2. Chapter 5 Supply Chapter 5, which deals with the supply side of the market, is a natural continuation of the preceding chapter on demand. Section 1 Section 1 focuses on the nature of supply Section 2 Section 2 introduces the theory of production, which explains how output varies when inputs change Section 3 Section 3 explains the role of costs in determining productivity, and provides an analysis of total and marginal revenues

3. I.What is Supply? A.Objectives 1.Understand the meaning and concepts of supply 2.Explain the difference between the supply schedule and the supply curve 3.Explain what is meant by a change in quantity supplied 4.Specify the reasons for a change in supply

4. B.An Introduction to Supply 1.Economists want to know how much of a certain product or commodity sellers will supply at each and every possible market price 2.Supply- The ability and willingness of producers to provide products over a wide range of prices a.If someone asks you to supply baby-sitting or yard work services after school, what is the first thing that comes to your mind? Money, Cash, Greenbacks, Moolah…

5. b.Let’s negotiate! 1)What generalization can you make? a)The higher I pay, the more work you are willing to supply 2)Supply is the amount of production, in this case your efforts, provided over a wide range of prices 3)If you are looking for a job, you are a supplier (service for sale) a)What factor of production are your? labor b)What market are you selling your labor at? factor product Pay per hour Yard Work Baby Sitting $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $14.00 $18.00 $20.00 $25.00

6. C.Supply Schedule and Supply Curve 1.If you are an owner of a business, you are more eager to make a product when the price is high a.Why? b.You are making a higher profit 2.A supply schedule tells the quantities of a commodity offered at each and every possible market price

7. Directions: Complete the Venn diagram below to compare and contrast demand and supply schedules  Title and labels  List the highest dollar amount on top  Tally numbers  The highest quantity number equals the number in focus group  Inverse relationship between price and quantity  Begin to tally from the top  The quantity increases as you move down the schedule  Direct relationship between price and quantity  Begin to tally from the bottom  The quantity decreases as you move down the schedule Supply Schedule Demand Schedule PriceQuantity (thousands) $14040 $12035 $10020 $8015 $606 $403 Supply Schedule PriceQuantity (thousands) $1404 $1208 $10015 $8020 $6027 $4035 Demand Schedule

8. a.Steps for Creating a Supply Schedule 1)Draw blank chart 2)Put the dollar amounts in schedule from Highest to Lowest 3)Tally and mark off dollar amounts from your focus group 4)Start with Lowest Dollar amount, put quantity supplied number in schedule by adding up the old and new tally marks 5)Check- Does your highest tally mark equal the number in the highest dollar amount in schedule? TallyDollarQuantity Supplied $ 30 $ 15 $ 20 10 5 1 IIIII 5 I 1 lIII4 $30 $20 $15 $20$30

9. Practice Time Directions: For each set of data, create a supply schedule with the raw data from your focus group interviews

10. Date Set # 1 Product: Huge, yellow, fluffy, happy, huggable, smilie face pillows $40, $90, $35, $85, $70, $70, $85, $90, $75, $85, $50, $65 Data Set # 2 Product: uPhone- the next generation of the iPhone $100, $140, $150, $120, $150, $140, $135, $140, $150, $135, $145

11. Data Set # 4 Product: Z-Box- the newest dance-craze instructional video so you can be hip- hopping coooool! $20, $18, $25, $15, $25, $20, $30, $20, $25, $16, $27 Data Set # 3 Product: Garden frogs that croak and glow in the dark $15, $20, $10, $20, $11, $18, $18, $20, $15, $19

12. Data Set # 5 Product: 6 wheeler all-terrain vehicle $155,000; $177,000; $166,500; $160,000; $188,000; $177,000; $166,500; $199,000; $177,000

13. 3.Supply Curve a.Data represented in the supply schedule shown graphically b.Slopes upward and to the right or has a positive slope to reflect the tendency of suppliers to offer greater quantities for sale at higher prices Supply Schedule for T-Shirts PriceQuantity $30350 $27330 $24300 $21240 $18190 $14140 $1270 $920 $60

