Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 5: The Law of Supply (Looking through the eyes of the Producer) “Quantity Supplied” Defined: The Quantity Supplied is the amount of a good or service that sellers are willing (motivation) and able (have resources/factors) to sell . Law of Supply Law of supply – the quantity supplied rises when the price of the good or service rises. $ = SUPPLY – As the price of a product rises, PRODUCERS will be willing to supply more. Supply Curve Price (monthly bill) Supply Curve 140 • Notice how the law of supply is reflected by the shape of the supply curve. • As the price of a good rises … ... producers supply more. 120 100 80 60 This is how much they are willing and able to sell, not how much they actually sell 5 10 15 20 25 30 Quantity (of Cell Phone Subscribers) Supply & Costs Relationship Role of Costs in Shaping the Supply Curve To understand the law of supply, we must recognize that companies need profits. •Profit occurs when revenues are greater than all costs (make more than you spend). • Revenue- money made from selling products. Role of Costs in Shaping the Supply Curve • Variable cost are cost that CAN change month to month depending on production • Ex- changes when production increases/decreases- hourly wages of workers, electricity, shipping, gas… Let us look at some examples of these costs. VARIABLE COST Role of Costs in Shaping the Supply Curve • Fixed cost- are cost that CANNOT change month to month. They are steady regardless of the amount of production. • Ex- DO NOT change when production increases/ decreases, must be paid even if no production takes place- rent, manager’s salary. Let us look at some examples of these costs. MONTHLY INSURANCE PAYMENT MANAGER’S COMPANY CAR FIXED COST Total Costs Variable Costs + Fixed Costs = Total Costs Review: •Variable Cost •Fixed Cost •Law of Supply Law of Diminishing Returns Law of Diminishing Returns As production increases, additional costs increase. – When benefits > costs: production continues – When benefits < costs: production ends Simply put, too much production can be a bad thing. Every company can reach a point where it cannot supply any more goods regardless of increases in price. LET’S LOOK AT AN EXAMPLE Elasticity of Supply Elastic and Inelastic Supply ELASTIC SUPPLY: quantity supplied is SENSITIVE to small price changes . If the marginal costs to make an additional good are low, then the producer will be more likely to produce the good if the price changes. INELASTIC SUPPLY: quantity supplied is NOT SENSITIVE to small price changes . If the marginal costs to make an additional good are high, then the producer will be less likely to produce the good if the price changes. Inelastic and Elastic Supply Curves $ (per auto) 27,000 Supply for Camries 24,000 21,000 18,000 Supply for Corollas 15,000 13,000 Quantity (per month) Elastic and Inelastic • If the market price for Supply Curves motor oil was to rise from $1.25 to $2.00, the quantity supplied in the market increases insignificantly $ 2.00 1.25 Motor Oil INELASTIC (from 7 to 8 units). • If the market price for burgers rises from $1.25 to $2.00, the quantity supplied in the market increases substantially $ 1 2 3 4 5 6 7 8 9 10 2.00 Burgers (from 1 to 8 units). • Burger supply is highly 1.25 sensitive to price changes and can be described as elastic; motor oil supply is insensitive to price changes and can be described as inelastic. Q ELASTIC 1 2 3 4 5 6 7 8 9 10 Q Elastic and Inelastic Supply Curves Price 100,000 Chopper (per unit) 75,000 1 2 3 4 5 6 7 8 9 10 Price 200 QUANTITY iPod (per unit) 125 1 2 3 4 5 6 7 8 9 10 QUANTITY Elasticity in Short Run and Long Run Short-Run - Firms don’t have enough time to adjust production in a short period of time (ex: stuck with current factory size). Supply tends to be inelastic in the short-run . Long Run - Firms have enough time to adjust in a longer period of time. (ex: build a larger factory, thus benefiting from mass producing a good). Supply tends to be more elastic in the long-run. ELASTICITY and SIZE of a FIRM If costs rise when they produce more, then why do they produce more. Which company do you think has a LOWER cost per unit (thus a larger profit margin)? OR Grandma’s Kitchen What is this called when one benefits from mass production?? ECONOMIES OF SCALE The MORE you produce/buy the LOWER the average cost per item. Changes in Supply vs. Quantity Supplied Change in “Supply” - shift OF the supply curve due to a determinate change. A shift to the right = $ Price increase in supply 8.00 A shift to the left = decrease in supply 5.00 1.00 1 5 10 Quantity Change in “Quantity Supplied” - movement ON the supply curve in response to a price change. $ Price 5.00 1.00 1 5 10 Quantity THE DETERMINANTS OF SUPPLY THE ONLY FACTORS THAT CAN CAUSE A SUPPLY CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). $ Price 8.00 5.00 1.00 1 5 10 Quantity THE DETERMINANTS OF SUPPLY 1. GOVERNMENT ACTIONS Taxes, Subsidies, Regulations 2. OUTLOOK OF FUTURE (Supplier’s Expectations) 3. SIZE OF INDUSTRY(positive relationship) 4. PRICE OF RELATED PRODUCT LINES Look at the market price of a good to determine which one to produce. 5. INPUT COSTS (inverse relationship) 6. TECHNOLOGY(positive relationship) THE DETERMINANTS OF SUPPLY Outlook of Future (positive relationship) A storm is predicted to destroy most of the seaports where most imported oil is delivered. Gas companies, expect that consumer demand after the storm will increase so they cut back on the current supply (shift left). After the storm hits and demand increases, suppliers will increase their supply until it runs out (usually because they take advantage of the higher prices). $ Price 5.00 3.00 5m 10m Quantity (gallons) THE DETERMINANTS OF SUPPLY PRICE OF RELATED GOODS THAT SHARE THE SAME RESOURCES • Look at the market price of a good to determine which one to produce. DONUT COMPANY: price of donuts decreases Less likely to produce donuts and more likely to use the dough to produce more donut holes (supply curve for rolls shifts right) THEREFORE, an increase in price of good the resources could go toward = supply curve of the other good decreases (shifts left) SUPPLY = $ THE DETERMINANTS OF SUPPLY RESOURCE PRICES (inverse relationship) As the price of resources goes $ then a supplier will the supply of a good and look for something else to make. As the price of resources goes $ then a supplier will the supply of a good because he/she is making a profit. $ LUMBER = SUPPLY HOUSE CONSTRUCTION THE DETERMINANTS OF SUPPLY TECHNOLOGY (positive relationship) Increase in technology = increase in amount supplied (shifts right) Decrease in technology = decrease in amount supplied (shift left) = T SUPPLY THE END EMAIL ME ANY QUESTIONS