Transcript Chapter 5 Supply 1. The Law of Supply is amount of goods available

Chapter 5
Supply
1. The Law of Supply
a.
is amount of goods available
1. The Law of Supply
a. Supply is amount of goods available
b. the higher the price, the more
people produce-they will make
more
1. The Law of Supply
a. Supply is amount of goods available
b. the higher the price, the more
people produce-they will make
more money!
c.
-how much of a
good is offered for sale at a specific
price
1. The Law of Supply
a. Supply is amount of goods available
b. the higher the price, the more
people produce-they will make
more money!
c. Quantity supplied-how much of a
good is offered for sale at a specific
price
“Chg in S”
“Chg in QS”
[Non-price change]
[Price change]
S1
S
P
Q1
QS
d. if price of a good falls, some firms
will produce less, why??
d. if price of a good falls, some firms
will produce less, why?? they can’t
make as much money
e. some companies will even enter the
market if price is going up
f. 2 movements that combine to
create all of supply
1. companies changing their level of
production
2. companies entering or leaving the
market
g. Higher production
1. if a company is already making
money selling a product, a
increase in price
will increase companies profits
g. Higher production
1. if a company is already making
money selling a product, a
increase in price (Ceteris paribus)
will increase companies profits
2. then company will want to
produce more, to make more
g. Higher production
1. if a company is already making
money selling a product, a
increase in price (Ceteris paribus)
will increase companies profits
2. then company will want to
produce more, to make more
money
Producers supply more at the higher price because
the opportunity cost increases if they don’t.
Consumers consume less at the higher price
because they now have less money to spend.
Producers supply less at the lower prices because
the opportunity cost decreases if they don’t.
Consumers consume more at the lower price
because they now have more money to spend.
I was going to buy a Honda
but this car is $4,000 cheaper.
I’m saving money
at the lower price.
I normally eat one, but
at this low price, I’m
Having two.
3. example of pizzeria on page 102-if pizzeria was
not making profit selling pizza, they would either
produce something else, or rise the price of the
pizza-if cost of making pizza stayed the same, they
would make more profit….if cost of making pizza
increases, then they would
3. example of pizzeria on page 102-if pizzeria was
not making profit selling pizza, they would either
produce something else, or rise the price of the
pizza-if cost of making pizza stayed the same, they
would make more profit….if cost of making pizza
increases, then they would not make a profit
4. when price of product goes up, the producer will
want to
, so they can make more
money
3. example of pizzeria on page 102-if pizzeria was
not making profit selling pizza, they would either
produce something else, or rise the price of the
pizza-if cost of making pizza stayed the same, they
would make more profit….if cost of making pizza
increases, then they would not make a profit
4. when price of product goes up, the producer will
want to make more, so they can make more
money
.
S
P2
P1
QS1
QS2
h. Market entry
1. other people who notice the profits
of a company may try to enter the
market
2. example-page 102-music industrydisco music of the 1970’s new
people entered the market to make
money of the new disco craze
2. The Supply Schedule
a. supply schedule shows relationship
between
2. The Supply Schedule
a. supply schedule shows relationship
between price and quantity supplied
for a specific good
b. it will show factors that can changeexample-price and units supplied
c. supple schedule lists supply for a very
specific set of conditions –all other
conditions are assumed to remain
2. The Supply Schedule
a. supply schedule shows relationship
between price and quantity supplied
for a specific good
b. it will show factors that can changeexample-price and units supplied
c. supple schedule lists supply for a very
specific set of conditions –all other
conditions are assumed to remain
constant
d. A change in quantity supplied
1. word supply is used to refer to the relationship
between price and quantity supplied
2. supply includes all possible combinations of
price and output –pg103
3. rise or fall in price, will cause quantity supplied
to change, but not the supply schedule-a
change in a good’s price moves the seller from
one row to another in same schedule,
d. A change in quantity supplied
1. word supply is used to refer to the relationship
between price and quantity supplied
2. supply includes all possible combinations of
price and output –pg103
3. rise or fall in price, will cause quantity supplied
to change, but not the supply schedule-a
change in a good’s price moves the seller from
one row to another in same schedule, but does
not change supply itself
4. a new schedule has to be made with other than
the price changes
e. Market supply schedule
1. all supply schedules of companies in a
market can be added up to create
e. Market supply schedule
1. all supply schedules of companies in a
market can be added up to create
market supply schedule
2. shows relationship between prices
and
quantity supplied by
companies-like in a whole city
e. Market supply schedule
1. all supply schedules of companies in a
market can be added up to create
market supply schedule
2. shows relationship between prices
and TOTAL quantity supplied by
companies-like in a whole city
e. Market supply schedule
1. all supply schedules of companies in a
market can be added up to create
market supply schedule
2. shows relationship between prices
and TOTAL quantity supplied by ALL
companies-like in a whole city
f. The Supply Graph
1. when the data points in supply schedule
are graphed-
f. The Supply Graph
1. when the data points in supply schedule
are graphed-supply curve
2. same as demand curve, except horizontal
axis measures quantity of good supplied
3. supply curve rises from left to right (pg
105)
SUPPLY SCHEDULE
CORN
P
$1
2
3
4
5
QS
5
20
35
50
60
SUPPLY CURVE
S
P
$5
$4
$3
$2
$1
5 20 35 50 60
QS
S
P1
QS1
S
P1
“Take it. We are losing money.”
