Download HOLT: Economics

HOLT: Economics
Chapter 4
Supply
“These documents are being distributed for educational discussion purposes only. They do not reflect any attempt by the North
East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions
expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect
those of the NEISD, its trustees, administrators or teachers.”
Section 1: Nature of Supply
• To meet consumer’s demand, producers
deliver goods and services to the
marketplace
• Producers make things in time to meet the
demand for them
• Ex. Factories make winter coats in the
summer and swim suits in the winter so
stocks can be in stores at the right time
Supply
• Supply is the quantity of goods and
services that producers are willing and
able to offer at various possible prices
during a given time period
• Quantity supplied is the amount of a good
or service that a producer is willing to sell
at each particular price
Law of Supply
• In our free enterprise system, price is the key
factor affecting not only the quantity demanded
but also the quantity supplied
• Quantity supplied is directly related to the prices
that producers can charge for their goods and
services
• The Law of Supply states that producers supply
more goods and services when they can sell
them at higher prices and fewer goods and
services when they must sell them at lower
prices
Mixed Signals
• Signals to producers are the opposite of
the signals to consumers
• Low prices signal consumers to buy more
while low prices signal producers to
produce less
• High prices signal consumers to buy less
while high prices signal producers to
produce more
Money, Money, Money
• Higher prices will encourage producers to
produce more
• Lower prices will encourage producers to
produce less
• Why do they do this?
• Their actions are based on a profit motive,
the desire to make money
Profit Motive
• The amount of money remaining after
producers have paid all of their costs is
called profit
• A business makes a profit when revenues
are greater than costs of production
• Costs of production include wages and
salaries, rent, interest on loans, electricity,
raw materials and anything else it takes to
make a product or provide a service
• Revenue – Costs of Production = Profit
Signals in the Marketplace
• High demand for a good or service signals
other producers to get in the market to
produce similar products/services
• Low demand for a good or service signals
producers to get out of the market and/or
cut production
• Remember, low demand is typically
followed by prices going down
• Profits go down at the same time
What follows low demand?
• Remember, low demand is typically
followed by prices going down
• Profits go down at the same time
• Low demand, and therefore low profit
causes producers to cut production
• It also signals others who produce a
similar product (the competition) to cut
production levels too
Supply Schedules
• High Prices! I think I will produce more…
This supply
schedule lists
the quantity of
a product that
producers are
willing to
supply at
various market
prices
Observe
that the
higher the
price, the
more
producers
are willing
to make
(profits
increase)
The supply
curve plots
on a graph
the
information
from a
supply
schedule
Elasticity of Supply
• Elasticity of supply is the degree to which
price changes affect the quantity supplied
• A products supply, like demand, can be
either elastic or inelastic
Elastic Supply
• Elastic supply exists when a small change
in price causes a major change in quantity
supplied
• Products with elastic supply usually can be
made….
• Quickly
• Inexpensively
• Using a few, readily available resources
Elastic Supply Curves
• T-shirts, posters & other
sports memorabilia are
good examples of goods
with elastic supply
• When a team wins, within
hours or days stores are
flooded with souvenir
merchandise
• Remember: Quick to
produce, inexpensive,
using readily available
resources
Inelastic Supply
• Inelastic supply exists when a change in a
goods price has little impact on the
quantity supplied
• A product usually has an inelastic supply if
production requires a great deal of…
• Time
• Money
• Resources that are not readily available
Examples of Inelastic Supply
• Gold-Rare, expensive to mine, requires
lots of time to refine or purify
• Fine Art
• Space Shuttles
• Labor intensive, expensive. Costs for
these items tends to be expensive
Dreamliner
Perfectly Inelastic Supply Curve
• Example: A builder has
only 10 lots in a subdivision
• No new lots can be created
(zoning laws)
• If demand is high the
builder can charge a higher
price for each lot
• If demand is low the builder
might lower the price of
each lot, however…..
• No new lots can be created
so supply is inelastic
Sect. 2: Changes in Supply
• Like demand curves,
supply curves illustrate a
products market at a
specific period of time
(snapshot)
• Because the snapshot is
taken at a specific period
in time the only factor
affecting quantity
supplied is price
• Notice that only price and
quantity supplied is
graphed
Supply Curves Shift Too
• Supply curves examine only price &
supply at a given time (snapshot)
• However supply is affected by other nonprice factors over time
• Over time a new snapshot needs to be
taken
• The new snapshot can show a shift in the
entire supply curve (up or down)
Shift In The Supply Curve
Supply can
increase or
decrease at
every level
over time
The red curve
is the original
curve
Non-Price Factors
• Over time non-price factors can affect supply
• These are called determinants of supply
•
•
•
•
•
Prices of resources
Government tools
Technology
Prices of related goods
Producer expectations
• A change in one of these can cause a change in
the overall supply of a product
Price of Resources
• A resource is anything used in the
production of a good or service
• Examples are:
• Workers wages/benefits
• Raw materials
• Rent/mortgage payments
• Utilities
• Much more….
