Transcript Ch.5 PP[1]

Supply
The Law of Supply

Supply is the amount of goods available
 According to the law of supply, producers offer more
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of a good as its price increases and less as its price
falls
Quantity supplied describes how much of a good is
willing to sell at a specific price
A producer is called the supplier if they supply a
product to the market
As prices increase, firms will produce more to make
additional revenue and incentive to earn profit
As prices fall, some firms will produce less or drop out
of the market
The Law of Supply

Higher Production
 If a firm is earning profit by selling a good,
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an increase in price (ceteris paribus) will
increase profits
The promise of high revenue encourages a
firm to produce more
Refer to example on page 111
The search for profit drives the supplier’s
decision
If prices fall, firms may look to produce
something else
The Law of Supply

Market Entry
 Profits appeal to producers in the market
and who may decide to join the market
 If the price of pizza rises and you want to
start your own restaurant, a pizzeria would
be a safe bet
 In the music business in the 1970’s, disco
became popular and many people from
other genres joined disco music to take
advantage of the potential profits
The Supply Schedule

The supply schedule shows the relationship
between price and quantity supplied for a
specific good, or how much a good a
supplier will offer at various prices
 The table will show two variables, or factors that
can change
 Variables are the two factors listed on the axis's
 Usually price and the product supplied
 Supply schedule lists supply for a very specific
set of conditions and other factors are assumed
to remain constant
The Supply Schedule

A Change In Quantity Supplied
 Economists use the word supply to refer to
the relationship between price and quantity
supplied
 The number of slices that a pizzeria offers
at a specific price is called the quantity
supplied
 A rise or fall in the price of pizza will cause
the quantity supplied to change, not the
supply schedule
The Supply Schedule

Market Supply Schedule
 All of the supply schedules of individual
firms in a market can be added up to create
the market supply schedule
 Shows prices and quantities by all firms in a
particular market
 Important when we want to determine the
total supply of pizza at a certain price in a
large area
The Supply Schedule

The Supply Graph
 When the data points in the supply schedule are
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graphed, they create a supply curve
The horizontal axis now measures the quantity
of the good supplied, not the demand
Market supply curve are from the market
schedule
Key feature is the supply curve will rise from left
to right
This illustrates the law of supply, high prices
lead to higher output
Supply and Elasticity

Elasticity of supply measures how firms
will respond to changes in the price of a
good
 When elasticity is very sensitive to changes
in price, it is considered elastic
 If supply is not very responsive to price
changes, it is considered inelastic
 When percentage change in price is
perfectly matched by an equal percentage
change, elasticity is exactly one or unitary
elastic
Supply and Elasticity

Elasticity and Time
 Elasticity in the short run is inelastic and in the long
run is elastic

Elasticity of Supply in the Short Run
 An orange groove is a good example because orange
trees take several years to mature
 The short run a orange grower can use more effective
pesticides to increase output, but not very much
 In the short run supply is inelastic whether the prices
increase or decrease
 A business that would be more elastic would be the
hair cutting business
Supply and Elasticity

Elasticity in the Long Run
 Supply will become more elastic over time
 The orange grower can plant more trees
with the hopes of making more profits in the
future
 If prices drop for a number of years, the
orange growers that survived might start
growing something else
Labor and Output

Business owners have to answer the
question of how many workers to hire
 The number of workers hired will affect total
production
 Ex. At the bean bag company
○ 1 person = 4 bags per hour
○ 2 people = 10 bags per hour
○ 3 people = 17 bags per hour
○ 7 people = 32 bags per hour ***PEAK***
○ 8 people = 31 bags per hour
Labor and Output

Marginal Product of Labor
 The change in output from hiring one more
worker
 Called marginal product because it
measures the change in output at the
margin, where the last worker is hired or
fired
Labor and Output

Marginal Product of Labor – Beanbags
Labor (number
of workers)
Output
(beanbags
per/hr.)
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
Labor and Output

Increasing Marginal Returns
 The marginal product of labor increases with
the first 3 workers because there are three
jobs involved in making beanbags
○ Cutting cloth into correct shape, stuff with
beans, and sewing the bag
 Because specialization increases output per
worker, the second worker adds more to
output then the first, or increasing marginal
returns
Labor and Output
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Chart Questions
 In this example, why does the marginal
product of labor increase with the first three
workers?
 Why does the marginal product of labor
decrease with more than four workers in this
example?
Labor and Output

Diminishing marginal returns
 Though workers 4-7 output increases, the
marginal product of labor shrinks
 The benefits of specialization ends after the
hiring of the first 3 workers
 Adding more workers increases total output
but at a decreasing rate, or diminishing
marginal return
 Limited amount of capital makes the firm
suffer
○ One sewing machine, one pair of scissors,
Production Costs

