1. ChapterSupply 9 9 Key Terms  Supply  law of supply  quantity supplied  supply schedule  variable:

2. ChapterSupply 9 9 Key Terms, cont.  market supply schedule:  supply curve:  market supply curve:  elasticity of supply:

3. ChapterSupply 9 9 Introduction  How does the law of supply affect the quantity supplied?  As prices rise, producers will offer more of a good and new suppliers will enter the market in the hopes of making a profit.  The law of supply states that as prices rise, so will the quantity supplied.

4. ChapterSupply 9 9 The Law of Supply  Supply is the amount of goods available.  As the price of a good increases, producers will offer more of it and as the price decreases, they will offer less.  The law of supply includes two movements: Individual firms changing their level of production Firms entering or exiting the market

5. ChapterSupply 9 9 What is the Law of Supply?

6. ChapterSupply 9 9 Higher Production  If a firm is earning a profit from the sale of a good or service, then an increase in the price will, in turn, increase the firm’s profits.  In general, the search for profit drives the choices made by the producer.

7. ChapterSupply 9 9 Market Entry Example  Take, for example, the music market: When a particular type of music becomes popular, such as 70’s disco or 90’s grunge, more bands will play that type of music in order to profit from such music’s popularity. This action reflects the law of supply.

8. ChapterSupply 9 9 The Supply Schedule  Supply of a good can be measured using a supply schedule.  A supply schedule shows the relationship between price and quantity supplied for a particular good.

9. ChapterSupply 9 9 Supply Schedule  The supply schedule lists how many slice of pizza one pizzeria will offer at different prices. The market supply schedule represents all suppliers in a market.

10. ChapterSupply 9 9 The Supply Graph  A supply schedule can be represented graphically by plotting points on a supply curve.  A supply curve always rises from left to right because higher prices leads to higher output.  Checkpoint: What are the two variables represented in a supply schedule or supply curve?

11. ChapterSupply 9 9 Elasticity in the Short Run  In the short run, it is difficult for a firm to change its output level, so supply is inelastic.  Many agricultural businesses, such as harvesting cranberries, have a hard time adjusting to price changes in the short term.

12. ChapterSupply 9 9 Elasticity in the Long Run  In the long run, supply can become more elastic.  Just like demand, supply becomes more elastic if the supplier has a longer time to respond to a price change.

13. ChapterSupply 9 9 Key Terms  marginal product of labor:  increasing marginal returns:  diminishing marginal returns:  fixed cost:

14. ChapterSupply 9 9 Key Terms, cont.  variable cost:  total cost:  marginal cost:  marginal revenue:  average cost:  operating cost:

15. ChapterSupply 9 9 Introduction  How can a producer maximize profits?  When thinking about how to maximize profits, producers think about the cost involved in producing one more unit of a good.  Costs producers take into consideration are: Operating cost Variable cost Total cost Marginal cost

16. ChapterSupply 9 9 Labor and Output  All business owners must decide how many workers they will hire.  The addition of new workers will increase production until it reaches its peak, at which point, production actually decreases.

17. ChapterSupply 9 9 Marginal Returns  The addition of more workers to a firm allow for a greater amount of specialization.  Specialization increases the output and the firm enjoys increasing marginal returns.

18. ChapterSupply 9 9 Marginal Returns, cont.  Eventually, though, the benefits of specialization end and the addition of more workers increases total output but at a diminishing rate.  A firm with diminishing marginal returns will produce less and less output from each additional unit of labor. What is the marginal product of labor when the factory employs five workers?

19. ChapterSupply 9 9 Fixed Costs  Production costs are divided into two categories - fixed costs and variable costs.  Fixed costs mainly involve the production facility and include: Rent Machinery repair Property taxes Worker’s salaries

20. ChapterSupply 9 9 Variable Costs  Variable costs include:  Price of raw materials  Some labor  Electricity and heating bills  Fixed costs and variable costs are added together to find the total cost.

21. ChapterSupply 9 9 The Shutdown Decision  What happens to a factory that starts to lose money?  Sometimes, even though a factory is producing at its most profitable level, the market price is so low that the factory’s total revenue is still less than its total cost.  The factory owners have two choices: Continue to produce goods and lose money Shut down the factory

22. ChapterSupply 9 9 Option 1: Continue to Produce  Checkpoint: When should a firm keep a money-losing factory open?  The firm should keep the factory open if the total revenue from the goods is greater than the cost of keeping the factory open. This would work if the benefit of operating the factory is greater than the variable cost.

23. ChapterSupply 9 9 Option 2: Shut Down the Factory  If a firm shuts the factory down it still has to pay all of its fixed costs so it would have money going out but nothing coming in.  The firm would lose an amount equal to its fixed costs.

24. ChapterSupply 9 9 Key Terms  subsidy:  excise tax  regulations:

25. ChapterSupply 9 9 Introduction  Why does the supply curve shift?  Several factors cause the supply curve to shift. These include: Shifts in prices Rising costs Technology Changes in the global economy Future expectations of prices Number of suppliers

26. ChapterSupply 9 9 Input Costs  Any changes in the cost of an input used to make a good will affect supply.  A rise in the cost of raw materials, for example, will result in a decrease in supply because the good has become more expensive to produce. The high input costs that dairy farmers pay for feed, labor, and fuel result in higher prices for milk and other dairy products.

27. ChapterSupply 9 9 Rising Costs and Technology  If costs continue to rise, a firm will have to cut production and lower its marginal cost.  It is possible for input costs to drop.  In many industries, advances in technology can lower production costs.  Examples of technology advances include: Automation Computers E-mail

28. ChapterSupply 9 9 Government’s Influence  In addition to input costs, the federal government also has the power to affect the supplies of many types of good.  Subsidies The government often gives subsidies to the producers of a good. Subsidies generally lower cost, which allows a firm to produce more goods. Reasons for subsidizing products include: –To provide for people during food shortages –To protect young industries from foreign competition.

29. ChapterSupply 9 9 Government Influences, cont.  Taxes  Excise taxes increase production costs by adding an extra cost for each unit sold. They are sometimes used to discourage the sale of a good the government deems harmful, such as cigarettes and alcohol.

30. ChapterSupply 9 9 Government Influences, cont.  Regulation  Indirectly, government regulation often has the effect of raising costs. When the government regulated the auto industry to cut down on pollution, these regulations led to an increase in the cost of manufacturing cars.

31. ChapterSupply 9 9 Shifts in the Supply Curve  Factors that reduce supply shift the supply curve to the left, while factors that increase supply move the supply curve to the right.  Which graph best represents the effects of higher costs?  Which graph best represents advances in technology?

32. ChapterSupply 9 9 Future Expectations of Prices  Checkpoint: What happens to supply if the price of a good is expected to rise in the future?  If a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future.  If the prices of good is expected to drop in the near future, sellers will earn more by placing goods on the market immediately, before the price falls.

33. ChapterSupply 9 9 Number of Suppliers  If more suppliers enter a market, the market supply will rise and the supply curve will shift to the right.  If suppliers stop producing a good and leave the market, market supply will decline, causing the supply curve to shift to the left.