Transcript Supply

Bell Ringer
 In one minute, list as many types of
diet soda as you can.
 Remember that in addition to
different brands, there are different
flavors and amounts of caffeine.
 Ready… set… GO!
Objectives
1. Define the law of supply.
2. Explain how prices encourage
new businesses to join the
market.
Before we continue…
 When talking about demand, we are talking
primarily about the consumers (their choices
about what to buy, when/how much to buy,
etc.).
 When talking about supply, we are talking
primarily about producers and firms.
 A very important distinction!
The Law of Supply
 Supply is the amount of goods available.
 The law of supply states that as prices rise,
so will the quantity supplied.



As the price of a good increases, producers
will offer more of it.
As the price decreases, they will offer less.
The law of supply includes two movements:
1.
2.
Firms changing their level of production
Firms entering or exiting the market
The Law of Supply
Law of Supply
S
P
S
DIRECT
RELATIONSHIP
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Supply Experiment
 How many hours would you be willing to work
in a week if you were paid…
 $1/hour?
 $5/hour?
 $10/hour?
 $25/hour?
 $100/hour?
The Law of Supply, cont.
 How does the law of
supply affect the
quantity supplied?


As prices rise,
producers will offer more
of a good and new
suppliers will enter the
market… why?
Answer: In the hopes of
making a profit.
Market Entry
 Rising prices encourage new firms to join the market
and will add to the quantity supplied of the good.
 Take, for example, the music market:
 When a particular type of music becomes popular,
such as disco, grunge, or dubstep, more bands
will play that type of music in order to profit from
such music’s popularity.
 This action reflects the law of supply.
Market Entry Exercise
 Working by yourself or with a partner, come
up with at least five other examples of firms
that have increased production or entered a
market when the price of a product rises.
 Every person/partnership will be required to
provide one original response.
Bell Ringer/Economic Enigma
 Oil is a nonrenewable resource.
 Humanity consumes 87 million barrels of oil
per day, and this number continues to climb.
 However, the world reserves of oil have
increased over the past 35 years. (Today’s oil
reserves stand at over 1 trillion barrels.)
 How can this be??
Bell Ringer/Economic Enigma
 How do prices create incentives for
producers of natural resources like oil?


Increased prices mean increased profit.
This drives producers to find more of the
resource and develop new technology to
extract it.
 Why do producers develop new technology
for extracting resources?


Profit
New technology = lower costs = higher profit
In your notes,
list the top
three
countries you
think the U.S.
imports its oil
from.
Objectives
Interpret a supply schedule and a supply
graph.
2. Define supply elasticity.
3. Examine the relationship between elasticity
of supply and time.
1.
The Supply Schedule/Curve
 Supply of a good can be measured
using a supply schedule or supply
curve.

A supply schedule/curve shows the
relationship between price and quantity
supplied for a particular good.
Supply Curve
1. Which direction does a supply curve
rise?
2. What are the two variables
represented in a supply schedule or
supply curve?
Supply Schedule
3. What is the relationship between
Price and Output (Quantity
Supplied)?
Elasticity of Supply
 Elasticity of supply, based on the same
concept of elasticity of demand, measures
how firms will respond to changes in the price
of a good.

Elastic


If the supply for a good/service is elastic, it is
very sensitive to price changes
Inelastic

If the supply for a good/service is inelastic, it is
not responsive to price changes.
Examples
 Elastic Supply
 Cheap products (trinkets, collectables, etc.)
 Fast food
 Inelastic
 Agricultural products
 Airplane tickets
Elasticity in the Short Run
 In the short run, it is difficult for a firm to change
its output level, so supply is always inelastic.
 For example, many agricultural businesses
have a hard time adjusting
to price changes in the
short term.
 In the long run, supply can
become more elastic.
Storyboard
 Read pg. 114-115 in the textbook, “Elasticity
of Supply in the Short Run” and “Elasticity in
the Long Run.”
 Create a two-panel storyboard of the
sections.
 The storyboard should include:




