Download Chapter 5

Supply
Section 1
SUPPLY
Supply - The amount of
goods produced at
different prices
Law of SUPPLY:
The higher the price, the
greater the quantity supplied
Quantity Supplied – the term
used to describe how much of
a good is offered for sale at a
specific price
SUPPLY EXPLAINS THE
BEHAVIOR OF SELLERS or
PRODUCERS IN A MARKET
When looking at supply, we are
concerned with OUTPUT (how
much you can produce)
IT HAS NOTHING TO DO WITH
YOU!!!
PRICE
P
Q
When price goes
up,
quantity
QUANTITY
supplied by firms
goes up
P
Q
When price goes
DOWN
__________
quantity supplied
by firms goes
DOWN
__________
Supply or Quantity Supplied?
Quantity supplied  the number of goods
offered for sale at a specific price
Eg.: at $14.99 Disney is willing and able to supply
10,000 Hannah Montana CDs per day (QUANTITY
SUPPLIED)
The SUPPLY for Hannah Montana CDs is how
many CDs Disney would make to sell at different
prices.
SUPPLY HAS NOTHING TO DO WITH BUYERS!!!!!!
The DEMAND is
how many
Hannah Montana
CDs deranged
tween fans will
buy at various
different prices!
DEMAND DOES
NOT AFFECT
SUPPLY! PRICE
DOES!
SUPPLY SCHEDULE
Individual:
a table that
lists the
quantity of a
good a seller
will supply at
each price
It shows the
relationship
between price
and quantity
supplied
PIZZA
(week)
Price
$1.00
1.50
2.00
2.50
3.00
****** all things constant
Quantity
1
2
3
4
5
P
S
$3.00
2.50
PIZZA
2.00
(week)
1.50
Price
$1.00
1.50
2.00
2.50
3.00
1.00
Quantity
0
1
2
3
4
5
1 2 3 4 5
Individual
Supply Curve
Q
P
$3.00
PIZZA
(week)
Price
$1.00
1.50
2.00
2.50
3.00
S
2.50
2.00
Quantity 1.50
100 1.00
0
200
300
400
500
100 200 300 400 500
Q
Market
Supply Curve
Elasticity of Supply
Elasticity of Supply – A measure of the
way suppliers respond to a change in
price
Elastic > 1
Inelastic < 1
Unitary Elastic = 1
Elasticity of Supply and Time
Short term
Example 1 Orange growers – can’t
just grow more oranges (that takes
years)
inelastic
Example 2 Hair Cuts – salon can stay
open later or hire more people
elastic
Costs of Production
Chapter 5, Section 2
Law of Supply
The Law of Supply states that
producers will offer more goods
as prices go up and fewer goods
as prices go down. But, suppliers
must decide how much to
produce. Entrepreneurs consider
marginal benefits and costs when
deciding how much to produce.
Labor & Output
The relationship between labor and
output is how many workers get
hired and how much gets
produced.
Marginal Product of Labor: The
change in output from hiring one
additional unit of labor.
Marginal Product of Labor
Labor (# of
workers)
Output
(beanbags per
hour)
Marginal Product
of Labor
0
0
--
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
Increasing Marginal
Returns
A level of production in
which the marginal
product of labor
increases as the
number of workers
increases.
Specialization leads to
more production.
Labor (#
of
workers)
Output
(beanbag
s per
hour)
Marginal
product
of labor
0
0
--
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
Diminishing
Marginal Returns
A level of
production in which
the marginal
product of labor
decreases as the
number of workers
increases.
The benefits of
specialization are
still increasing total
output but at a
decreasing rate.
Labor (#
of
workers)
Output
(beanbag
s per
hour)
Marginal
product
of labor
0
0
--
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
Negative Marginal
Returns
This situation
occurs when
adding an
additional worker
decreases total
output.
Example: Too
many workers can
get in each other’s
way and slow
everything down.
Firms rarely let this
happen.
Labor (#
of
workers)
Output
(beanbag
s per
hour)
Marginal
product
of labor
0
0
--
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
Production Costs
Paying workers and
purchasing capital are all
costs of producing goods.
Two categories:
Fixed costs
Variable costs
Fixed Costs
A Fixed Cost is a cost that does
not change no matter how much
of a good is produced.
Equipment
Building/ rent
Repairs
Property taxes
Salaries
Variable Costs
A Variable Cost is a cost that
rises or falls depending on
how much is produced.
