Transcript Understanding Supply and Changes in Supply

Understanding Supply and
Changes in Supply
Chapter 5, Sections 1 and 3
Law of Supply
• Producers will offer more of a good if
prices rise, and less of a good if prices fall
(in other words, the higher the price, the
larger the quantity produced).
• This is to try to make as large of a profit as
possible
• Competition is created among firms
(businesses), and some are forced to drop
out of the market
Market Supply Curve
• A market supply curve illustrates the
quantity supplied by all producers in a
market at different prices
• It always rises from left to right
• This is because higher prices lead to
higher output / production of goods
Example of a Supply Curve
Elasticity of Supply
• Like the concept of elasticity of demand,
elasticity of supply is a concept that
shows how suppliers react to price
changes.
Inelastic Supply
• Industries that cannot easily change
production have inelastic supply.
• Example: Orange growers cannot increase
production quickly when prices rise
because they need to purchase more land
and plant more trees in order to increase
output
Elastic Supply
• When a firm (business) / industry can
easily alter production after a price
change, it has elastic supply.
• Example: A service industry like a barber
shop has elastic supply. If the price of a
haircut rises, barber shops and salons can
hire new workers quickly, new barber
shops will start, and existing businesses
will stay open later.
Changes in Supply
• Any change in the cost of inputs, like raw
materials, machinery, or labor, will affect
supply.
• A decrease in production costs increases
the supply of a good and an increase in
production costs decreases the supply of a
good because the good has become more
expensive to produce
Changes in Supply
• The government has the power to affect
the supply of many goods.
• A subsidy is a government payment to
support a business or market
• Since the subsidy lowers the cost of
producing a good, its effect is to increase
supply
Changes in Supply
• The government can also reduce the
supply of some goods by placing an
excise tax on them.
• An excise tax is a tax on the production or
sale of a good, making it more expensive
to produce
• Regulation, or steps the government
takes to control production, can also
decrease the supply of a good
Changes in Supply
• Another influence on supply is producers’
expectations
• If producers expect the price of a good to
drop in the future, they will put more goods
on the market immediately (increase
supply) to try to make as much profit as
they can in the short-term before the price
of the good falls
Changes in Supply
• If sellers expect the price of a good to rise
in the future, they will store more goods
now and sell more in the future (decrease
supply) in order to try to make as much
profit as they can in the long-term (they
make more profit when selling a good
when the price is higher).
Changes in Supply
• Technology and Competition in the market
also affect supply
• Improvements in technology will increase
supply because production costs will be
lowered, and more firms entering the
market (more competition) will also
increase supply as firms attempt to
compete with each other for market control
Changes in Supply
• Firms (businesses) leaving the market will
decrease supply because there will be
less competition. Companies not forced to
leave the market know that, at least in the
short-term, they do not have to produce
more goods to compete with other
companies.
Summary of Changes in Supply
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Forces that Increase Supply:
Decreases in production costs
Increases in technology
Government subsidies
Expectations of lower prices
More firms entering the market
Summary of Changes in Supply
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Forces that Decrease Supply:
Increases in production costs
Excise taxes
Government regulations
Expectations of future higher prices
Firms leaving the market