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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.