Fixed Costs
 A fixed cost is a cost that does not change, no matter
how much of a good is produced
 Most involve cost of building or equipment
 Ex. Is rent, machinery repairs, property taxes, and
salaries

Variable Cost
 Variable costs are costs that rise or fall depending on
the quantity produced
 Includes raw materials and labor
○ Depends on if the firm wants to produce more or less
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Ex. Also include electricity and heating bills
Production Costs

Total Cost and Marginal Cost
 Fixed cost + variable cost =
total cost
 Marginal cost is the additional
cost of producing one more unit
Beanbags
(per hour)
Fixed
Cost
Variable
Cost
Total Cost
(FC+VC)
0
$36
$0
$36
1
36
8
2
36
3
Marginal
Cost
Marginal
Revenue
Total
Revenue
Profit
(TR-TC)
______
$24
$0
$ -36
44
$8
24
24
-20
12
48
4
24
48
0
36
15
51
3
24
72
21
4
36
20
56
5
24
96
40
5
36
27
63
7
24
120
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
10
36
106
142
24
24
240
98
11
36
136
172
30
24
264
92
12
36
173
209
37
24
288
72
Setting Output

Marginal Revenue and Marginal Output
 Another way to find the best level of output is to find
the output level where marginal revenue is equal to
marginal cost
 Marginal revenue is the additional income from
selling one unit of a good
 If firm has no control over market price then marginal
revenue = marginal cost
 We can also determine profit by comparing price and
average cost
○ Average cost is total cost divided by quantity produced
Setting Output

Responding to Price
 What would happen if the price of a
beanbag rises from $24 to $37?
○ Firm would increase to 12 beanbags/hr.
○ Marginal cost is equal to the new higher price
○ This is an example shows the law of supply in
action
Input Costs
Any change in the cost of input, such as
raw materials, machinery, or labor will
affect supply
 Effect of Rising Costs

 If the costs of labor or raw materials rise,
marginal cost will rise
 If the costs of inputs increases enough, marginal
cost may become higher than the price, which
means no profit
 If the firm has no control over price, the only
solution is to cut production and lower marginal
cost
○ The supply curve would shift to the left
Input Costs

Technology
 Advances in technology can lower the
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production costs in many industries
Automation like robotic tools save in labor
costs
Computers have simplified tasks
Email saves paper
Technology lowers costs and increases
supply at all levels
○ This would cause a shift to the right on the
supply curve
Government Influence
The government has the power to affect
supplies of many types of goods
 Subsidies

 A subsidy is a government payment that
supports a business or a market
 Subsidies generally lower costs, allowing a
firm to produce more goods
 European governments protect farms so that
some will be available to grow food in case
cheaper imports are ever restricted
Government Influence

Subsidies
 Governments in developing countries often
subsidize manufacturers to protect young,
growing industries from strong foreign
competition
 Indonesia and Malaysia subsidize cars as a
source of pride
 In many countries governments have stopped
subsidizing in the interest of free trade and
competition
○ Subsidizing can shift the supply curve to the right
Government Influence

Taxes
 A government can reduce the supply of some
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goods by placing an excise tax
A tax on the production or sale of a good
An excise tax increases production costs by
adding an extra cost for each unit sold
Alcohol, cigarettes, and high-pollutant gasoline
Usually built into prices
Increase in cost cause a decrease in supply
○ Shifts the supply curve to the left
Government Influence

Regulation
 Government regulation often has the effect
of raising costs
 Regulation is government intervention in a
market that affects the price, quantity, or
quality of good
 Regulation like reducing exhaust and using
lead-free gas increase cost and reduces
supply
○ The supply shift shifts to the left
Other Influences on Supply

Changes in the Global Economy
 The U.S. imports carpets from India. An
increase in the wages of Indian workers
would decrease the supply of carpets to the
U.S. market, shifting the supply curve to the
left
 The United States imports oil from Russia. A
new oil discovery in Russia could increase
the supply of oil to the U.S. market and shift
the supply curve to the right.
Other Influences on Supply

Future Expectations of Prices
 If a seller expects a price of a good to rise in
the future, the seller will store the goods now
in order to sell more in the future
 If prices are expected to fall, the seller will
market the product immediately
 During rising inflation, the value of money
decreases but a good will still hold its value
if it is stored for a long period
Other Influences on Supply

Number of Suppliers
 The number of suppliers in a market affects
supply
 If more suppliers enter the market to
produce a certain good, the market supply of
the good will rise –supply curve shifts right
 If suppliers stop producing the good and
leave the market
Where Do Firms Produce?

Key factor for many firms is
transportation
 Transporting inputs to a production facility
and transporting the finished product to
consumers
 Some firms locate themselves near raw
materials if inputs are costly to transport
 Some firms will locate close to consumers
when output in more costly to transport