 If it costs more to make a product, a company has less incentive to produce a product. Your book calls the costs to make a product “input costs.” Any increase in total cost is an “input cost.”  Companies will usually try and compensate for rising costs by raising the price of the product they are selling. However, the demand may decrease so companies have to be careful that the price raise does not cost them money.

 A few years ago, the price of cheese increased, so many Pizza shops were forced to increase their prices in order to cover costs.  In companies where costs fall, it becomes cheaper to produce a product and companies will produce more of the product. Example: robots replacing workers means that the factory owner will spend much less on labor. I PIZZA

 Government has three main ways of affecting supply:  Subsidies  Taxes  Regulation

 A subsidy is a government payment that supports a business or market ◦ subsidize means to provide a subsidy  Governments provide subsidies with the aim of promoting a beneficial economic or social outcome

 Agricultural Subsidies ◦ Each year the U.S. distributes 20 billion in subsidies to various farmers and farming companies ◦ In 2002, for every bushel of wheat sold, farmers were paid an extra 52 cents and guaranteed a price of $3.86 ◦ The social benefit intended is to make sure farmer can continue to profit and grow food for our country  Oil Subsidies (next slide)  Meat & Dairy Subsidies (future slide)

 Do you think it is wise for the government to spend this money subsidizing oil? Or would the money be better spent elsewhere such as improving public transportation. Support your opinion.

Yesterday we discussed change in supply including the effect of rising costs on supply and the effect of government action on supply.  Briefly summarize the effect of rising costs on supply and explain one way that government can influence supply  Also, what effect do you think taxes on goods might have on supply?

 How might taxes influence supply?  Give a few real life examples

 In order to reduce the supply of certain goods, government may place an extra tax on the sale of these goods, thereby increasing the cost on the producer and thereby the consumer.  This is known as an excise tax, which is a tax on the production or sale of a good.  Examples include: ◦ Alcohol ◦ Cigarettes For instance, the current federal tax on cigarettes increased the price of cigarettes by 13.3%

 Regulation ◦ Government intervention in a market that affects price, quantity, or quality of a good.  Example ◦ In 1970, the federal government required car manufacturers to install technology to reduce pollution from auto exhaust. ◦ This increased the cost of manufacturing cars and therefore supply decreased

 The Global Economy  Future Expectation of Prices  Number of Suppliers

 Countries across the globe trade with one another. If the cost of supply increases in the producing country, the supply will lower in consumer country. Conversely, if the cost of supply lowers in the producing country, the supply to the consumer country will increase.  Examples ◦ The U.S. imports carpets from India. An increase in the wages of Indian workers would decrease the supply of carpets to the U.S. market ◦ The U.S. imports phones from Japan. A new technology decreasing the cost of phones would increase the supply of phones to the U.S.

 If a seller expects the price of goods to rise in the future, the seller will store the goods now and wait for the price to rise. ◦ If you produce cell phones, and cell phones are expected to rise in one month, would you sell your quota immediately or would you wait a month?  Inflation, known as the condition of rising prices, will cause supply to fall  The more suppliers = the higher quantity of supply for that good

 What are three ways government influences supply?  If China is supplying t-shirts to America, and the price of fabric used to make these t- shirts rises, what happens to the supply of t- shirts in America?  If the price of stuffed animals is projected to increase in the future, what will happen to the current supply of stuffed animals? What will happen to the future supply of stuffed animals during the projected price increase?