Download understanding supply - Bibb County Schools

LAW OF SUPPLY
PRICE
GOES
DOWN
Quantity OF
SUPPLY
Goes
DOWN
Price
Goes Up
Quantity Of
Supply Goes
Up
UNDERSTANDING SUPPLY



Supply is the amount of goods available.
Law of Supply – The higher the price the larger
the quantity produced.
Example – When do parents buy kids the most?
 Suppose that Cabbage Patch dolls sell for
$10.00 ea. from January to August but the
demand is low therefore producers make a
small quantity.
 For Christmas lots of children want Cabbage
patch dolls. Christmas is a hot buying season
therefore dolls now sell for $20.00 ea.
Producers make more because the profit
motive is higher.

Quantity Supplied describes how much
of a good is offered for sale at a specific
price.


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

When the price of goods rise firms
produce more in order to earn more
profit.
The key to profit is that they utilize
almost the same labor & output cost.
The rise in the price of goods causes
new firms to enter into the market.
Firms changing their level of output and
new firms entering into the market
combine to create the Law of Supply.
Bottom Line – The more money to be
made the higher the supply becomes.


If a firm is making a profit an increase in
price will automatically bring an increase
in profit.
A Supply Schedule shows relationship
between a price increase of a good and
the quantity supplied. (individual firm)



Variables are the factors that can
change. See Figure 5.2
A supply schedule only deals with price.
It shows how the price affects the
producer’s output.
A Supply Curve – is a graph of the data
in a supply schedule.


A Market Supply Schedule lists how
much of a good all suppliers will offer at
different prices. (all makers of cell
phones)
A Market Supply Curve – is a graph of
the quantity supplied of a good by all
suppliers at different prices.
SUPPLY SCHEDULE
Price of
Snickers
.50
Snickers
supplied per
week
50
.75
100
1.00
150
2.00
200
2.50
300
SUPPLY CURVE
100
9
P
R
8
7
I
6
5
C
E
4
3
2
1
0
0
50
75
100
150
200 250 300
350
Quantity of Goods supplied
100
90
80
Supply Curve
70
SupplyCurve
60
50
40
30
20
10
0
1
1
2
3
4
5
6
7
8
9
10
2
Amount of demand
3 4
5
6
7 8
Amount Supplied
9
10
UNDERSTANDING ELASTICITY OF
SUPPLY

Unlike consumers, suppliers have to
make their products. Their ability to
make more products during the time
when prices increase determines
whether or not a supplier is elastic or
inelastic. Time is the main factor to
determine whether or not a producer
is elastic or inelastic.
•
Elasticity of Supply and Time – If a
producer can increase his production to
take advantage of a higher price the
supply is elastic.
•
A Baker can increase or decrease the amount
of cakes baked in a day.
•

Marriott hotel wants to take advantage of
three straight months of large conventions
being held in Macon starting in May.


His supply is elastic.
Do they have time to add more rooms to their
hotel?
If a producer cannot change his supply in a
short period of time the supply is inelastic.
•
Elasticity of Supply and Time – If a
producer can increase his production to
take advantage of a higher price the
supply is elastic.

Marriott hotel wants to take advantage of
three straight months of large conventions
being held in Macon starting in September
2011.


Do they have time to add more rooms to their
hotel?
If a producer can change his supply in a
period of time to take advantage of the price
increase the supply is elastic. Olympics in
Atlanta

Elasticity of Supply measures the way
SUPPLIERS respond to a change in prices.



If elasticity is greater than one supply is
considered ________
If Elasticity is less than one supply is
considered ________
If Elasticity is equal to one supply is said to
be ___________.
The change in quantity supplied
Change in price
Bridge section 1& 2

Quantity supplied only takes into account
prices. All other factors remain constant.




The producer does not hire any new
workers.
The producer does not buy any more capital.
The cost factor of producing more products
are basically constant.
In reality producing products there are
numerous variables that go along with
production.
COSTS OF PRODUCTION


Entrepreneurs consider marginal
benefits and costs when deciding
how much output to produce.
Firms earn their highest profit when
the cost of making one more unit is
the same as the market price of the
good.
COSTS OF PRODUCTION


Why do you suppose that some
employers increase the work load on
its employees instead of hiring help?
Labor & Output – how does the
number of workers affect production?

Marginal Product of Labor – the change
in output from hiring one more worker –

Why would an employer pay an employee
overtime instead of hiring another
employee?
COSTS OF PRODUCTION

Labor & Output – how does the
number of workers affect production?


Marginal Product of Labor – the change in
output from hiring one more worker –
Recall THINKING AT THE MARGIN!!!
Deciding whether to do or add one unit of
resource.
 The marginal product of labor measures the
change of output at the margin.


How much more will the producer get by hiring
one more worker?

Increasing Marginal Returns –a level
of production in which the marginal
product of labor (what is being
made) increases as the number of
workers increase.



More workers equal greater production
More workers can specialize thereby
creating EFFICIENCY.
Diminishing Marginal Returns - a
level of production in which the
marginal product of labor decreases
as the number of workers increase.

More workers equals less production.
Production Costs

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Fixed costs – a cost that does not
change no matter how much goods
are produced.
Variable Costs – costs that rise or
fall depending on the quantity
produced.
Total costs – the fixed costs and
variables costs added together find
the total cost.
Marginal cost - is the additional cost
to produce one more unit.
Production Costs


Marginal revenue – the additional
income from selling one more unit;
sometimes equal to the price
Operating Costs – the cost of
operating a facility
CHANGES IN SUPPLY


Changes in the costs of Inputs can raise
or lower the supply of a good at all
prices.
The number of firms in a market and the
price and supply of other goods can also
have an effect on the supply of a good.

Inputs - 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 levels because the good has
become more expensive to produce.
A fall in the cost of input will cause an
increase of supply at all levels.
Effect of Rising costs –
Rising costs affect the relationship between
marginal revenue & marginal cost.
 Marginal costs includes the cost of the inputs
that go into production.


Inputs - any change in the cost of an
input used to produce a good - such as
raw materials, machinery, or labor –
will affect supply.

Effect of Rising costs –
Rising costs affect the relationship between
marginal revenue & marginal cost.
 Marginal costs includes the cost of the inputs
that go into production.
 If the cost of an input increases marginal cost
increases so firms decrease the supply in order
to MAXIMIZE PROFITS, to get the marginal cost
to equal the marginal revenue.


Inputs - any change in the cost of an
input used to produce a good - such as
raw materials, machinery, or labor –
will affect supply.


Technology – can lower costs of production
by simplifying tasks, performing jobs more
efficiently, and cutting the costs of salaries.
Government’s Influence on Supply – the
government can raise or lower supplies
by …

Raising or lowering the costs of producing
goods

Government’s Influence on Supply – the
government can raise or lower supplies
by …

Raising or lowering the costs of producing
goods through…
Regulations – a government intervention in a
market that affects price.
 Subsidies – a government payment that
supports a business or market.
 Taxes – a government can reduce or raise the
supply of good by placing or removing an excise
tax, a tax on the production or sale of a good.

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Other Influences on Supply –
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Future expectations of prices – if prices are
expected to increase a firm will decrease
the supply. If prices are expected to
decrease firms will increase the supply.
Number of suppliers – if more suppliers
enter the market the quantity of the supply
of goods will rise.