Supply Section 1

SUPPLY S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!!!

P PRICE QUANTITY When price goes up, quantity supplied by firms goes up Q

When price goes __________ quantity supplied by firms goes __________ P DOWN Q

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 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 PriceQuantity $ PIZZA (week) Individual: ****** all things constant

Individual Supply Curve PriceQuantity $ PIZZA (week) P Q $ S

Price Quantity $ PIZZA (week) P Q Market Supply Curve $ S

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

Chapter 5, Section 2 Costs of Production

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

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

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

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

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 revenue- total cost) 0$36$0$36--$24$0$ $

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 revenue- total cost) 0$36$0$36--$24$0$ $

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 revenue- total cost) 0$36$0$36--$24$0$ $

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 revenue- total cost) 0$36$0$36--$24$0$ $

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.

CHAPTER 5, SECTION 3 Changes in Supply

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.