Changes of Resource Costs
• When resource costs go down,
businesses can produce more with the
same costs
• Producing more with the same costs
increases a businesses profit
• This encourages businesses to expand
supply even more
• Opposite is true if resource costs go up
Government Tools
• A tax is a required payment of money to
the government to help fund government
services
• Businesses must pay taxes on materials
they use, the property they own, and the
profits they make
• Taxes increase production costs just like
rent or raw materials do
• Taxes make production less profitible
Another Government Tool
• Payments to private businesses by the
government are called subsidies
• Ex: The government might want to
encourage farmers to grow more wheat so
food supplies will remain at a certain level
• Farmers grow more wheat (to get the
subsidy) instead of another unsubsidized
crop
Another Government Tool
• To protect the public the government
passes many kinds of regulations, or rules
about how companies conduct business
• Ex. Strict pollution control, discrimination
• Following regulations can increase costs
of production
• Loose regulations tend to increase supply
• Strict regulations tend to decrease supply
Technology
• Using technology can make production
more efficient and less expensive
• Think Fords assembly line
• Lower production costs created by using
technology encourages producers to
supply more
• Technology is not FREE
• Initial costs can be high (research and
development) but eventually savings occur
Competition
• Competition tends to increase supply
• Lack of competition tends to decrease supply
• Popularity of some items (video games) makes
other businesses produce similar products so
they can make a profit too
• Supply increases
• Each producer competes for a share of the
market
• Sometimes too much is produced resulting in an
oversupply and some producers leave the
market
Prices of Related Goods
• The supply of one good can be connected
to the supply for its related good
• If the price of wheat drops because
subsidies cause an oversupply in the
market a farmer growing wheat might
switch to corn which suddenly becomes
more profitable
Producer Expectations
• Producers make production decisions
based on their expectation that sales
prices of their products will rise or fall
• If they expect prices will rise they will
increase production to make more profit
• If they expect prices will fall they will
decrease production to limit their losses
Sect. 3: Making Production
Decisions
• The amount of goods/services that
companies are willing to produce is
affected by…
• The laws of demand and supply
• The elasticity of demand and supply
• Shifts in the demand and supply curves
Productivity
• Productivity is the amount of goods and
services produced per unit of input
• Productivity tells business owners how
efficiently their resources are being used
in production
• Business owners examine the inputs to
production to see if they can get more
production by remixing inputs
• Ex. More automation less manual labor
Total Product
• All of the product a
company makes
during a given period
of time is called its
total product (total
output)
• Marginal product is
the change in output
generated by adding
one more unit of
input
Law of Diminishing Returns
• The Law of Diminishing Returns states
that when one input is added to a fixed
supply of other resources, productivity
increases up to a point
• At some point marginal return begins to
diminish
• Eventually, it will result in a negative
marginal product
Examining Diminishing Returns
At some point
production goes
down as new
inputs are
introduced
Observe what
happens with the
introduction of
the 12th worker
Also notice that
this schedule
examines only
one input, labor
Good managers
would look at more
than one input to
maximize
production
3 Stages of Productions
Increasing Marginal Returns:
Production increases with the
addition of each additional unit of
input
Diminishing Marginal Returns:
Production continues to increase,
but at a lower rate than previous
additional inputs added
Negative Marginal Returns:
Production begins to decrease as
each additional input in added
Two Categories of Costs of
Production
• Fixed Costs—(also called Overhead) Those
costs that do not change no matter how many
goods are made
• Rent, interest on loans, insurance premiums, property taxes,
salaries, depreciation on equipment
• Even if the company produces nothing, these costs continue
• Variable Costs—Those costs that increase as
production increases
• Wages, raw materials, utilities
• These costs are zero until production begins and increase as
production increases
• Fixed Costs + Variable Costs = Total Costs
How much can 1 more cost?
• Marginal Costs—the additional costs of
producing one more unit of output
• Being able to calculate marginal costs
allows businesses to determine the
profitability of increasing or decreasing
production levels
References
• Holt Economics; Texas Edition: 2003, Holt, Rinehart and
Winston,