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Chapter 5
Section 3
• Just as several factors can
affect demand at all price
levels, a separate set of
factors can affect supply
supply, or shift an entire
supply curve to the left or
right.
• Any change in the cost of raw
materials, machinery, or labor
will affect supply.
• If production costs increase,
the marginal cost may become
higher than the price.
• A rise in the cost of resources will
cause a fall in supply at all price
levels because the good has been
more expensive to produce.
• A fall in the cost of resources will
cause an increase in supply at all
price levels.
• If a firm has no control over
the price, the only solution is
to cut production and lower
marginal cost until marginal
cost equals the lower price.
• Computers have simplified
tasks and cut cost in fields as
diverse as journalism, and
architecture.
• For Example- Email can be sent
and received in an instant
rather than slowly delivered
letters and expensive long
distance phone calls.
• Technology lowers costs and
increases supply at all price
levels.
• The government has the power
to affect the supplies of many
goods. Raising or lowering the
cost of producing goods, the
government can encourage or
discourage an industry, or
entrepreneur.
• One method used by
governments to affect supply is to
give subsidies to the producers of
a good, particularly food.
• A subsidy is a government
payment that supports a business
or market. The government pays
a producer a set subsidy for each
unit of a good produced.
•Governments have several
reasons for subsidizing
producers.
•Governments in developing
countries often subsidize
manufacturers to protect
young, growing industries from
strong foreign competition.
•In the past, countries such as
Indonesia and Malaysia have
subsidized a national car
company as a source of pride,
even though American and
Japanese cars were less
expensive to build.
• In Western Europe, banks and
national airlines were allowed to
suffer huge losses with the
assurance that the government
would cover their debt.
• By lowering marginal cost at all
levels of output, subsidies allow
the supply of a good to increase.
• In many countries,
governments have stopped
providing industrial subsidies
in the interest of free trade
and fair competition.
• A gov’t can reduce the supply
of some goods by placing an
excise tax on them.
• In the U.S., the federal
government subsidizes
miners, cattle ranchers,
tobacco growers, and
producers in many industries.
• An excise tax is a tax on the
production or sale of a good.
• An excise tax increases
production costs by adding an
extra cost for each unit sold.
• Excise taxes are built into the
prices of these and other
goods, so consumers may not
realize that they are paying
them.
• Excise taxes are sometimes
used to discourage the sale
of goods that the
government thinks are
harmful to the public-good,
like cigarettes, alcohol, and
high-pollutant gasoline.
• One final factor to consider
when looking at changes in
supply is the # of suppliers
in the market. If more
suppliers enter a market to
produce a certain good, the
market supply of the good
will rise.
• Like any increase in cost, an
excise tax causes the supply
of a good to decrease at all
price levels.
• Regulation- government
intervention in the market
that affects the production of
a good.
• Subsidies and excise taxes
represent ways that
governments directly affect
supply by changing revenue
or production costs.
• Governments can also raise
or lower supply through
indirect means.
• Government regulation often
has the effect of raising costs.
• Regulations such as lead-free
fuel increased the cost of
manufacturing cars and
reduced the supply. The
supply curve shifted to the
left.
• The United States imports
telephones from Japan. A
technological innovation
that decreases the cost of
producing phones would
increase the supply of
phones to the U.S. market.
• An import ban on sugar
would eliminate foreign
sugar suppliers from the
market, shifting the market
supply curve to the left. At
any price, a smaller quantity
of sugar would be supplied.
• If the government restricted
imports by establishing an
import quota, the supply
curve would shift to the left,
but the shift would be
smaller than it would be for
an absolute ban on sugar
imports.
• While government can have
an important influence on
the supply of goods, there
are also other important
factors that influence supply.
Like producer’s expectations
of future prices.
• Second, the supply of goods
increase with the number of
firms producing the good.
• If a seller expects the price of
a good to rise in the future,
the seller will store the goods
now in order to sell more in
the future.
•If the price of the good is
expected to drop in the
near future, sellers will
earn more money by
placing goods on the
market immediately
before the price falls.
•Inflation is a chronic
condition of rising prices.
During periods of
inflation the value of
cash in a person’s pocket
decreases from day to
day as prices rise.
Ch.5 Sec.3
questions
Question #1
•How does a
subsidy effect
supply?
Question #2
•Why does the
government impose
excise taxes?
Question #3
•How can
regulation affect a
producer’s output
decisions?
Question #4
•What is
regulation?
Question #5
•What does an excise
tax do for the
economy?
Question #6
•What is a subsidy
and what is its
purpose?
Question #7
•What affect does
technology have
on the economy?
Question #8
•What effects does
input cost have on the
relationship between
marginal revenue and
marginal cost?
Question #9
•Why do
governments
subside producers?
Question #10
•The numbers of
suppliers in a market
is a factor of what?