Transcript Chapter 5
Chapter 5 Supply Law of Supply • Because the producer is receiving payment more will be offered at higher prices. • Suppliers will normally offer more for sale at high prices and less at lower prices. The Supply Schedule • The only real difference between a supply schedule and a demand schedule is that prices and quantities now move in the same direction for supply • can also be illustrated graphically as an upward-sloping line Change in Quantity Supplied • Suppliers have some control over the price • Ultimately the final interaction between supply and demand determines the price. • Again if the price changes then it is a movement along the supply curve. Change in Supply • Appears as a SHIFT in the Supply curve. • Decrease in Supply – Shift to the Left • Increase in Supply – Shift to the Right Cost of Inputs • A change in the cost of inputs can cause a change in supply • If the price of the inputs drops, producers are willing to produce more at each price Productivity • If workers work more efficiently, productivity should increase • The result is more is produced at every price – supply shifts right • if workers are unmotivated, untrained, or unhappy, productivity could decrease – Supply shifts left Technology • New technology tends to shift the supply curve to the right • New Technology can affect supply by lowering the cost of production or by increasing productivity Taxes and Subsidies • Firms view taxes as costs • If the producer’s inventory is taxed or if fees are paid the cost of production goes up. • Taxes shift supply left Taxes and Subsidies • A subsidy is a government payment to encourage or protect a certain type of economic activity • Subsidies lower the cost of production • Subsidies shift supply right Expectations • Expectations about the future price can affect the supply curve • If producers think the price of their product will go up, they may withhold some of the supply • If producers may expect lower prices they may try to produce and sell as much as possible right away Government Regulations • When the government establishes new regulations, the cost of production can be affected • Increased government regulations restrict supply – supply curve to shifts to the left • Relaxed regulations allow producers to lower the cost of production – Shift to the right Elasticity of Supply • If a small increase in price leads to a large increase in output, supply is elastic. • If the quantity supplied changes very little, supply is inelastic Determinants of Supply Elasticity • If a firm can adjust to new prices quickly, then supply is likely to be elastic. • If adjustments take longer, then supply is likely to be inelastic. Theory of production • The relationship between the factors of production and the output of goods and services. • Short run vs Long run • Some things take longer to change and can only be changed in the long run. Short run vs Long run • Short run – only the variable inputs can be changed • Long run – any input, fixed or variable, can be changed • hiring 300 extra workers is a short-run adjustment • building a new factory, this is a long-run adjustment Stage 1 - Increasing • With only a couple of workers not all resources are used • Some machines are idle • Each extra worker adds more than the previous Stage 1 - Increasing • Workers begin to specialize and work as a unit • This stage is characterized by increasing marginal returns Stage 2 - Decreasing • Eventually the plant is at full employment • All resources are maximized • Adding more workers still increases production • But each work adds less than the previous • This is called decreasing marginal production Stage 3 - Negative • Finally there are just too many workers • They get in the way and slow down production • Each worker actually subtracts from total production • This is call negative marginal product