Supply Economics Ch. 5 Section 1 • Law of supply – Supply is the amount of goods available – Means the higher the price, the larger the quantity produced – Develops from choices of both current and new producers. – The movement of individual firms changing their level of production and firms entering/exiting the market combine to create the law of supply. • An increase in price will increase a firm’s profit. – Even the promise of higher sales will encourage more production. – Profit drives supplier’s decision • If price falls, producer is discouraged from producing as much • Profits appeals to those in the market and those deciding to join the market. • Supply schedule – Similar to demand schedule – Shows relationship between price and quantity supplied for a specific good. – Lists supply for a very specific set of conditions. – All other factors are assumed to remain constant. – A rise or fall in price of a good will cause the quantity supplied to change, but not schedule. – When an outside factor affects output a new supply schedule has to be produced. • Market supply schedule shows the relationship between prices and the total quantity supplied by all firms in a particular market. • When data points of a supply schedule are graphed it creates a supply curve or market curve. – Always rises from left to right • Elasticity of supply – Is a measure of the way suppliers respond to a change in price – Elastic: responsive to supply – Inelastic: unresponsive to supply Costs of Production Economics Ch. 5 Section 2 • Labor and Output – Business owners must always question how many workers to hire. • Must consider the # of workers that will affect total production – The more workers hired will increase output of product up to a point. • Increasing marginal returns: a level of production in which the marginal product of labor increases as the # of workers increase. – As more workers are hired the marginal product of labor is positive and promotes total output. • But product output will decrease the more workers are hired after a point. – Diminishing marginal returns: level of production in which the marginal product of labor decreases as the number of workers increases. • Reasons for the decrease in output have to do with the limited amount of capital. • Few companies hire more workers than necessary • Production Costs – Two factors have to be taken into consideration when producing goods • Fixed costs: cost that does not change, no matter how much of a good is produced. – Examples – rent, repairs, taxes, salaries • Variable costs: costs that rise or fall depending on the quantity produced – Examples – raw materials, cost of labor, electricity – To find the total cost of production add fixed and variable costs. • Setting Output – How to maximize profit is the goal behind all decisions. – Profits is the total revenue minus total cost. – Companies want to keep their marginal revenue (price) equal to or less than marginal cost. • If increase output they would get less profit. – If the product price increased then production of the product would also increase. • Shutdown decision – Total revenue vs. Operating cost • Includes variable and fixed cost – Fixed costs still have to be paid, so sometimes it is better for a company to remain in business, even if profit is not what they are hoping for. Changes in Supply Economics Ch. 5 Section 3 Input Cost • Any change in the cost of an input used to produce a good – such as raw materials, machinery, or labor – will affect supply. • A rise in the cost of an input will cause a fall in supply at all price levels because the good has become more expensive to produce. • A fall in the cost of an input will cause an increase in supply at all price levels. • Effect of Rising Costs – Suppliers set prices at levels that are equal to marginal cost (cost to make). – If inputs increase the marginal cost increases. – Marginal costs could increase higher than the price, so the business is not as profitable. – If business has no control over price, then production is cut and marginal cost until it equals the lower price. – Supply falls at each price, so the curve shifts to the left. • Technology – Input costs may drop also. – New technology lowers production costs in many industries. • Robots have replaced workers so less money is spent on salary. – Lowers costs and increases supply at all price levels, curve shifts to the right. Government’s Influence on Supply • Subsidies – Is a government payment that supports a business or market. – Reasons for using subsidies • Protect local business if supply runs out (WWII) • Protect local culture (French countryside) • Protect young businesses from foreign competition • Taxes – Excise tax is the tax on the production or sale of a good. – Increases production costs by adding an extra cost for each unit sold. – Used on the sale of products that the government thinks are harmful to the public good. • Examples: cigarettes, alcohol, etc… – Built in to the prices, not realizing you are paying them. – Because it is a cost increase, supply curve shifts left (down) • Regulation – Government intervention in a market that affects the price, quantity, or quality of a good. – Protecting the environment, safety of the public, etc… Supply in the Global Economy • A large share of goods are produced in one country and imported by another to be sold to consumers. • The supplies of goods are affected by changes in other countries. – p. 119 – bulleted list – Import restrictions Other Influences on Supply • Producers’ expectations of future prices affect their output decisions. – Store goods in order to sell more in the future. • This reduces supply now and increase supply later. – Inflation is a condition of rising prices • During periods of inflation the value of cash decreases from day to day as prices rise. • A good will still hold its value, if it can be stored for long periods of time • Supply of goods increases with the number of firms producing the good. – The more producers of a good in the market will increase the amount of that good in the market.