Transcript chapter five econx

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Supply
Chapter five
Economics – Swenson
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5.1 Understanding Supply
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Supply is the amount of goods that are available
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The law of supply – the higher the price, the larger the quantity offered
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Quantity supplied – how much of good is offered at one particular price
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When a price rises a company will have an incentive to create more
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In addition, new firms will have an incentive to enter the market
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If a price falls, producers will produce less and some firms may drop
out of the market
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This is the law of supply
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Higher production
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An increase in price – ceteris paribus
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If a price is increased in a slice of pizza and the costs stay the
same = higher profits off each slice sold
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A sensible entrepreneur will try and make and sell even
more (and vice versa--- he may try and see more salads or
calzones)
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Market entry
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If the price of a good rises than more competitors will join
the market
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Ex: lots of boy bands in 90s
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Ex: lots of disco acts in the 70s
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Ex: lots of girl pop acts in this decade
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Once the trend or demand changes you will see less of these
acts or they will try and transition into other forms of music
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Supply Schedule
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Supply schedule shows the quantity supplied at every given
price point (with all factors being equal)
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Chart 5.2 on page 103
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What trend do you see?
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A: the higher the price the more units sold
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When a factor other than the price of pizza (or other good)
changes (like maybe labor costs) then a whole new supply
schedule needs to be produced
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Market Supply Schedule
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All firms selling one product will be listed on a market
supply schedule
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Will also show price + # of total items produced
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Law of supply operates here as well
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See page 104, chart 5.3
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The Supply Graph + Supply and
Elasticity
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When data points on a supply schedule are graphed, they
create a supply curve (data points on a market schedule
show the market supply curve)
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The horizontal axis measures quantity of good supplied
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The vertical axis – the various prices
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Elasticity of supply will tell how firms respond to changes in
the price of a good (they may be able to respond to a change
in price or they may not).
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Q: What may cause a company to not produce more of a
good?
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Elasticity of Supply and Time
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Some producers may not be able to produce more of something in the
short run and so therefore their supply is inelastic (not easily changed)
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EX: If the price of OJ went up– orange production cannot change
dramatically overnight to yield more oranges.
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It could take years to produce more orange producing trees
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In addition, few people might be interested in joining into the industry
for the same reason.
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Conversely, the price of OJ dropped dramatically the same producer
more than likely would produce the same amount of oranges because it
is not like you can tell a tree to stop producing.
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The producer will take what he can get.
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If the demand for mani-pedis is elastic.
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The supply of this service is easily expanded or reduced.
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A shop can hire more workers and expand operating hours to
take in more customers at the higher price and vice versa when
things go south
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Exit ticket:
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Explain in your own words the law of supply
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Explain the relationship between elasticity of supply and time
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5.2 Costs of Production
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The ultimate question for a producer is how much to produce
and how many workers to hire?
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Let’s do a little simulation before we start. 
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One minute to complete this task:
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Take from piles of paper and produce a packet that goes in this
order:
Dark blue, green, white, yellow, red, white, light ble
Packets must be stapled and place into this specific order
You cannot spread out from your factory.
Please take this task very seriously 
Good luck !!!!
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simulation
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What did you notice about the level of productivity once
more employees were added?
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Why is it that when more employees were added that
production began to diminish at one point? What caused
this?
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Do you think this happens in real life?
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What is the point of this simulation?
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How can a company yield more?
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Marginal product of labor
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Measures the changes in output when you hire or fire a
worker
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Practice -----
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Make a word document with page 109 chart on it with the
marginal product of labor missing and have kids do it
themselves in their notes
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Review correct answers at end.
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Increasing, decreasing and
diminishing marginal returns
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Increasing marginal returns --- each new worker added helps
the entire group produce more of a product.
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Specifically he or she can produce more of a product than what
the others before him could
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Decreasing returns – a new worker comes in and helps add to
the production of more total product but…
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Individually there total number of units made decreases
compared to their peers
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Diminishing returns – a new worker comes in and the total
production falls
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Obviously when diminishing returns occurs something was done
wrong.
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How does this happen?
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Specialization of tasks occurs early on in the hiring and helps
yield higher levels (ideal)
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But if additional capital is purchased (and that might not
occur) at some point productivity will decreases due to
waiting to use machine (among other things) or people
having limited space to work efficiently
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It is important for business owners to track production
carefully in order to know if hiring or firing is needed.
