1. Chapter 9: Supply Opener

2. Slide 2 Copyright © Pearson Education, Inc.Chapter 9, Opener Essential Question How do suppliers decide what goods and services to offer?

3. Slide 3 Copyright © Pearson Education, Inc.Chapter 9, Opener Guiding Questions Section 1: Understanding Supply –How does the law of supply affect the quantity supplied? The law of supply states that as the price increases, the quantity supplied increases.

4. Slide 4 Copyright © Pearson Education, Inc.Chapter 9, Opener Guiding Questions Section 2: Costs of Production –How can a producer maximize profits? The costs of production must be weighed by a producer so that he or she can maximize profits.

5. Slide 5 Copyright © Pearson Education, Inc.Chapter 9, Opener Guiding Questions Section 3: Changes in Supply –Why does the supply curve shift? Many things can affect supply and cause the supply curve to shift, including costs, prices, technology, changes in the global economy, and government intervention.

6. Chapter 5: Supply Section 1

7. Slide 7 Copyright © Pearson Education, Inc.Chapter 9, Opener Objectives 1.Explain the law of supply. 2.Interpret a supply schedule and a supply graph. 3.Examine the relationship between elasticity of supply and time.

8. Slide 8 Copyright © Pearson Education, Inc.Chapter 9, Opener Key Terms supply: law of supply: quantity supplied: supply schedule: variable: market supply schedule: supply curve: market supply curve: elasticity of supply:

9. Slide 9 Copyright © Pearson Education, Inc.Chapter 9, Opener Introduction How does the law of supply affect the quantity supplied? –As prices rise, producers will offer more of a good and new suppliers will enter the market in the hopes of making a profit. –The law of supply states that as prices rise, so will the quantity supplied.

10. Slide 10 Copyright © Pearson Education, Inc.Chapter 9, Opener Bell Ringer Brainstorm the names of different types of diet soda. Why are there so many different kinds of diet soda?

11. Slide 11 Copyright © Pearson Education, Inc.Chapter 9, Opener The Law of Supply Supply is the amount of goods available. –As the price of a good increases, producers will offer more of it and as the price decreases, they will offer less. –The law of supply includes two movements: Individual firms changing their level of production Firms entering or exiting the market

12. Slide 12 Copyright © Pearson Education, Inc.Chapter 9, Opener What is the Law of Supply?

13. Slide 13 Copyright © Pearson Education, Inc.Chapter 9, Opener Higher Production If a firm is earning a profit from the sale of a good or service, then an increase in the price will, in turn, increase the firm’s profits. In general, the search for profit drives the choices made by the producer.

14. Slide 14 Copyright © Pearson Education, Inc.Chapter 9, Opener Market Entry Checkpoint: Why do firms increase production when the price of a good goes up? –Rising prices encourage new firms to join the market and will add to the quantity supplied of the good. –Take, for example, the music market: When a particular type of music becomes popular, such as 70’s disco or 90’s grunge, more bands will play that type of music in order to profit from such music’s popularity. This action reflects the law of supply.

15. Slide 15 Copyright © Pearson Education, Inc.Chapter 9, Opener The Supply Schedule Supply of a good can be measured using a supply schedule. –A supply schedule shows the relationship between price and quantity supplied for a particular good. An individual supply schedule shows how much of a good a single supplier will be able to offer at various prices. A market supply schedule shows how much of a good all firms in a particular market can offer at various prices.

16. Slide 16 Copyright © Pearson Education, Inc.Chapter 9, Opener Supply Schedule The supply schedule lists how many slice of pizza one pizzeria will offer at different prices. The market supply schedule represents all suppliers in a market. –What does the individual supply schedule tell you about the pizzeria owner’s decisions? –How does the market supply schedule compare to the individual supply schedule?

17. Slide 17 Copyright © Pearson Education, Inc.Chapter 9, Opener Supply Schedule What does the individual supply schedule tell you about the pizzeria owner’s decisions? How does the market supply schedule compare to the individual supply schedule?

18. Slide 18 Copyright © Pearson Education, Inc.Chapter 9, Opener The Supply Graph A supply schedule can be represented graphically by plotting points on a supply curve. –A supply curve always rises from left to right because higher prices leads to higher output. –Checkpoint: What are the two variables represented in a supply schedule or supply curve?

19. Slide 19 Copyright © Pearson Education, Inc.Chapter 9, Opener Learning Styles I need to hire several people to clean out my yard. How many of you willing to work for: $1.00 $2.00 $3.00 $4.00 $5.00

20. Slide 20 Copyright © Pearson Education, Inc.Chapter 9, Opener The Supply Graph

21. Slide 21 Copyright © Pearson Education, Inc.Chapter 9, Opener Elasticity of Supply Elasticity of supply, based on the same concept of elasticity of demand, measures how firms will respond to changes in the price of a good. –Elastic When elasticity is greater than one, supply is very sensitive to price changes –Inelastic When elasticity is less than one, supply is not very responsive to price changes.

