Chapter 5 Supply

Supply, Law of Supply Supply—willingness and ability of producers to offer goods, services Anyone who provides goods or services is a producer Law of supply: — producers willing to sell more of product at higher than at lower price

Example Price and Supply Smiths sell tomatoes at farmers’ market — willing to offer 24 pounds at standard price of $1 per pound — willing to offer 50 pounds at $2 per pound — willing to offer 10 pounds at 50 cents per pounds — not willing to supply any tomatoes below 50 cents

Supply Schedules Supply schedule shows — amount of product individual willing, able to offer at each price Market supply schedule shows — amount of product all producers willing, able to offer at each price

Individual Supply Schedule Supply schedule is two-column table — left-hand column lists various prices of a good or service — right-hand column shows quantity supplied at each price

Market Supply Schedule Market supply schedule format similar to supply schedule — quantities supplied are much larger — market quantity supplied also depends on price Market supply schedule format similar to supply schedule — some producers want to learn prices, amount offered by all in market

Individual Supply Curve Supply curve is graphic representation of law of supply Supply schedule and curve based on following assumption: — all economic factors except price remain the same

Market Supply Curve Market supply curve differs in scope from individual supply curve — both constructed same way Supply curves for all types of producers follow law of supply — will provide more at higher prices although costs more to produce more — reason: higher prices signal potential for higher profits

Section 2 Costs of Production KEY CONCEPTS Marginal product—change in total output caused by adding one worker Specialization—having a worker focus on one aspect of production

Marginal Product Schedule Marginal product schedule—relation between labor, marginal product Increasing returns—new workers cause marginal product increase Diminishing returns—total output grows at decreasing rate Negative returns—output decreases through crowding, disorganization

Production Costs KEY CONCEPTS Fixed costs—expenses owners incur no matter how much they produce Variable costs—expenses that vary as level of output changes Total cost—the sum of fixed and variable costs Marginal cost—additional cost of making one more unit of the product

Fixed and Variable costs Fixed costs: mortgage, insurance, manager salaries, machinery Variable costs: workers’ wages, electricity, materials, shipping — the more a business produces, the more variable costs increase — cutting back hours or workers, vacation closings decrease costs

Production Cost Schedule Fixed costs remain the same no matter what total product amounts to Calculating marginal cost: — divide change in total cost by change in total product Diminishing returns result in increase in marginal cost

Earning Highest Profit Marginal revenue—money made from sale of each additional unit sold — same as price Total revenue—income from selling a product — Total revenue = P (price) x Q (quantity purchased at that price)

Production Costs and Revenue Schedule To make most profit, owner decides number workers hired, units made To decide, owner performs marginal analysis — comparison of costs, benefits of adding a worker, making another unit Profit-maximizing output—level of production yielding highest profit — marginal cost and marginal revenue are equal

Discussion question Suppose you own a video store that has total costs of $3,600 per month. If you charge $12 for each DVD you sell, how many do you need to sell each month in order to break even? Explain your answer.

Questions to answer Please answer the following questions Section 1 page Section 2 Evaluating Sources page 144 “Thinking Economically” 1-3

Section 3 What Factors Affect Supply? Key Concepts: Change in quantity supplied: — rise or fall in amount offered for sale because of change in price Different points on supply curve show change in quantity supplied

Changes Along a Supply Curve Change in quantity supplied does not shift the supply curve — movement to right means increase in price and quantity supplied — movement to left means decrease in price and quantity supplied Market supply curves show larger changes than individual curves

Changes in Supply Change in supply—producers offer different amounts at every price As production costs rise, supply drops; as costs drop, supply rises Change in supply shifts the supply curve Six factors cause change in supply — input costs, labor productivity, technology, government action, producer expectations, number of producers

Factor 1 Input Costs Input costs—price of resources needed to produce good or service — if price of resource increases, costs increase — if price of resource decreases, costs decrease

Factor 2 Labor Productivity Labor productivity—amount of product worker can produce in set time Rise in productivity lowers production costs; supply increases Specialization can allow producer to make more goods at lower cost Better-trained workers produce more in less time; decrease costs

Factor 3 Technology Technology—use of scientific methods, discoveries in production — results in new products or manufacturing techniques Manufacturers use technology to make goods more efficiently Technology enables workers to be more productive

Factor 4 Government Action Excise tax—tax on production or sale of specific good or service — often placed on items that government wants to discourage use of — taxes increase producers’ costs; decrease supply Regulation—set of rules, laws designed to control business behavior — examples: banning use of certain resources, worker safety laws

Factor 5 Producer Expectations Producers have expectations about future price of their product — expectations affect how much they will supply at present Expectations of higher price in future may lead to different actions — Farmer may withhold part of current crop and decrease supply — Manufacturer may buy more equipment to increase future supply

Factor 6 Number of Producers When one producer has successful new idea, others enter the market — supply of good or service increases Increase in number of producers leads to increased competition — may drive less-efficient producers out of market

Section 4 Elasticity of Supply Elasticity of supply—measures producer response to price changes Elastic—price change leads to larger change in quantity supplied Inelastic—price change leads to smaller change in quantity supplied Unit elastic—price and quantity supplied change by same percentage

Elastic Supply As product gains popularity, shortage develops, price goes up Producers can increase supply if — resources are easy to come by, inexpensive — production uncomplicated, easy to increase

Inelastic Supply Producers can increase supply if — availability of resources limited — production capacity cannot be increased — shipping too costly or unavailable

Test Review Ch. 4 market demand curves and schedules, inelastic vs elastic, 6 factors that can change demand, total revenue (tr=p times q), law of marginal utility, inferior and normal goods, and make sure to look at figures 4.6,4.8, 4.9. Ch.5 Supply, inelastic vs elastic, factors that affect supply, profit maxim output, interpreting graphs, make sure to look at figures 5.11, 5.12, 5.13, 5.14

Case Study “Robots” Read articles A,B and C on pages on Robots. After reading make sure to answer the questions after each article and then the 3 thinking economically synthesizing questions at the bottom of page 159. You will be answering 6 total questions. Turn in when finished for grade!