Transcript notes

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
Circular Flow Diagram of a Market Economy
EXPENDITURES
Product market
REVENUE
monetary flow
physical flow
Firms supply
households with
goods and services.
Households
Households supply
firms with land, labor,
and capital.
Firms
WAGES, INTEREST,
NET PROFIT
House-hold
INCOME.
physical flow
monetary flow
Factor market (Resource Market)
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
Supply
As price
increases…
Quantity
supplied
increases
Price
Supply
As price
falls…
Quantity
supplied
falls
• Example: Ms. Yeomans needs some pencils for
school
– At Walmart, she finds a box of 12 pencils is $1
$1
– This is such a great price she decides to buy 5 boxes!
– As she is going to the register she sees that all office
supplies are on sale!!!
– This is great! She hurries back to grab 3 more boxes!
– Why did she buy more?
• Example:
– Cardinal Diner makes and sells
gingerbread cookies
– It costs them 10¢ to make the cookies so
they have to charge at least 10¢ for
them.
– They don’t make any money at this price
though so they don’t make very many
cookies.
– If they can charge 20¢ per cookie they
will make 100 cookies to sell
• How do we know what price will eventually
be charged?
– We use a Supply schedule and a Demand
schedule
• A list of quantity supplied
range of prices
Quantity Price Quantit
and
quantity demand
Supplied
y at
Deman
d
• Example:
– Chicken sandwiches
• At $1 consumers will demand
43 chicken sandwiches but
49
$7
4
39
$6
8
29
$5
13
19
$4
19
12
$3
26
5
$2
34
a
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
Market Supply Schedule
• Market supply schedule- is a chart that lists how much of a
good all suppliers will offer at different prices
Market Supply Schedule
Price per slice of pizza
Slices supplied per day
$.50
1,000
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500
Market Supply Curve
3.00
Supply
Price (in dollars)
2.50
2.00
1.50
1.00
.50
0
0
500
1000 1500 2000 2500 3000 3500
Output (slices per day)
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
0
0
—
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
–1
Marginal Returns
Increasing marginal returns- occurs
when marginal production levels
increase with new investment.
Increasing, Diminishing, and
Negative Marginal Returns
8
7
Negative marginal returns- occurs when
the marginal product of labor becomes
negative.
Diminishing
marginal
returns
6
Marginal Product of labor
(beanbags per hour)
Diminishing marginal returns- occurs
when marginal production levels
decrease with new investment.
Increasing
marginal
returns
5
4
3
Negative
marginal
returns
2
1
0
–1
1
2
3
4
5
6
7
–2
–3
Labor
(number of workers)
8
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.
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.
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
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)
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
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
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 yearWhat do you do?
2. Gas Stations- A hurricane is going to hit and cause a shortageWhat do you do?
3. Farmer- Corn is expected to go down next yearWhat do you do?
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.
• Examples1. 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?