Section title
3-5 sentence summary of the section
Visual/Illustration
Test question
Storyboard Example
Law of Supply
The law of supply states that producers offer more of a good as its price
increases and less as its price falls. This is due to the producers’ desire to
gain more profit. An example of the law of supply in action would be…
Q: How does the law of
supply meet at least one of
the characteristics of the
American free enterprise
system?
Key Terms
 supply: the amount of goods available
 law of supply: producers offer more of a
good as its price increases and less as its
price falls
 elasticity of supply: a measure of the way
quantity supplied reacts to a change in price
Bell Ringer/Economic Enigma
 In 2014, Walmart reported $485 billion in
revenue.
 However, Walmart makes a profit of only
3-6 cents for every dollar of revenue.
 In your notes, write a list of possible answers
to the question…
Where does the rest of the money go??
Objectives
1. Analyze the various production costs
of a firm.
2. Define the law of diminishing returns.
Introduction
 When thinking about how to maximize
profits, firms think about the cost
involved in producing additional units of
a good.
 Costs producers take into consideration
are:
 Fixed costs
 Variable costs
 Total costs
Fixed Costs
 Fixed costs don’t
change with the
quantity produced.
 They include:





Property taxes
Rent
Machinery repair
Salaried labor
Insurance
Variable Costs
 Variable costs
increase as quantity
produced increases.
 They include:




Electricity and heating
bills
Price of raw materials
Hourly or commission
labor
Transportation
Total Costs
 Fixed costs + variable
costs = total cost.
 What causes the
total cost to rise as
the quantity
produced rises?

A: Increased
variable costs
What type of business typically lists its costs in this way?
Why would “parts” be variable costs?
What is an example of a fixed cost for this business?
Business Costs
 Working with an elbow partner,
list 10 business costs for
Starbucks Coffee.
Diminishing Returns
 Has there been a time in your life where
you’ve put so much effort into doing
something that you eventually feel like you’re
not getting as much out of it as you’re putting
into it?
 What was it? How did it make you feel?
Law of Diminishing Returns
 The law of diminishing returns refers to
a point in time where the level of profits or
benefits gained is less than the amount of
money or energy invested.
 In plain English… it simply means
sometimes, you can push an idea too
far.
Law of Diminishing Returns Example
 Imagine a Nike factory that only has a certain
number of square feet of work space and a
certain number of machines inside it.
 You can’t increase the space available or the
number of machines without a long, costly
delay for construction or installation.
Law of Diminishing Returns Example
 What is the factory owners’ only option
left?
 Current employees can work more shifts
or extra workers can be hired.
 Adding extra man-hours of labor will
increase the number of Nike products
produced, but only within limits.
Law of Diminishing Returns Example
 After a certain point, such things as worker
fatigue, increasing difficulties in supervising the
large work force, more frequent breakdowns by
over-utilized machinery, or just plain inefficiency
due to overcrowding of the work space begin to
take their toll.
 Eventually, the cost of the additional labor
exceed the returned revenue for the additional
Nike products.
Diminishing Returns Review
 What is the Law of Diminishing
Returns?
 Imagine that our class runs a business
where we get paid for each ball we can
transfer from one box to another.
 Let’s see if we can find the optimal
number of employees for our business.
Rules
 Every employee must handle every
product (Chinese fire drill style).
 One ball at a time.
 The product is fragile… No throwing!
Dropped product = broken!
 Only the balls that are in the box when
time expires count toward the total
output.
Key Terms
 fixed cost: a cost that does not change, no
matter how much of a good is produced
 variable cost: a cost that rises and falls
depending on the quantity produced
 total cost: the sum of fixed costs plus
variable costs
• Why did Hershey’s have to raise the price of their
chocolate bars by over 10 percent in 2008?
• Give an example of another product or company
(not chocolate related) that would have to increase
its prices because of rising costs of milk.
Objectives
Explain how factors such as input costs
create changes in supply.
2. Analyze other factors that affect supply.
1.
Introduction
 Why does the supply curve shift?
 Several factors cause the supply curve to
shift. These include:

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
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Input costs
Substitute or related goods
Number of suppliers
Future expectations of prices
Government intervention
Shifts in the Supply Curve
 Factors that reduce supply shift the supply curve
to the left, while factors that increase supply
move the supply curve to the right.
Input Costs
 Any changes in the
cost of an input used
to make a good will
affect supply.