22. Slide 22 Copyright © Pearson Education, Inc.Chapter 9, Opener Elasticity in the Short Run In the short run, it is difficult for a firm to change its output level, so supply is inelastic. Many agricultural businesses, such as harvesting cranberries, have a hard time adjusting to price changes in the short term.

23. Slide 23 Copyright © Pearson Education, Inc.Chapter 9, Opener Elasticity in the Long Run In the long run, supply can become more elastic. Just like demand, supply becomes more elastic if the supplier has a longer time to respond to a price change.

24. Slide 24 Copyright © Pearson Education, Inc.Chapter 9, Opener Review Now that you have learned how the law of supply affects the quantity supplied, go back and answer the Chapter Essential Question. –How do suppliers decide what goods and services to offer?

25. Chapter 5: Supply Section 2

26. Slide 26 Copyright © Pearson Education, Inc.Chapter 9, Opener Objectives 1.Explain how firms decide how much labor to hire in order to produce a certain level of output. 2.Analyze the production costs of a firm. 3.Explain how a firm chooses to set output. 4.Identify the factors that a firm must consider before shutting down a profitable business.

27. Slide 27 Copyright © Pearson Education, Inc.Chapter 9, Opener Key Terms marginal product of labor: increasing marginal returns: diminishing marginal returns: fixed cost: variable cost: total cost: marginal cost: marginal revenue: average cost: operating cost:

28. Slide 28 Copyright © Pearson Education, Inc.Chapter 9, Opener Introduction How can a producer maximize profits? –When thinking about how to maximize profits, producers think about the cost involved in producing one more unit of a good. –Costs producers take into consideration are: Operating cost Variable cost Total cost Marginal cost

29. Slide 29 Copyright © Pearson Education, Inc.Chapter 9, Opener Bell Ringer According to some reports, supermarkets make a profit of three to six cents for every dollar of revenue. Where does the rest of the money go? –Cost of producing the products, rent, utilities, salaries…..

30. Slide 30 Copyright © Pearson Education, Inc.Chapter 9, Opener Labor and Output All business owners must decide how many workers they will hire. –The addition of new workers will increase production until it reaches its peak, at which point, production actually decreases.

31. Slide 31 Copyright © Pearson Education, Inc.Chapter 9, Opener Marginal Returns The addition of more workers to a firm allow for a greater amount of specialization. –Specialization increases the output and the firm enjoys increasing marginal returns.

32. Slide 32 Copyright © Pearson Education, Inc.Chapter 9, Opener Marginal Returns, cont. Eventually, though, the benefits of specialization end and the addition of more workers increases total output but at a diminishing rate. –A firm with diminishing marginal returns will produce less and less output from each additional unit of labor. What is the marginal product of labor when the factory employs five workers?

33. Slide 33 Copyright © Pearson Education, Inc.Chapter 9, Opener Fixed Costs Production costs are divided into two categories - fixed costs and variable costs. –Fixed costs mainly involve the production facility and include: Rent Machinery repair Property taxes Worker’s salaries

34. Slide 34 Copyright © Pearson Education, Inc.Chapter 9, Opener Learning Styles Page 204 Group 1 Production – Group 2 Production – Group 3 Production – Explain the results –The pair specialized, enabling it to produce more than the individual. The team of three lacked capital – another pen – which slowed production.

35. Slide 35 Copyright © Pearson Education, Inc.Chapter 9, Opener Variable Costs Variable costs include: –Price of raw materials –Some labor –Electricity and heating bills Fixed costs and variable costs are added together to find the total cost.

36. Slide 36 Copyright © Pearson Education, Inc.Chapter 9, Opener Marginal Cost of Production Knowing the total cost of several levels of output helps determine the marginal cost of production at each level, or the additional costs of producing one more unit. One way to find the best level of output is to figure out where marginal cost is equal to marginal revenue, or the additional income from selling one more unit of a good.

37. Slide 37 Copyright © Pearson Education, Inc.Chapter 9, Opener Setting Output A firm’s primary goal is to maximize profits. The firm wants to make the most profit with the least amount of total production cost to the firm. Why is the marginal revenue always equal to $24?

38. Slide 38 Copyright © Pearson Education, Inc.Chapter 9, Opener Setting Output Why is the marginal revenue always equal to $24?

39. Slide 39 Copyright © Pearson Education, Inc.Chapter 9, Opener Determining a Firm’s Profit The graph to the right shows how a firm’s profit per hour can be determined by subtracting total cost from total revenue. –What would happen to output if market price fell to $20? –Why would the firm increase output if the price of a beanbag rose to $37?

40. Slide 40 Copyright © Pearson Education, Inc.Chapter 9, Opener The Shutdown Decision What happens to a factory that starts to lose money? –Sometimes, even though a factory is producing at its most profitable level, the market price is so low that the factory’s total revenue is still less than its total cost. –The factory owners have two choices: Continue to produce goods and lose money Shut down the factory

41. Slide 41 Copyright © Pearson Education, Inc.Chapter 9, Opener Option 1: Continue to Produce Checkpoint: When should a firm keep a money-losing factory open? –The firm should keep the factory open if the total revenue from the goods is greater than the cost of keeping the factory open. This would work if the benefit of operating the factory is greater than the variable cost.

