less to produce a product/service = increase in supply

Upward Slope of Market Supply Curve because:

1. Higher price leads individual businesses to supply larger quantities 2. New businesses enter the market and ell positive amounts

Shifter 2: PRODUCTIVITY AND TECHNOLOGY CHANGES

1. More output with same amount of inputs 2. Can produce same output with less inputs causes lower marginal cost per unit

Shifts in supply curve

1. change in marginal cost for a given unit 2. change in the quantity that the market wants to sell at each price

supply vs quantity supplied

A change in supply and a change in quantity supplied are different things. The first is shown graphically as a movement of a supply curve while the second is shown as a movement along a curve. The first is caused by changes in costs and incentives that change how much a producer can and will produce at a given price.

Market Supply

Add up all individual supply curves; graph plotting the total quantity of an item supplied by a market

supply curve =

marginal cost curve

Reason 2: Rising Input Costs

As BP produces more, they need to purchase more inputs, which might increase the unit costs of those inputs

Example of substitutes in production

BP can decide if they want to use their oil to produce gas or diesel fuel. Diesel is selling at higher prices so diesel is more profitable. Therefore, they will produce more diesel over gasoline

Example of complements in production

Because of climate change, decrease in supply of gasoline, so also decrease in supply of propane. ?

Supply shift 5: THE TYPE AND NUMBER OF SELLERS

Because the entry and exit decisions of businesses are driven by expected future profits, any factor that changes expected future profits will change the number of suppliers in the market: -if new business enter the market, supply increase -if businesses shut down, supply decreases

Cost-Benefit Principle for Supply

Compare MB (price) to MC for one more gallon

Fixed Cost

Don't vary with output and included in marginal cost Ex: oil rig (already built so so it is fixed / pay for it once)

What leads to identical prices charge by all firms:

Ex: The market price for gas is $2 per gallon but BP wants to charge $2.50 - people wouldn't go to BP since gas is so high

A beach resort in Bali builds 24 villas with private pools. They also establish two restaurants using state-of-the-art equipment (such as multipurpose ovens, freezers, and food processors). Meals are prepared using organic, locally sourced vegetables and meat. The hotel also uses water from the town supplier. Based on this scenario, what are the variable costs for the beach resort?

Organic Vegetables and water

Shifter 4: Expectations

Price changes in the future: -think storable goods or inventory changes -BP has oil stored in the ground - pump today or tomorrow?

Marginal Principle for Supply

Should BP supply one more gallon?

Shifter 3: PRICES OF RELATED OUTPUTS

Substitute in Production & Complements in Production

Reason 1: Diminishing Marginal Product

The marginal product of an input declines as you use more of that input

Variable Cost

Vary with output and included in marginal cost Ex: employees

The opportunity cost principle

When determining the marginal cost, you should compare the cost of production to its next best option - not producing

Price-taker

an actor who charges the market price and whose actions do not affect the market price (can be buyers or sellers); opposite of mcdondals

marginal product

increase in output from an additional unit of input

increase in input prices causes

marginal cost (cost of production) increases so SUPPLY DECREASES

decrease in input prices causes

marginal cost (cost of production) so SUPPLY INCREASES

increase in tech or productivity causes

more output with same amount of inputs causing lower MC per unit - INCREASE IN SUPPLY

decrease in supply

shift left; ex: quantity supplied decreases

increase in supply

shift right; ex: wages went down so input (employees) went down so marginal cost went down

Anything that changes the cost of production (marginal cost) will...

shift the supply curve