14. c.Directions on Creating a Supply Curve Price Quantity Supplied $19020 $17518 $16015 $15010 $1305 1)Label “Price” on Y axis, “Quantity” on X axis, and write the title 2)By looking at the schedule, figure out a scale and write it on the graph Supply Curve of Radios Price Quantity 2 4 6 8 10 12 14 16 18 20 190 170 150 130 110 100 3)Place a dot at the intersection of each corresponding “Price” and “Quantity” 4)Draw a general line over the dots S 5)Label the line with a “S”

15. S Directions: complete the Venn diagram by comparing and contrasting a demand and supply curve  Title  “Price” is labeled on the Y axis  “Quantity is labeled on the X axis  Slopes downward  Has a negative slope  Greater amounts would be bought at lower prices  Inverse relation between price and quantity  Demand curves are labeled “ D ” Shared Traits  Slopes upward  Has a positive slope  Greater amounts would be offered for sale at higher prices  Direct relation between price and quantity  Supply curves are labeled “ S ” Demand CurveSupply Curve

16. Practice Time Directions: For each set of data, create a supply schedule with the raw data from your focus group interviews, create a supply curve and answer the questions

17. Data Set #1 Product: Stereo System $500, $450, $300, $600, $500, $400, $600, $550, $600, $400 Data Set #2 Product: Computer $3,000, $1,200, $2,400, $3,000, $2,000, $2,400, $2,800, $1,800, $1,600

18. Data Set #3 Product: Mega Pack of Cinnamon Extra Gum $4.00, $3.75, $3.50, $3.00,$2.50, $2.00, $1.50, $1.00, $0,75, $ 0.50 How many packs of gum will Extra Co. be willing to supply at $1.50 a pack? How many more packs of gum will Extra Co. Be willing to supply at $3.00 a pack? Using the answer from the last question, how may more packs of gum will Extra Co. be willing to supply at $3.65 a pack? Data Set #4 Product: Ford Explorer $70,000, $65,000, $60,000,$55,000, $50,000, $75,000, $80,000, $75,000 How many Ford Explorers will Ford Motor Co. be willing to supply at $75,000? How many less Ford Explorers will Ford be willing to supply at $60,000? Using the answer from the last question, how many more Ford Explorers will Ford be willing to supply at $72,000?

19. Data Set #5 DVD Collection of Dexter $75.00, $70.00, $55.00, $70.00, $60.00, $75.00, $60.00, $80,00, $60.00, $65.00, $80.00 Data Set #6 Product: Stuffed Teddy Bear $60.00, $55.00, $65.00, $90.00, $85.00, $70.00, $85.00, $90.00 How many DVD Dexter sets would Showtime be willing to supply at $65.00?______ How many more DVD Dexter sets would Showtime be willing to supply at $75.00?______ How many less DVD Dexter sets would Showtime willing to supply at $63.00?______

21. 4.Law of Supply a. The tendency of suppliers to offer more for sale at high prices than low prices 1)If you sell something on E-bay, would you rather sell your “thing” at a high price or a low price? 2)If you sell something on E-bay at a REALLY good price, do you wish that you had more of that product to sell? b.“The quantity supplied, or offered for sale, varies directly with its price” PriceSupply High/More Low/Less

22. How Does the Law of Demand Compare to the Law of Supply Law of Demand “the quantity demanded varies inversely with its price” Quantity people are willing and able to buy or purchase a product Inverse High demand Low demand The Law states… Define Demand Supply Relation between price and quantity Low Price High Price Law of Supply “the quantity supplied, or offered for sale, varies directly with its price” Quantity producers are willing and able to produce a product Direct Low supply High supply PricePrice Quantity Quantity

23. 5. Basic Supply Curve 1.Using two lines, make a 90 degree angle opening to the right 2.Label “Price” on Y axis, “Quantity” on X axis, and write the title 3.Draw an upward or positive sloping curve 4.Label the curve “S” 5.Pick a spot on the Y axis and mark a P 1 6.Draw a line to the curve and then draw down to the X axis and mark a Q 1 Price Quantity Basic Supply Curve S P1P1 Q1Q1