42. Slide 42 Copyright © Pearson Education, Inc.Chapter 9, Opener Option 2: Shut Down the Factory If a firm shuts the factory down it still has to pay all of its fixed costs so it would have money going out but nothing coming in. The firm would lose an amount equal to its fixed costs.

43. Slide 43 Copyright © Pearson Education, Inc.Chapter 9, Opener Review Now that you have learned how a producer can maximize profits, go back and answer the Chapter Essential Question. –How do suppliers decide what goods and services to offer?

44. Chapter 5: Supply Section 3

45. Slide 45 Copyright © Pearson Education, Inc.Chapter 9, Opener Objectives 1.Explain how factors such as input costs create changes in supply. 2.Identify three ways that the government can influence the supply of goods. 3.Analyze other factors that affect supply. 4.Explain how firms choose a location to produce goods.

46. Slide 46 Copyright © Pearson Education, Inc.Chapter 9, Opener Key Terms subsidy: excise tax: regulations:

47. Slide 47 Copyright © Pearson Education, Inc.Chapter 9, Opener Introduction Why does the supply curve shift? –Several factors cause the supply curve to shift. These include: Shifts in prices Rising costs Technology Changes in the global economy Future expectations of prices Number of suppliers

48. Slide 48 Copyright © Pearson Education, Inc.Chapter 9, Opener Input Costs Any changes in the cost of an input used to make a good will affect supply. –A rise in the cost of raw materials, for example, will result in a decrease in supply because the good has become more expensive to produce. The high input costs that dairy farmers pay for feed, labor, and fuel result in higher prices for milk and other dairy products.

49. Slide 49 Copyright © Pearson Education, Inc.Chapter 9, Opener Rising Costs and Technology If costs continue to rise, a firm will have to cut production and lower its marginal cost. It is possible for input costs to drop. –In many industries, advances in technology can lower production costs. –Examples of technology advances include: Automation Computers E-mail

50. Slide 50 Copyright © Pearson Education, Inc.Chapter 9, Opener

51. Slide 51 Copyright © Pearson Education, Inc.Chapter 9, Opener Government’s Influence In addition to input costs, the federal government also has the power to affect the supplies of many types of good. –Subsidies The government often gives subsidies to the producers of a good. Subsidies generally lower cost, which allows a firm to produce more goods. Reasons for subsidizing products include: –To provide for people during food shortages –To protect young industries from foreign competition.

52. Slide 52 Copyright © Pearson Education, Inc.Chapter 9, Opener Government Influences, cont. Taxes –Excise taxes increase production costs by adding an extra cost for each unit sold. They are sometimes used to discourage the sale of a good the government deems harmful, such as cigarettes and alcohol.

53. Slide 53 Copyright © Pearson Education, Inc.Chapter 9, Opener Government Influences, cont. Regulation –Indirectly, government regulation often has the effect of raising costs. When the government regulated the auto industry to cut down on pollution, these regulations led to an increase in the cost of manufacturing cars.

54. Slide 54 Copyright © Pearson Education, Inc.Chapter 9, Opener Non-Price Influences Changes in the global economy –Since many goods and services are imported, changes in other countries can affect the supply of those goods. An increase in wages in one country or the increased supply of a good in another will cause the overall supply curve to shift. Restrictions on imports also affect supply.

55. Slide 55 Copyright © Pearson Education, Inc.Chapter 9, Opener Shifts in the Supply Curve Factors that reduce supply shift the supply curve to the left, while factors that increase supply move the supply curve to the right. –Which graph best represents the effects of higher costs? –Which graph best represents advances in technology?

56. Slide 56 Copyright © Pearson Education, Inc.Chapter 9, Opener Future Expectations of Prices Checkpoint: What happens to supply if the price of a good is expected to rise in the future? –If a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future. –If the prices of good is expected to drop in the near future, sellers will earn more by placing goods on the market immediately, before the price falls.

57. Slide 57 Copyright © Pearson Education, Inc.Chapter 9, Opener Number of Suppliers If more suppliers enter a market, the market supply will rise and the supply curve will shift to the right. If suppliers stop producing a good and leave the market, market supply will decline, causing the supply curve to shift to the left.

58. Slide 58 Copyright © Pearson Education, Inc.Chapter 9, Opener Where do Firms Produce? Checkpoint: When is a firm likely to locate close to its consumers? –A key factor in where a firm will locate is transportation. When inputs such as raw materials are expensive to transport, a firm will locate close to the inputs. When outputs (the final product) are more costly to transport, firms will locate close to the consumer.

59. Slide 59 Copyright © Pearson Education, Inc.Chapter 9, Opener Review Now that you have learned why the supply curve shifts, go back and answer the Chapter Essential Question –How do suppliers decide what goods and services to offer?