Transcript Law of Supply

Law of Supply
Supply
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supply--amount of goods/services that producers
are willing and able to offer for sale at various
possible prices
Quantity supplied—amount of goods/services that
a producer is willing to sell at each particular
price.
What is the difference between supply and
quantity supplied?
What is the difference between supply and
demand? (think about the relationship between
price and quantity)
Supply
Law of Supply
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Law of supply-- higher the price consumers
are willing and able to pay, the more the
sellers are willing to produce. Visa versa.
Why do you think this is true?
Law of Supply
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1. profit motives
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profit—the amount of money left after a producer has paid
all their costs
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a business makes a profit when revenues (amt. coming in)
are greater than the money going out
costs of production—the outgoing costs
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wages, salaries, rent, interest on loans, utilities, raw
materials
to make a profit producers must provide the goods/services
that people want, at a price consumers are willing and able
to pay
Law of Supply
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profits and markets
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High demand for a good leads to increased
production and higher profits
Higher profits in this market lead other producers
to enter markets
Lower demand leads to decrease in production
and lower profits
Lower profits in this market lead other producers
to leave the market
Curves & Schedules
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supply curve-a graphic representation of the
amount of units a seller will make available at all
possible prices.
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direct relationship between price and quantity supplied
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upward sloping curve
supply schedule-a numerical representation of the
amount of units a seller will make available at all
possible prices displaying the relationship
between the price of a good/service and the
quantity that producers will supply
Changes in Quantity Supplied
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any movement along the supply curve.
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shifts result from change in price only
Changes in Supply:
Determinants of Supply
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supply curve move left (not up) and right
(not down) as supply is increased or
decreased
Changes in Supply:
Determinants of Supply
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change in resource prices (raw materials, electricity, wages)
change in technology
government tools
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tax-required payment of money to the gov’t (materials, property,
and profits)
subsidies-payments to private businesses from gov’t (usually
agriculture)
regulation-rules about how companies conduct business
(pollution, discrimination, worker’s rights)
change in prices of related goods (ag products)
change in producer expectations (sell high, hold low)
change in total number of suppliers (competition)
Elasticity of Supply
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the degree to which price changes affect the
quantity supplied; can be elastic or inelastic
Elastic Supply—when a small change in price
causes a major change in the quantity supplied.
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elastic supply if products can be made:
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quickly
inexpensively
using a few readily available resources
examples:
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sports team souvenirs
Christmas toys
fad items
Elasticity of Supply
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Inelastic Supply—when a change in the goods
price has little impact on the quantity supplied.
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inelastic supply if products requires a great deal of:
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time
money
resources that are not readily available
examples:
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gold
fine art
rare and precious items
Critical Thinking
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Critical thinking question: You are an alchemist in
the Middle Ages trying to convert base metals to
gold. What would be the economic
consequences if you succeed and your methods
become widely known?
the supply of gold would skyrocket and destroy its
value as a precious metal. This is a shift in the
supply curve, not a change in quantity supplied.
Productivity
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the level of output that results from a given
level of input
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Total Product (output)—all the product a
company makes in a given period of time, with a
given amount of input
Marginal Product—the change in output
generated by adding one more unit of input
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the value of workers output
marginal means additional, or last worker hired
Productivity:
Law of Diminishing Returns
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Law of Diminishing Returns-production principle
that states when one factor of production is
increased while the others are held constant, a
point will be reached where each additional input
will result in smaller and smaller outputs, or
diminishing returns.
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law applies to all factors of production when they are
added to a fixed amount of other resources. This must be
kept in mind when searching for the right combination of
land, labor and capital.
Productivity:
Law of Diminishing Returns
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example: factory making whiffle ball bats. 10,000
sq. ft. w/ 10 machines. Add 10 more machines.
Add 10 more machines. With each new machine
added the productivity percentage decreases
because of overcrowding. Eventually production
will come to halt if machines are continued to be
added. Similar to Law of Diminishing Marginal
Utility.
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law of diminishing returns begins to set in when total
production begins to increase at a decreasing rate.
We will practice examples of this in a bit.
Productivity:
Law of Diminishing Returns
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Increasing Marginal Returns
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Diminishing Marginal Returns
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as the number of workers increases, the total output rises
at a steep rate
when output begins to increase at a diminishing rate
Negative Marginal Returns
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workers (machines) getting in each others way, making
each other frustrated and lowering morale
leads to a drop in the total product in production curve
Productivity:
Costs of Productions
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directly affects the amount of profit their business makes
the ingoing portion of profit
Fixed Costs (overhead) --a cost of doing business that
remains more or less constant regardless of volume of
business
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Variable Costs- costs that increase as output increases
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Wages, raw materials, and any resource or capital
Total Costs—the sum of a companies fixed and total costs
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Rent, interest on loans, insurance, taxes, salaries, routine wear
and tear
at 0 output a companies total cost is equal to their output
Marginal Costs—the additional cost of producing one more
unit of output
Productivity:
Economies of Scale
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Economies of Scale-increased productivity while reducing costs…goal of a business
Division of Labor (Specialization)
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breaking down total production process into a series of simpler tasks
Advantages:
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Disadvantages:
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boring
fill-ins when absent
Quantity Discounts-more resources obtained at lower cost (Bulk purchase)
Specialized Machinery-necessary for large-scale production (auto industrial
automation)
Easier Credit-less risk to lending institutions
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workers need only be trained for one operation or process (reduces cost)
increases productivity (efficient)
easier to get credit w/ good collateral & credit
get lower interest loans (prime rate)
Research, Development, By-Products-can afford to hire scientists, build labs, and
conduct research.
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by products are when meat packing places produce glue, fertilizers, soap, meat, dog food, ect.