Raw materials
Labor
Electricity
Heating
Total Cost = Fixed Costs + Variable
Costs
Beanbag
s (per
hour)
Fixed
Cost
Variable
Cost
Total
Cost
(fixed
cost +
variable
cost)
Marginal
Cost
Marginal
Revenue
(market
price)
Total
Revenue
Profit
(total
revenuetotal
cost)
0
$36
$0
$36
--
$24
$0
$-36
1
36
8
44
$8
24
24
-20
2
36
12
48
4
24
48
0
3
36
15
51
3
24
72
21
4
36
20
56
5
24
96
40
5
36
27
63
7
24
120
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
Marginal Cost is the cost of producing one more unit of a
good.
Beanbag
s (per
hour)
Fixed
Cost
Variable
Cost
Total
Cost
(fixed
cost +
variable
cost)
Marginal
Cost
Marginal
Revenue
(market
price)
Total
Revenue
Profit
(total
revenuetotal
cost)
0
$36
$0
$36
--
$24
$0
$-36
1
36
8
44
$8
24
24
-20
2
36
12
48
4
24
48
0
3
36
15
51
3
24
72
21
4
36
20
56
5
24
96
40
5
36
27
63
7
24
120
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
Setting Output: A firm’s basic goal is to maximize profits
Profit = Total Revenue – Total Cost
Beanbag
s (per
hour)
Fixed
Cost
Variable
Cost
Total
Cost
(fixed
cost +
variable
cost)
Marginal
Cost
Marginal
Revenue
(market
price)
Total
Revenue
Profit
(total
revenuetotal
cost)
0
$36
$0
$36
--
$24
$0
$-36
1
36
8
44
$8
24
24
-20
2
36
12
48
4
24
48
0
3
36
15
51
3
24
72
21
4
36
20
56
5
24
96
40
5
36
27
63
7
24
120
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
Responding to Price Changes: If the price of beanbags rose to
$37 the firm would increase production to 12 beanbags.
Beanbag
s (per
hour)
Fixed
Cost
Variable
Cost
Total
Cost
(fixed
cost +
variable
cost)
Marginal
Cost
Marginal
Revenue
(market
price)
Total
Revenue
Profit
(total
revenuetotal
cost)
0
$36
$0
$36
--
$24
$0
$-36
1
36
8
44
$8
24
24
-20
2
36
12
48
4
24
48
0
3
36
15
51
3
24
72
21
4
36
20
56
5
24
96
40
5
36
27
63
7
24
120
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
Shut down Decision
A firm is losing money when the market
price is so low that the factory’s total
revenue is lower than its total costs.
When should the firm shut down???
If the total revenue is more than the variable
costs, the factory should remain open.
Example:
Total revenue of 5 bean bags $35 - Variable costs
$27
= $8 to spend on fixed costs
So, the owner can put the $8 towards the fixed costs
that the owner would have to pay regardless.
Changes in Supply
CHAPTER 5, SECTION 3
Input Costs
Input Costs: Any change
in the cost of an input used
to produce a good.
Raw material
Machinery
Labor
Effect of Rising Input
Costs
The supply curve will shift to the left,
indicating that the supply has decreased.
The rising cost of inputs effect the
relationship between marginal revenue
(price) and marginal cost.
Marginal cost should remain lower than the
marginal revenue for the firm to stay in business.
If there is a rise in input cost, supply will go
down.
Technology
Technology lowers input costs.
Thus, technology increases
supply.
As the result of technology, the
supply curve shifts to the right.
Example: Robots replace workers.
Government Influence on
Supply
The government can raise
or lower the cost of
producing goods in THREE
ways:
Subsidies
Taxes
Regulation
Subsidies
A subsidy is a government
payment that supports a business
or market.
It decreases production costs.
Therefore, supply increases and the
supply curve shifts to the right.
Example: Milk
Excise Tax
An excise tax is a tax on the
production or sale of a good.
It increases production costs.
Therefore, supply is decreased,
and the supply curve shifts to
the left.
Examples: Cigarettes, alcohol
Regulation
A regulation is a government
intervention in a market that
affects the price, quantity, or
quality of a good.
It increases production costs.
It reduces supply, and the supply
curve shifts to the left.
Examples: Cars/unleaded gasoline
Other Influences on
Supply
Future Expectations
Expectations of higher prices will reduce supply now
and increase supply later
Expectations of lower prices will increase supply now
and decrease supply later
Number of Suppliers
If more suppliers enter the market, the supply of
goods will rise. The supply curve shifts to the right.
If some suppliers stop producing a good, the supply
will decrease. The supply curve shifts to the left.