1. Law of Supply MICROECONOMICS SSEMI2
Students will explain how the Law of Supply, prices, and profit work to determine production and distribution in an economy

2. Factor market (Resource Market)
REVENUE
EXPENDITURES
Product market
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
WAGES, INTEREST, NET PROFIT
House-hold INCOME.
Factor market (Resource Market)

3. Law of Supply
Law of Supply- refers to the relationship between price and the quantity of a good or service that firms are willing to produce. The higher the price of the product leads to more supplies and more companies making the product.
Price
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls

4. How does the Law of Supply work?
Quantity supplied- describes how much of a good is offered for sale at a specific price.
Elasticity of supply- is a measure of the way a quantity supplied reacts to a change in price, it is very sensitive.
1. Inelastic- not sensitive to changes in prices. (Bread)
2. What effects Elasticity?- TIME, in the short term a firm can not change its supply level, but in the long term a firm is more flexible.
Supply Curve- is a graph of the quantity supplied of a good by all suppliers at different prices. ALWAYS GOING UP

5. Market Supply Schedule
Market supply schedule- is a chart that lists how much of a good all suppliers will offer at different prices
$.50
1,000
Price per slice of pizza
Slices supplied per day
Market Supply Schedule
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500

6. Output (slices per day)
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
Supply

7. Cost of Production
Firms- always look at how the number of workers they hire will affect production.
1. Marginal Cost of Production- represents the change in output for hiring one additional worker
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor — 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1

8. Labor (number of workers) Marginal Product of labor
Marginal Returns
Increasing, Diminishing, and Negative Marginal Returns
Labor (number of workers)
Marginal Product of labor
(beanbags per hour) 8 7 6 5 4 3 2 1 –1 –2 –3 1 2 3
Increasing marginal returns
Increasing marginal returns- occurs when marginal production levels increase with new investment.
Diminishing marginal returns- occurs when marginal production levels decrease with new investment. 4 5 6 7
Diminishing marginal returns
Negative marginal returns- occurs when the marginal product of labor becomes negative. 8 9
Negative marginal returns

9. Production Costs
Fixed cost- is a cost that does not change, regardless of how much of a good is produced.
1.Examples: Rent & Salaries
Variable costs- are costs that rise or fall depending on how much is produced.
1. Examples: costs of raw materials & some labor costs.
Total cost- is the fixed costs plus variable costs.

10. Production Costs and Supply
Changes- any change in the cost of an input such as raw materials, labor, cost.
1. Increase- a rise in cost will cause a fall in supply as the product becomes more expensive to make
2. Decrease- the fall of input costs causes supplies to increase.

11. Government Subsidies and Supply
Subsidy- is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.
Examples
1. Paying farmers not to farm a piece of land
2. Fannie Mae and Citigroup
3. Japanese Banks

12. Government Regulation and Supply
Regulation- occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs.
Examples
1. Automobile Industry (Emissions)
2. Banks (minimum in their savings)
3. Insurance Industry (failed regulations)

13. The Excise Tax and Supply
Excise Tax- tax on the production or sale of a good. This increases production costs by adding extra costs for every item sold. Causes the supply of the item to decrease on all levels.
Examples- some are used to discourage the buying of a good considered harmful to the public good.
1. Cigarettes
2. Alcohol
3. Tariff on Imported Goods (Foreign Food) makes them more expensive to buy

14. The Global Economy and Supply
The Global Economy- The supply of imported goods and services has an impact on the supply of the same goods and services here.
1. Government Actions- if the government imposes a ban or restriction on the import of a product than the supply curve shifts left on all prices
Examples
1. Clothes- U.S. imports clothes from China, wages go up in China, decreasing the supply. Supply curve goes left because costs have increased
2. Toyota- new technology cuts the costs of producing cars- increases the supply of cars here. Supply curve goes right costs have fallen

15. Future Expectations and Supply
Future Expectations of Prices- Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect.
1. Inflation- is the condition that the value of the cash in your pockets decreases as prices rise. This can cause supply to fall dramatically. (GREED from PRODUCERS)
Examples
1. Farmers- Corn prices are expected to go up next year- What do you do?
2. Gas Stations- A hurricane is going to hit and cause a shortage- What do you do?
3. Farmer- Corn is expected to go down next year-
What do you do?

16. The Number of Suppliers and Supply
Number of Suppliers- if more firms enter a market and sell a good the supply increases, if more leave the supply decreases.
Examples-
1. Pizza Store- Fat Tony’s is the only one in town and he sells his pies for $17. The Papa John’s, Pizza Hut and Original Fat Tony’s open up. What happens to the cost of pies?