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Production costs
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Fixed costs – a cost that doesn’t change no matter how much of a good
is produced
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Ex: cost of building, equipping the building, property taxes, salaries of
management
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Variable costs – costs that rise or fall depending on the quantity
produced
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Ex: hourly wages and raw materials needed to purchase more of
something
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EX: heating or AC use
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If a company wants to they add workers or hours to one person to
produce more
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If a company wants they fire or diminish hours
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Production costs
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Total costs – fixed costs + variable costs
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You will find that the total costs of producing more of anything will add to the total costs
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It is essential to know the marginal costs of production at each level
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Marginal cost is the additional cost of producing one more unit
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The goal of any producer is to maximize profit
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To find this look for the biggest gap between total revenue and cost or you can find
where marginal revenue is equal to marginal cost.
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Marginal revenue is the additional income from selling one more unit of a good.
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Looking at the chart on page 111 --- where should the company produce?
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A: 10
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Why isn’t it smart for the company to produce 11 or 12?
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A: losing the profit that they would have earned if they
stopped at 10 (this is due to the raise in the marginal cost of
producing the extra units)
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Responding to price change
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What if the price of the bean bags went up from $24 to $37?
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What should the company do? (please look at the chart)
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Then it would be smart to hire the additional workers needed
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The slowdown effect
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Sometimes keeping a money losing factory is the best choice
of action
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How so?
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Don’t forget there are fixed costs and so you should at very
least try to clear enough profits to meet those fixed costs
(and try and ride out the storm of low prices)
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If you closed your factory then no money would be earned to
meet your fixed costs and those you are still on the hook for
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5.3 Changes in Supply
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Any change in the cost of inputs (labor, machinery….) will
affect supply
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A rise in cost of an input will cause a fall in supply at all price
levels because the good has become more expensive to
produce (and vice versa)
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Effects of rising costs will more than likely cause a producer
to produce less (especially if they have no control over price)
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Supply then will fall at each price and the supply curve will
shift to the left
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Changes in supply
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Input costs can drop as well
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Technological advances can help drive down production
costs
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Technology lowers costs and increases supply at all price
levels
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The supply curve has shifted to the right
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Governmental influence on supply
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The govt has the power to affect the supplies of many goods.
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By raising or lowering the price of producing goods, the
government can encourage or discourage businesses
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Ways the government influences
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1. Subsidies
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A gov payment that supports a business
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The gov often pays a set subsidy for each unit of good
produced
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EX: The govt will give money for farmers to NOT produce as
much of an agricultural product. This is done to keep prices
higher and keep farmers in the business.
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EX: French govt will subsidize small farms because the
French like the character of the French countryside
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Ways the government influences
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2. Taxes
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The govt can reduce the supply of a product by placing an
exise tax on the production or sale of something
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This will raise prices of an item and thus typically affect
demand
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EX: cigarettes, alcohol, gasoline
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Ways the government influences
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3. Regulation
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Govt intervention in a market affects the price, quantity or
quality of a good
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EX: US govt required auto manufacturers to install technology
to reduce pollution from auto exhaust
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The exhaust was causing wide spread health issues
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The regulation was an added cost to the producers and the
supply was reduced
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The supply curve shifted to the left
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Supply in the Global Economy
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Since the world is so interdependent what goes on in one
country will affect the supply of something here
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If Russia goes into a war with the Ukraine then oil production
might be diminished and therefore supply will go down
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If India’s workers demand better working conditions then
supply also will be affected
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If China continues to advance in tech innovations then an influx
of Chinese products may soon arrive in the US (and other
markets)
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If the govt wanted to protect US supply then they could place
import taxes on foreign made goods
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Future expectations of prices
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If the price of a good is expected to rise in the next month.
What do you think would happen to the quantity supplied
now?
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A: less supply now and hold some in reserve for later
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Conversely, if a producer expects a drop in price in the near
future…
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They try and sell as much as they can NOW
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Inflation
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Inflation is a condition of rising prices
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During a period of inflation, the value of a cash decreases
from day to day as prices rise
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Sellers of a product may hold on their stock (if able) until
inflation decreases
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This has caused riots in some countries when food wasn’t
made available to purchase
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Where do firms produce?
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Before beginning a business that produces a product it is important to
decide where your ideal location might be.
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Certain businesses might find it better to be closer to their raw materials
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Other might find it better to be closer to their consumers
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Transportation expenses need to be factored in
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Would it better for a tomato sauce company to be closer to a big city or need
tomato fields?
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A: By the fields because to make one can of sauce will need far more
tomatoes to produce and so you want your heavy transportation to be limited
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On the hand if a product is bulky or perishable--- have factory close to
customers
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Where do firms produce?
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Some firms are looking for certain type of workers and so
they want to locate where they are currently living
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EX: Silicon Valley
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Many states or cities give major tax breaks for establishing a
company there