Ch 5 Economics Supply

To Earn an “A” on Notes: You MUST DO ALL OF THE FOLLOWING: Have a complete set of notes: Contain all of the skeleton AND the details Explain concepts, graphs, charts, … Draw conclusions Fill in all details Answer all questions All answers MUST CONTAIN THE TOPIC Have correct and complete explanations and answers Be organized: Topics are separated and underlined/highlighted Supporting details are indented under the topic Leave a blank line between chunks of info.

Section 1 Understanding Supply Students will explain: The Law of Supply Interpret a Supply Graph using a Supply Schedule The relationship between elasticity of Supply and Time.

Law of Supply Supply is the ___________________________ Law of Supply: _________________________________________. Law of Supply: Why does Supply drop when Prices drop?

How Much to Produce? Higher Production Pgs 101 & 102. Suppliers have to find the right amount of supply It has to be enough to meet Demand Because they are not sure of How Much Demand there is, Suppliers tend to produce more As the price of a good increases, Producers SUPPLY MORE.

Three Reasons Why Supply Increases When Price Increases As the Price of a Good Increases: Some Suppliers will switch to making that Good Because it means higher Profits Suppliers will produce MORE of that Good Because they think they can sell MORE New Firms will enter the Market because they think there is enough Demand to support MORE FIRMS in the Market

Supply Schedule Shows the relationship between Price and Quantity Supplied Shows ONLY: Price Quantity Supplied Two Types: Individual Suppy Schedule (1 supplier) Market Supply Schedule ALL OF THE SUPPLIERS IN THAT MARKET

Market Supply Curve Is a visual representation of Supply Is created just the way that we created a Market Demand Schedule EXCEPT THAT IT IS FOR SUPPLY NOT DEMAND You use a Market Supply Schedule to create a Market Supply Curve

Elasticity of Supply Measure how Supply Changes in Response to: Price Over Time Depends on the Good or Service How long it takes to make the good

SUPPLY and TIME For Example: The Price of Apples Increases, Suppliers WANT to PRODUCE MORE HOWEVER, They Can’t Change Supply Quickly It is YEARS between the time you plant an apple seed UNTIL THE TREE BEARS FRUIT. TIME is the BIGGEST DETERMINANT OF ELASTICITY OF SUPPLY But there are OTHER VARIABLES, TOO!

Supply and Time A Supplier who CAN CHANGE Suppliers who CANNOT CHANGE Production Output Quickly will have a MORE ELASTIC SUPPLY CURVE Ex: YOU write in an example of a Supplier Who Can change Supply in the Short Run Suppliers who CANNOT CHANGE Production Output in the Short Run will have a LESS ELASTIC SUPPLY CURVE Ex: YOU write in an example of a Supplier Who Can change Supply in the LONG Run

Elastic Supply The MORE ELASTIC THE SUPPLY, the MORE SUPPLY WILL REACT TO A CHANGE IN PRICE. A SMALL Price Change CAUSES a LARGER SUPPLY CHANGE

Q & A What is the Elasticity of Supply for an Orange Grower? Write ONE of the following as answers: Elastic Supply Unitary Elasticity of Supply Inelastic Supply What is the Elasticity of Supply for an Orange Grower? A Clothing Manufacturer A Nail Salon Automobile Manufacturer

Section 2 Costs of Production Copy the STGs from the whiteboard or from the Objectives in your book: How to firms decide who much labor to hire to produce a certain output (maximum output usually) The Production Costs of a Firm How a Firm Sets Output How to decide When to Shut Down an Unprofitable Firm

How Much Labor to Hire? A Firm needs enough workers to reach a Target Output. Use Pg. 109, Figure 5.6 to answer questions on the next few slides. Leave plenty of room for answers. NOTE: Each Worker Added is increasing the Overall Output of Beanbags. The increase in Output due to the Additional Worker is called Marginal Product of Labor 1. At what point (# of workers) is Output Maximized (highest # of beanbags)?