QS1
Butter
Bread
I have just
200 acres.
.
Broccoli
S
P2
P1
P
Corn S1
S2
QS1 QS2
“Supply Shifters” [RATNEST]
1. Resource Cost [wages
2.
3.
4.
5.
6.
7.
P
Alternative Output Price Change
[INVERSE]
“Substitutes in production”
“Things that can be supplied
with the same resources.”
S1 S2
P
[capital cost]
/raw materials
] [INVERSE]
Alternative Output Prices [INVERSE]
Technology [DIRECT]
Number of Suppliers [DIRECT] [new football league- bigger “S” of games]
Expectations [about future price] [INVERSE]
Subsidies [DIRECT]
S
3 S1
S2
Taxes [INVERSE]
Don’t confuse these
two with Chg in QS.
“Suppliers produce smaller/
larger quantities at each price.”
QS3 QS1
QS2
g. Supply and Elasticity
1. elasticity of supply is measure of the
way suppliers respond to change in
price
2.
(changes greater than 1)
(chance is less than 1) and
(exactly equal to 1)
g. Supply and Elasticity
1. elasticity of supply is measure of the
way suppliers respond to change in
price
2. elastic(changes greater than 1)
(chance is less than 1) and
(exactly equal to 1)
g. Supply and Elasticity
1. elasticity of supply is measure of the
way suppliers respond to change in
price
2. elastic(changes greater than 1)
inelastic (chance is less than 1) and
(exactly equal to 1)
g. Supply and Elasticity
1. elasticity of supply is measure of the
way suppliers respond to change in
price
2. elastic(changes greater than 1)
inelastic (chance is less than 1) and
unitary (exactly equal to 1)
Quantity Supplied
Quantity Supplied
3. Elasticity of Supply and Time
a. Time determines the elasticity
b. in short run, if a company cannot
easily changes its output level, the
supply is
3. Elasticity of Supply and Time
a. Time determines the elasticity
b. in short run, if a company cannot
easily changes its output level, the
supply is inelastic
c. in long run, firms are more flexible,
so supply is
3. Elasticity of Supply and Time
a. Time determines the elasticity
b. in short run, if a company cannot
easily changes its output level, the
supply is inelastic
c. in long run, firms are more flexible,
so supply is elastic
d. Short Run
1. Orange grove is example-got to grow trees to
produce oranges-pg105-cannot grow more
trees too fast, but in short run maybe use more
effective pesticide-inelastic
2. also new producers will
d. Short Run
1. Orange grove is example-got to grow trees to
produce oranges-pg105-cannot grow more
trees too fast, but in short run maybe use more
effective pesticide-inelastic
2. also new producers will not enter into the
market
3. short run, inelastic, regardless if price changes
4. other business can me more changing, and
more elastic in short run-business that supply
services
e. long run
1. supply can be more elastic over
time-grow more orange trees
2. supply becomes more elastic over
time
4. Cost of Production
a. Labor and Output
1. how many workers to
4. Cost of Production
a. Labor and Output
1. how many workers to hire effects
production
2. Marginal Product of Labor-
4. Cost of Production
a. Labor and Output
1. how many workers to hire effects
production
2. Marginal Product of Labor-change in
output from hiring more workers
3. measures in the change in output at the
margin, where the last worker has been
hired or fired (1 worker produced 4 units,
a second one total output is 10-so the
marginal product of labor is 6)
4. Increasing Marginal Returns-more
workers means each one can
4. Increasing Marginal Returns-more
workers means each one can
specialize-increasing returns
5. Diminishing Marginal Returns-too
many workers causes the output to
4. Increasing Marginal Returns-more
workers means each one can
specialize-increasing returns
5. Diminishing Marginal Returns-too
many workers causes the output to
diminish or decrease
6. negative marginal returns-
4. Increasing Marginal Returns-more
workers means each one can
specialize-increasing returns
5. Diminishing Marginal Returns-too
many workers causes the output to
diminish or decrease
6. negative marginal returns-decrease in
production
b. Production Costs
1. 2 types of cost for producers-fixed and
variable
2. Fixed-
b. Production Costs
1. 2 types of cost for producers-fixed and
variable
2. Fixed-cost that does not change-rent,
salaries, etc
3.
