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Chapter 5
Section 1
The Law of Supply
Supply: the amount of goods available
The law of supply is when goods are produced
according to their price.
The law of supply begins with the producers, if prices
are high, they have to produce more to make a profit.
When prices drop, they must make less.
Prices
increase
Supply
increase
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Prices
decrease
Supply
decrease
Higher Production
When prices go high, in order to make a
profit, more of that good needs to be
produced. If prices are dropped, less need
to be produced. That is when
entrepreneurs become discouraged.
If ceteris paribus applies, the raising of the
profit benefits the entrepreneur and the
producer.
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The Supply Schedule
The supply schedule shows the
relationship between the price and the
quantity supplied for a certain good.
The supply schedule compares two factors
that are not necessarily constant.
The schedule shows specific sets of
conditions
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Supply graph
Price per slice of pizza
Slices supplied per day
$ 0.50
100
$ 1.00
150
$ 1.50
200
$ 2.00
250
$ 2.50
300
$ 3.00
350
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A rise or fall, will change the input and
output of a supply schedule.
When a factor besides the price has an
affect, a whole new supply schedule
needs to be made.
To generalize a supply schedule within the
market, a market supply schedule is
created.
A market supply schedule shows the
relationship between the prices and
quantities of a product within firms in a
market.
David L. Perez
Ch. 5 Sec. 1
03-21-2011
Period 2
Supply and Elasticity
Elasticity of demand measures how consumers will react
to change in price. Elasticity of supply is based on the
same concept.
Elasticity of supply is a measure of the way supplies
respond to a change in price.
The labels elastic, inelastic, and unitary elastic represent
the same values of elasticity of supply as those of
elasticity of demand
When a percentage change in price is perfectly matches
by an equal percentage change in quantity supplies,
elasticity is exactly one, and supply is unitary elastic
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Elasticity of Supply and Time
The key factor in determining whether the supply of a
good will be elastic or inelastic is time.
In short runs, a firm cant easily change its output level,
so supply is inelastic.
In long runs, firms are more flexible, so supply is more
elastic.
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Elasticity of Supply in the Short Run
A example of a business that has difficulty adjusting to a
change in price in the short term is an orange grove.
In the short term, the grower could take smaller steps to
increase output.
In the short run, supply is inelastic whether the price
increases or decreases.
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Elasticity in the Long Run
Just like demand, supply can become ore elastic
over time.
An example is a farmer that sells tomatoes that
cant increase his output. So he begins to plant
more and more trees overtime until he increases
his supply. As this process becomes more
effective, he will be able to sell more tomatoes at
a higher market price.
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“Chapter 5, Section 2”
Danny Baeza
March 23rd, 2011
Period 2
Economics
Mrs. Mitat
Labor and Output.
The owners of firms need to consider the
number of employees they decide to hire
because it will have an effect on the firm’s
total production. At one point in time, the
hiring period, the total production of the
firm will decrease, in conjunction to the
amount of people the owner decides to
hire.
Prentice Hall Book
Increasing Marginal Returns.
“Increasing Marginal Returns” are when workers find a
specialization in something. For example, a firm that
produces beanbags, have workers specifically dealing
with the physical production of the bean bag while the
other workers are specified in “tailoring” and sew up the
bean bag. Each worker has a specific set of skill that
pertains to certain tasks in the firm.
Prentice Hall Book
Diminishing Marginal Returns.
Diminishing Marginal Returns is when the
marginal production is decreasing.
Why? – The reason of the decrease of
production is because a firm has a limited
amount of resources. For example, lets assume
the firm has two sewing machines but there are
three workers, the first two workers will be able
to use the machines but the third one will not,
decreasing the marginal production of that firm.
Prentice Hall Book
Negative Marginal Returns.
Is when the firm does not realize when the
marginal production is going down and
they continue hiring people. The workers
then have to wait more, so the marginal
production will become negative.
Setting Output.
Marginal Revenue and Marginal Cost:
- The Marginal Revenue is the money that the
firm has to spend to make the product and the
marginal cost is the money that the people pay
for the product. So if the firm wins $12 dollars in
the fourth beanbag, and just spend $7 to make a
new one, they are going to make more bags and
earn more money.