How Much Labor to Hire? 2. Increasing Marginal Returns is maximized at _________ workers. 3. Marginal Product of Labor declines at ________workers. At this point, the firm is experiencing Diminishing Marginal Returns

How Much Labor to Hire? Negative Marginal Returns occurs when the ____________th worker is hired. Read Pg 109-110 “Diminishing Marginal Returns” AND “Negative Marginal Returns”. Explain why output eventually decreased when additional workers were hired.

Production Costs Pgs 110-112 Total Costs = Fixed Costs + Variable Costs TC = FC + VC Fixed Costs – Does NOT Change. Give Examples:

Production Costs Variable Costs – Give Examples: Rise or fall with output. Also known as the Operating Cost The higher the output, the more you will use of a Resource. Give Examples:

Marginal Cost (MC) Pgs 111-112 The additional cost to produce ONE MORE UNIT OF A GOOD OR SERVICE Firms use this to decide whether to produce one more unit or to hire one additional worker

Setting Output Marginal Revenue (MR) AND Marginal Cost (MC) Used to decide Optimal Output

When to stop producing additional units? When Marginal Revenue = Marginal Cost MR = MC OR To MINIMIZE LOSSES OR Firms WILL PRODUCE MORE UNITS EVEN THOUGH THEIR PROFIT IS DROPPING BECAUSE THEY USE THE ADDITIONAL REVENUE TO PAY TOWARDS FIXED COSTS . Pg 111, Figure 5.9: Beanbags 11 and 12.

Q & A What do you notice about Marginal Cost and Variable Cost? Pg 111, Figure 5.9. Copy each question and answer it. What do you notice about Marginal Cost and Variable Cost? What is the Total Cost even if 0 beanbags are produced? What could be the source of the Cost? What type of Cost is this? Why is MR always $24? What is Optimal Output? (Where Profit is highest?)

Section 3 Changes in Supply STGs: Read pg 116 Objectives & write them as Short Term Goals of what you will be able to explain at the end of this section.

What variables affect Supply? There are several. TIME IS THE MOST IMPORTANT VARIABLE.

Input Costs The cost to make the good When the Input Cost: Raw materials such as beans or cotton fabric Machinery Labor When the Input Cost: Increases: Supply will ____________________________ Decreases:

Input Costs (Continued) Technology When a new technology comes along or a faster way of producing a good, the production costs often are decreased. (After the cost of initial installation). Tends to _____________________ Supply Shifts the Supply Curve to the __________ (left or right) Draw this Change in the Supply Curve

Is your Supply Curve correct? Look at Pg 117, Figure 5.12 Did your Supply Curve shift to the Right to show the INCREASE in Supply? If Supply DECREASES, draw what that does to the Supply Curve. (Draw a new Supply Curve).

Government’s Influence Subsidies Define: Purpose To ensure that a good is available Usually something that is considered a staple or important to daily life Direct Means to Affect Supply Examples: What is the impact on the Supply Curve? Graph it. Remember to label both axes and add a title.

Government Influence (Continued) Excise Taxes Define: Purpose Direct Means to Affect Supply Examples:

Government Influence (Continued) Regulations Define An Indirect Means to affect Supply Purpose Examples:

Supply in the Global Economy Imports- made outside the nation Import Restrictions Tariffs – a tax on imported goods Raises the cost and thus price of imported goods Attempts to protect native industries Tends to Decrease Supply a little Shifts Supply Curve to the _________________ (left or right)

Supply in the Global Economy (Continued) Ban on Imports What affect does a Ban have on Supply? Increase or Decrease? Shift to the ______________________ (left or right)

Future Expectations of Prices If you are a soybean farmer and you expect the Prices to Increase, what will you do with your current Supply? This mainly applies to Perishable Goods that can’t be stored very long. CORRECTION!!!  You can ONLY store GOODS FOR A WHILE THAT ARE NON-PERISHABLE. For example, SOYBEANS CAN BE STORED, but FRESH TOMATOES have a short shelf-life and CANNOT BE STORED. If Prices are expected to Decrease?

Number of Suppliers What is the Affect on Supply when… New Suppliers enter the Market? Increase or Decrease Supply Curve Shifts _____________ (left or right) Suppliers leave the Market?

How Many Factors Affect Supply? Go back through your notes and tally (add them up).

The End