1. Supply Chapter 5

2. Understanding Supply Chapter 5, Section 1

3. The Law of Supply  How do producers know how much to produce?  According to the law of supply, the higher the price, the more a firm will produce  This creates more revenue  The amount produced is known as the quantity supplied

4. Earning a Profit  If a firm is already earning profit, an increase in price will create more profit.  This drives producers and their decisions  Don’t forget ceteris paribus  All things remain constant (except for price) in order to guarantee a change in profit

5. New Producers  An increase in price will not only cause firms to produce more, but it will encourage the entry of new firms into the market  However, according to the law of supply, this lasts only as price increases  After the price increase stops, new firms may leave the market  Dot Coms

6. Supply Schedule  Like a demand schedule, a supply schedule is a table that shows how much of a product firms will produce at a given price  In turn, a supply curve is a graphical representation of the supply table $1100 $2150 $3200 $4250

7. Changes in Supply  Like demand, a change in quantity supplied represents movement along the supply curve.  A change in another variable (besides price) results in a change in supply (whole new curve)

8. Supply Curve Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply

9. Change in Supply Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply

10. Elasticity of Supply  A measure of the way quantity supplied reacts to a change in price  If supply is elastic, it will react quickly to a change in price  If it is inelastic, it will react slowly

11. Elasticity of Supply and Time  In the short run, a firm cannot easily change its output so supply is inelastic  In the long run, firms can make greater changes so supply becomes more elastic  Firms that produce products are often inelastic and more effected by time  Firms producing services are more elastic  Ex: Cars vs. Haircuts

12. Review 1. What is the law of supply?  (a) The lower the price, the larger the quantity supplied.  (b) The higher the price, the larger the quantity supplied.  (c) The higher the price, the smaller the quantity supplied.  (d) The lower the price, the more manufacturers will produce the good. 2. What happens when the price of a good with an elastic supply goes down?  (a) Existing producers will expand and some new producers will enter the market.  (b) Some producers will produce less and others will drop out of the market.  (c) Existing firms will continue their usual output but will earn less.  (d) New firms will enter the market as older ones drop out.

13. Cost of Production Chapter 5, Section 2

14. Labor and Output  One question firms need to answer is how many to hire  Output increases with additional labor but to what point?  Marginal Product of Labor...the change in output from hiring one additional worker

15. Marginal Product of Labor Labor (# of workers) Output (chairs per hr) Marginal Product of Labor 00- 144 2106 3177 4236 5285 6313 7321 831

16. Increasing Marginal Returns  Level of production where the marginal product of labor increases with the number of workers  Results from specialization and efficient use of capital  All workers are efficient and working at a high level  No interruptions at work

17. Decreasing Marginal Returns  Level of production where the marginal product of labor decreases with the numbers of workers  Output continues to increase but at a slower rate. Benefits of specialization actually end.  Workers become less efficient due to limited capital  Ex…have to borrow equipment, tools, etc.

18. Negative Marginal Returns  Production actually decreases with the addition of labor  Too many cooks in the kitchen  Ex…workers get in each other’s way, disrupt production, etc.  Very few companies hire SO many workers that MPL becomes negative.

19. Production Costs  All the costs involved in producing goods and services  Fixed Costs...costs that do not change regardless how much is produced  Rent, machinery, repairs, taxes, salaries  Variable Costs...costs that change with the amount produced  Supplies, electricity, hourly wages  Total Costs...FC+VC

20. Marginal Cost and Marginal Revenue  The cost of producing one more unit is known as Marginal Cost  The income earned from selling one more unit is know as Marginal Revenue. This is usually equal to the price

21. Setting Output  Firms set output to maximize profits (profits =Total Revenue-Total Cost)  This happens where Marginal Revenue=Marginal Cost

22. Review 1. What are diminishing marginal returns of labor?  (a) Some workers increase output but others have the opposite effect.  (b) Additional workers increase total output but at a decreasing rate.  (c) Only a few workers will have to wait their turn to be productive.  (d) Additional workers will be more productive. 2. How does a firm set his or her total output to maximize profit?  (a) Set production so that total revenue plus costs is greatest.  (b) Set production at the point where marginal revenue is smallest.  (c) Determine the largest gap between total revenue and total cost.  (d) Determine where marginal revenue and profit are the same.

23. Changes in Supply Chapter 5, Section 3

24. Factors that Affect Supply  Input Costs  Government’s Influence  Supply in the Global Economy  Other Influences

25. Input Costs  Any change in the cost of an input will affect supply (either up or down)  Raw materials  Machinery  Labor  If the input cost goes up, supply will go down  If the input cost goes down, supply will go up  Technology often causes input costs to go down  Ex…Machines replace humans on assembly lines so firms spend less on salaries

26. Government’s Influence on Supply  Subsidies  government payment that supports a business or market  Farms to keep producing food  WWII…European countries faced food shortages so gov’ts protected farmers to keep producing  Small companies to prevent foreign producers  Encourage growth in an area

27. Government’s Influence on Supply  Taxes...Excise taxes are used to reduce production. Built into prices. Supply  Gas, tobacco, alcohol have excise taxes to discourage people from using  Regulation...policies that regulate an industry can eventually change supply  Pollutant producing industries are regulated  1970 – All cars must have pollutant reduction tech.  Release of national reserves after Katrina

28. Supply in the Global Economy  Supply in other countries can cause a change in imports, which will in turn change our supply  Changes in foreign wages  New discoveries of oil

29. Supply in the Global Economy  Example  United States imports carpets from India. An increase in the wages of Indian workers would decrease the supply of carpets to the USA. Shift curve to the left.  Example  USA imports oil from Russia. A new discovery of oil in Russia could increase the supply of oil to the USA. Shift supply curve to the right.

30. Other Influences  Future Expectations  If the seller expects the price of a good to rise, they may store the product for later sales (non-perishables). Cutting back in the short term.  If the price is expected to fall, they may sell immediately. Need to get rid of supplies.  During periods of high inflation, sellers will hold their products because goods keep value and money loses its value.

31. Other Influences  Number of Sellers  If there are more suppliers in a market, market supply will increase  If suppliers leave a market, the market supply will decrease