24. D. Change in Quantity Supplied 1.The amount that producers bring to market at any ONE price is called quantity supplied 2.A change in quantity supplied is the change in amount offered for sale in response to a change in price Supply Schedule for T-Shirts Price per T-Shirt Quantity of T-Shirts Supplied $30350 27330 24300 21240 18190 14140 1270 920 60 a.At $30 (P 1 ), 350 T-shirts are supplied (Q 1 ) b.If the price decreases to $15 ( P 2 ), 160 T-shirts are supplied ( Q 2 ) c.This change illustrates a change in the quantity supplied, which also represents a movement along the supply curve A P1P1 Q1Q1 B Q2Q2 P2P2

25. 3.Reasons for Change in Quantity Supplied a.Usually the interaction of supply and demand determines the final price b.The producer has the freedom to adjust production 4.Types of graphs a. Increase in Change in Quantity Supplied b. Decrease in Change in Quantity Supplied

26. Directions: Read the situation, draw the supply curve making sure you have all of the pertinent information, and finally tell me if it decreases or increases Practice Time

27. 1. The price the automobile producers will receive for their product decreases 2. The price that a producer of shoes can receive for their product increases

28. 3. The price that a producer of gummy bears receives goes down 4. The price that an apple producer can receive goes up

29. E. Change in Supply 1. When producers offer different amounts of products for sale at all possible prices in the market 2.When a fundamental change in the economy causes an increase or decrease in the amount supplied at every price 3.The price doesn’t change, but something in the economy as a whole changes S1S1 S2S2 S3S3 Price Quantity P1P1 Q1Q1 Q2Q2 Q3Q3 a.Overall line shifts to the right to show an increase in supply b.Overall line shifts to the left to show a decrease in supply

30. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples Cost of Inputs inputresources that are required for industrial production, such as capital goods, labor services, raw materials/capit al, etc. (review Chapter 1) if the price of inputs goes down, producers can produce more at each and every price if the price of inputs goes up, producers will not be willing to produce as many products at each and every price Increase Corn prices go down, so it is cheaper to raise hogs Decrease minimum wage increases costan outlay or expenditure of money, time, labor, trouble, etc… to require the payment of money or something else with value in an exchange for a commodity 4. Seven Reasons for Change in Supply Directions: the seven reasons and new vocabulary is given to you. In the box provided, fill in a complete definition of each reason, then explain how it would increase supply, then decrease supply, and finally give examples for each.

31. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples Productivityproductivity more motivated, better trained, and happy workers increase productivity unmotivated, untrained, or unhappy workers decrease productivity Increase classes at LHS Decrease Technologytechnologythe specific methods, materials, and devices used to solve practical problems especially in industry or commerce introducing new machines, chemicals, or industrial processes can affect supply by lowering the cost of production Increase writing an excellent essay by means of paper/pencil or word processor Decrease commercean interchange of goods or commodities; trade; business

32. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples Number of Sellers sellersperson or business that transfers goods or renders services for another in exchange for money when more sellers get into the market when sellers leave the market Increase in a growing economy, sellers open business and join the market; in a recession, sellers go bankrupted and leave the market Decrease renderto do; perform; provide

33. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples Taxes and Subsidies taxesa sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. taxes are the same as the cost of inputs; taxes decreased taxes are the same as the cost of inputs; taxes increase Renaissance Zone are virtually free of all state and local taxes for businesses located within their boundaries; There are over 150 geographic areas in Michigan that are designated as renaissance zones; Carson/Bloomer/ North Shade, City of Stanton, Howard/Pierson/ Reynolds, Montcalm Township, Village of Edmore http://ref.michigan. org/medc/services/ sitedevelopment/re nzone/index.asp leviedan imposing or collection by authority or force

34. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples cont… Taxes and Subsidies subsidiesa grant made by a government to some individual or business in order to maintain an acceptable standard of living or to stimulate economic growth when an individual or business receives a subsidy when an individual or business losses the subsidy Increase Federal Pell Grant; subsidized housing; free or reduced breakfast and/or lunch; farm programs; Decrease government or organizations are in declining growth so they stop or lessen subsidizing granta sum of money, that does not have to be repaid by the individual or business; provided by a government, local authority, public fund/foundations to help finance educational study, those in need, or to encourage or produce a certain type of economic activity

35. ReasonsVocabularyDefinitionIncrease SupplyDecrease SupplyExamples Expectationsexpectationsanticipation of future events if producers expect prices for their output to lower, they may try to get rid of as much supply or inventory as possible now if producers think it is likely for the price of their output will go up in the future, they may withhold or keep some of their supply or inventory now Increase Farm Future Market, poor reports for future earnings Decrease reports for strong future earnings Government Regulations government make laws requiring companies to do required things the government mandates something, this makes it higher cost to production Increase Government gets rid of mandates Decrease No Child Left Behind Environment regulations mandatesto authorize or decree (a particular action), as by the enactment of law

36. Practice Time Directions: Read the situation, draw a Change in Supply curve making sure you have all of the pertinent information, tell if it is increasing or decreasing, which of the broad categories it belongs to and why. 1. Cost of inputs increase. 2. New technology makes it easier and more efficient to produce items. 3. Number of sellers declines due to recession. 4. Expectations for the future are positive.

37. 5. New government regulations require more strict and costly cleanup plans. 6. Productivity declines due to layoff at a plant. 7. Tax breaks are given to area businesses. 8. Subsidies are given to business to aid in research and development.

38. 9. A hurricane destroys 10 factories in North Carolina. 10. Cost of inputs decreases due to surplus of item in the market.

39. Change in Quantity Supplied or Change in Supply? Directions: For each situation, tell if it is a Change in Quantity Supplied or Change in Supply

40. 1. The price that an automobile producer can receive for his product decreases 2. Cost of cotton, tread, ink, labor, etc. increase for a tee-shirt producer 3. The ability of workers to produce products improves with professional development. 4. Less producers of sugarcane are in business due to a catastrophic hurricane.

41. 5. The federal business tax is repealed. 6. Subsidies are made available for cancer drug producers for research and development. 7. New technology makes it easier and more efficient to produce a product. 8. The price that a producer of shoes can receive for her product increases.

42. 9. More lenient government regulations make it less costly to produce aluminum. 10. Expectations are positive for a producer of beach towels.

43. F. Elasticity of Supply 1.Elasticity of Supply: a measurement of a supply curve’s sensitivity to changes in price a. Elastic supply is used to describe a supply curve which is shaped such that a change in price would result in a more- than-proportional change in quantity supplied 1)If a small increase/decrease in price causes a relatively larger increase/decrease in output, the supply curve is said to be elastic Elastic Supply Note: this is why is strongly suggested that the lengths of the X and Y axis were equal (not the scale, but the number of lines used). If you do this, then you don’t have to do the following slide to figure out proportion. a)More than proportional b)Decreasing the price by 50% ($40 to $20) created a decrease in supply by 76% ( 50 units to 12 units)

44. Want to know how much we lost in percent… but how? 1. Figure out how much we lost for price and quantity Price 40-20= 20 Quantity 50-12= 38 2. Change the amount that we lost into a percent Percent is the amount or part of something compared to the whole thing. I know that for price I started at 40 which would be the whole, then the price lowered to 20 which means I lost 20 which would be the part. For Quantity my whole would be 50, then I produced 12 which means I lost 38 which would be the part. (Ohhhh… another way of looking at quantity would be opportunity cost?) part x 100 = percent (cuz everything is out of 100%) whole Price 20 (20 divided by 40) =0.5 to figure percent 0.5x 100= 50% 40 Quantity 38 (38 divided by 50)= 0.76 to figure percent 0.76X 100= 76% 50