Prentice Hall Book
Responding to Price Changes.
Responding to Price Changes is when the
people buy too much of the product,
making the demand higher and the price
increase. Instead of winning $12 per bag,
one will win, $22 per bag, so the firm will
start making more and more money per
bag per hour.
Prentice Hall Book
“Resources”
All the information found in this
presentation was retrieved from the
Prentice Hall Book of Economics.
Chapter 5 Section 2
Production Costs
&
The Shutdown Decision
Production Costs
Consists of two types of costs
Fixed costs
Variable costs
Fixed Costs
Definition: A cost that does not change, no matter how
much of a cost is produced.
Most involve the production facility, the cost of building
and equipping a factory, office, store, or restaurant.
Examples: rent, machinery repairs, property taxes on a
factory, and the salaries who keep the business
running even when production temporarily stops.
http://simplestudies.com/repo
sitory/lectures/ch9_total_fixed
_cost_graph.gif
Variable Costs
Definition: A cost that rises or falls depending on how much
is produced.
Increase costs to produce more: Purchase more resources
and hire workers to produce more.
Cut back costs: Stop purchasing resources or cut back
workers hours weekly.
Examples: Cost of labor, electricity, and heating bills.
http://simplestudies.com/repos
itory/lectures/ch9_variable_co
st_graph.gif
Total Cost
Definition: The total of fixed costs and
variable costs.
http://image.wistatutor.com/c
ontent/feed/tvcs/fixed20cost.
JPG
Marginal Cost
Definition: The cost of producing one more
unit of a good.
http://www.peoi.org/Courses/mic/
Resources/Image122b.gif
The Shutdown Decision
Decision made when a factory is losing money
constantly. Whether to keep it running or
shutdown.
The factory should stay open when the total
money made from the good or service produced
is greater than the operating cost.
Alfredo
Rodriguez
Period 2
Chapter 5
Economics
Section 3
Changes in Supply
27
Input Cost
Any change in the cost of an input used to produce a
good.
Rise in Cost: Supply will fall
Fall of Cost: Increase of Supply
Source: Economics Book
28
Effects of Rising Cost
Suppliers set output (Products or Service) where $ =
Marginal Cost
Marginal Cost includes the cost of input that go into
production.
Increase in Input will = Marginal Cost to rise.
Source: Economics Book
29
Technology
Input cost can also drop.
Advances in technology can lower production cost
Technology: -Lowers Cost
-Increase Supply at all price levels.
Source: Economics Book
30
Government Influence on Supply
Government can affect supplies.
By rising or lowering costs -They encourage
Entrepreneurs or Industries.
Source: Economics Book
31
Subsidies
A method government uses: Government pays or
supports a business or market.
Government in developing countries protect growing
industries with subsidies.
In the US, Farm subsidies are controversial, since
government pays farmers to take land out of cultivation
to keep prices high.
Source: Economics Book
32
Taxes
Government can reduce the supply of some goods by
placing an Excise tax.
Excise Tax: Is tax that is placed upon the production or
sales of a good.
It increases production cost by adding an extra cost for
each unit sold.
An increase in cost, produces that excise tax decrease the
price level for supplied goods
Source: Economics Book
33
Regulation
Government regulation often has the effect of rising costs.
Regulation is when government intervenes in the market,
affecting price, quantity or quality of goods.
Source: Economics Book
34
Supplying the Global Economy
A country produces goods and services, and these can
later be imported to another, to be sold to consumers.
Supply of Imported Goods is affected by any changes
within the import country.
Total supply of a product equals the sum of imports and
domestically produced products.
Source: Economics Book
35
Future Expectations of Prices
Expectations of higher prices will reduce supplies and
increase them later in time.
Expectations of Lower Prices, will have an opposite
effect.
According to Inflation (Which is the increase of prices, as
the value of money lowers); Suppliers decide to withhold
their goods, so their value rises.
This method of storing goods, can dramatically drop
supply.
Source: Economics Book
36
Number of Suppliers
If more suppliers enter the market to produce a certain
good, the market supply of the good will rise.
If suppliers stop producing a good or leave the market,
the supply of a certain good (depending on what was
produced) will decline.
Source: Economics Book
37