-costs that rise and fall
depending on quantity produced-hourly
workers, electricity bills
b. Production Costs
1. 2 types of cost for producers-fixed and
variable
2. Fixed-cost that does not change-rent,
salaries, etc
3. variable costs-costs that rise and fall
depending on quantity produced-hourly
workers, electricity bills
4. Total costs-
b. Production Costs
1. 2 types of cost for producers-fixed and
variable
2. Fixed-cost that does not change-rent,
salaries, etc
3. variable costs-costs that rise and fall
depending on quantity produced-hourly
workers, electricity bills
4. Total costs-fixed and variable together
5. Marginal cost-
b. Production Costs
1. 2 types of cost for producers-fixed and
variable
2. Fixed-cost that does not change-rent,
salaries, etc
3. variable costs-costs that rise and fall
depending on quantity produced-hourly
workers, electricity bills
4. Total costs-fixed and variable together
5. Marginal cost-the additional cost of
producing one more unit pg 112
c. Setting output
1. companies want to make most money
2.
-equal to the price of
each unit multiplied by number of
goods sold
c. Setting output
1. companies want to make most money
2. total revenue-equal to the price of
each unit multiplied by number of
goods sold
3. companies want to produce where
there is the biggest gap between
c. Setting output
1. companies want to make most money
2. total revenue-equal to the price of
each unit multiplied by number of
goods sold
3. companies want to produce where
there is the biggest gap between total
cost and total revenue
d. Marginal revenue and marginal cost
1. marginal revenue is the additional
income from selling one more unit
of a good-
d. Marginal revenue and marginal cost
1. marginal revenue is the additional
income from selling one more unit
of a good-usually equals market
price
2. never want the marginal cost to
be higher than marginal revenue
5. Changes in Supply
a. Input costs-any change in cost of input, will
affect the supply
b. effect of rising costs-an increase in cost of
input=
5. Changes in Supply
a. Input costs-any change in cost of input, will
affect the supply
b. effect of rising costs-an increase in cost of
input=higher marginal cost
c. so if company does not control price, they
would not be making any money, so they
would have to decrease production (supply)supply falls, supply curve shifts to
5. Changes in Supply
a. Input costs-any change in cost of input, will
affect the supply
b. effect of rising costs-an increase in cost of
input=higher marginal cost
c. so if company does not control price, they
would not be making any money, so they
would have to decrease production (supply)supply falls, supply curve shifts to left
d. technology-advances in technology can lower
production cost-
5. Changes in Supply
a. Input costs-any change in cost of input, will
affect the supply
b. effect of rising costs-an increase in cost of
input=higher marginal cost
c. so if company does not control price, they
would not be making any money, so they
would have to decrease production (supply)supply falls, supply curve shifts to left
d. technology-advances in technology can lower
production cost-it lowers costs, and increases
supply at all price levels
e. Government’s influence on Supply
1.
-government payment that supports a
business or market-usually food-done to help
struggling areas
e. Government’s influence on Supply
1. subsidies-government payment that supports a
business or market-usually food-done to help
struggling areas
2. government usually allots how much a crop is
produced, so that prices will stay high
3.
-tax on production or sale of a
good-increases production costs by adding
extra cost for each unit sold
e. Government’s influence on Supply
1. subsidies-government payment that supports a
business or market-usually food-done to help
struggling areas
2. government usually allots how much a crop is
produced, so that prices will stay high
3. taxes excise tax-tax on production or sale of a
good-increases production costs by adding
extra cost for each unit sold
4.
-government intervention in a
market that affects the price, quantity, or
quality of a good
e. Government’s influence on Supply
1. subsidies-government payment that supports a
business or market-usually food-done to help
struggling areas
2. government usually allots how much a crop is
produced, so that prices will stay high
3. taxes excise tax-tax on production or sale of a
good-increases production costs by adding
extra cost for each unit sold
4. regulation-government intervention in a
market that affects the price, quantity, or
quality of a good
f. future expectations of prices
1. if price is expected to increase, producers
will store the goods til later, causing
supply to decrease (soybeans, wheat)
2. if price is expected to decrease,
f. future expectations of prices
1. if price is expected to increase, producers
will store the goods til later, causing
supply to decrease (soybeans, wheat)
2. if price is expected to decrease, producers
will sell product now, increase in supply
3.
-decrease in the value of the
dollar-if a product will hold its value,
producers will hang on the product as
long as they can
f. future expectations of prices
1. if price is expected to increase, producers
will store the goods til later, causing
supply to decrease (soybeans, wheat)
2. if price is expected to decrease, producers
will sell product now, increase in supply
3. inflation-decrease in the value of the
dollar-if a product will hold its value,
producers will hang on the product as
long as they can
g. Number of suppliers
1. more producers enter market,
supply increases
2. positive relationship in producers
and supply
h. Where do firms produce?
1. key question is cost of transportationcost of transporting inputs and
outputs
2. if input is expensive,
h. Where do firms produce?
1. key question is cost of transportationcost of transporting inputs and
outputs
2. if input is expensive, they locate close
to them
3. if output is too expensive to
transport,
h. Where do firms produce?
1. key question is cost of transportationcost of transporting inputs and
outputs
2. if input is expensive, they locate close
to them
3. if output is too expensive to
transport, they locate closest to
consumer
The End