45. b. Inelastic Supply: used to describe a supply curve which is shaped such that a change in price would result in a less-than- proportional change in quantity supplied 1)If an increase/decrease in price causes the quantity supplied to change very little, supply is inelastic a)Less than proportional b)Decreasing the price by 50% ($40 to $20) created a decrease in supply by 12.5 % i.(32 units to 28 units) (5 units/32 units x100) Inelastic Supply

46. c.Unitary Elastic Supply: used to describe a supply curve which is shaped such that a change in price would result in a proportional change in quantity supplied 1)a given change in price causes a proportional change in the quantity supplied, supply is unit elastic a)Proportional b)The price decreased by 50% ($40 to $20) and the quantity supplied also decreased by 50% (40 units to 20 units) P1P1 P2P2 Q2Q2 Q1Q1 S Price Unit Elastic

47. elastic inelastic P1P1 P2P2 Q2Q2 Q1Q1 S Similarities 1.Change in Quantity Supplied graph 2.The price change unit elastic Differences 1.A decrease in price causes a relatively larger decrease in output 2.Price drops 50% and quantity drops 76% 3.More than proportionate Similarities 1.Change in Quantity Supplied graph 2.The price change Similarities 1.Change in Quantity Supplied graph 2.The price change Differences 1.A decrease in price causes a relatively smaller decrease in output 2.Price drops 50% and quantity drops 12.5% 3.Less than proportionate Differences 1.A decrease in price causes a proportionate decrease in output 2.Price drops 50% and quantity drops 50% 3.Change is proportionate

48. Practice Time

49. II.The Theory of Production A.Objectives 1.Explain the theory of production 2.Understand the importance of marginal product and its application to the economy 3.Describe the three states of production and how they relate to the concept of diminished returns

50. B.Theory of Production 1.Explains the relationship between the factors of production (land, labor, or capital)and the output of goods and services 2.It looks at how output changes when input changes 3.The theory is based on the short run a.Short Run- a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied ( 2nd edition of Parkin and Bade's "Economics“) 1)We normally assume that the quantity of capital inputs (e.g. plant and machinery) and the amount of land available for production are fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labor, components, raw materials and energy inputs b.Long run- is a period of time in which the quantities of all inputs can be varied (2nd edition of Parkin and Bade's "Economics“)

51. C.Law of Variable Proportions 1.In the short run, output will change as one input is varied while the others are held constant 2.Looks at the relationship between the input of productive resources and the output of final products a.As the amount of input (chili power) increases, so does the output (the quality of the chili) 1)If you make chili, the first teaspoon of chili powder will make the chili taste better 2)Two teaspoons may make it taste better yet 3)However, at some point the chili begins to taste terrible 3.Helps to answers the questions, “How is the output of the final product affected as more units of one variable input or resources are added to fixed amount of other resources?” a.Farmer may have land, machines, workers, and other items needed to produce a crop, however the farmer may have some questions about fertilizer and the amount needed 1)The variable input is the fertilizer added per acre

52. D.The Production Function 1.The Law of Variable Proportions can be illustrated by using a production function a.Production function is a concept that relates changes in output to different amounts of a single input while other inputs are held constant b.Production Schedule is a chart that details the total product, marginal product and the one variable in one production function 1)Total Product is total output produced by the firm and the one variable changes, but all other variables stay the same 2)Marginal Product is the extra output generated by adding one more unit of variable input a)Change in total product caused by the addition of one more unit of variable input

53. Production Schedule Using Varying Amounts of Labor Number of Workers Total Product (In Units) Marginal Product (In Units) 0 0 0 1 14 14 3 75 33 2 42 28 4 112 37 6 180 30 5 150 38 7 203 23 8 216 13 10 190 -17 9 207 -9 The number of workers is the only thing that changes in this schedule. No changes occur in the amount of machinery used, level of technology, or quantities of raw materials (unprocessed natural products used in production). Under these conditions, any change in output must be the result of the variation in the number of workers. Marginal product- the extra output generated by adding one more unit of variable input. (Change in total product caused by the addition of one more unit of variable input) Total Product- total output produced by the firm (Add up all of the marginal products)