A rise in the cost of
raw materials, for
example, will result in
a decrease in supply
because the good has
become more
expensive to produce.
The high input costs that dairy
farmers pay for feed, labor, and
fuel result in higher prices for
milk and other dairy products.
Substitute or Related Goods
 If the price of substitute or related goods goes
up, the supply of currently supplied goods
goes down (and vice versa).
 Examples:


If farmers can make more money producing
rice instead of cranberries, what happens to
the supply of cranberries?
Why don’t cell phone companies make flip
phones anymore?
Number of Suppliers
 If more suppliers enter a market, the market
supply will rise and the supply curve will shift
to the right.
 If suppliers stop producing a good and leave
the market, market supply will decline,
causing the supply curve to shift to the left.
Future Expectations of Prices
 What happens to supply if the price of a
good is expected to rise in the future?


If a seller expects the 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 the prices of goods are expected to drop in
the near future, sellers will earn more by
placing goods on the market immediately,
before the price falls.
Bell Ringer
 A carton of cigarettes can cost
as much as $70!
 Why do you think cigarettes
cost so much?
Objectives
Identify the ways that the government can
influence the supply of goods.
2. Define “subsidies” and how their use
directly influences food and other
commodity production in the U.S.
1.
Government Influences
 Excise taxes are taxes on the
production or sale of certain goods
 They
are collected by the producer
and not paid directly by the
consumer. This makes them "hidden"
in the price of a good/service.
 Examples?
 Cigarettes, Alcohol, Gambling, Gas
Government Influences
 Excise taxes are often called
“sin taxes” because the government
uses them to control or limit certain
behaviors (smoking, excessive
drinking, gambling, etc.).
 Do
you think “sin taxes”
are appropriate?
Government Influences, cont.
 Regulation
 Indirectly, government regulation
often has the effect of raising costs.
 EX.- When the government regulated
the auto industry to cut down on
pollution and increase car safety in
the 1970s, these regulations led to an
increase in the cost of manufacturing
cars.
Government Influences, cont.
 Subsidies
 A government payment that supports a
business or market
 Subsidies generally lower cost, which
allows a firm to produce more goods.
 Reasons for subsidizing products include:



To prevent food shortages
To protect domestic industries from foreign
competition.
Examples: Sugar, Oil, and CORN
“America’s Subsidized
Food System”
https://www.youtube.com/watch
?v=FFS2cd83kyM
Key Terms
 subsidy: a government payment that
supports a business or market
 excise tax: a tax on the production or sale of
certain goods; sometimes called a “sin tax”
 regulations: government intervention in a
market that affects the production of a good
Supply Quiz
1. Demand is to Consumers
as Supply is to
__________________.
Supply Quiz
2. The Law of Supply states
that as the price for a
good/service goes up, the
supply goes _______.
Supply Quiz
3. The majority of the United
States’ imported oil comes
from which country?
Supply Quiz
4. As prices rise, producers
will offer more of a good and
new suppliers will enter the
market… why?
Supply Quiz
5. Why does the government
provide subsidies to certain
businesses/industries?
Supply Quiz
6. A company trying to
increase productivity by hiring
lots of workers finds that its
productivity actually drops.
This is explained by the Law
of ___________________.
Supply Quiz
7. The Law of Supply
expresses a ____________
relationship between Price
and Supply.
Supply Quiz
8. How do government
regulations affect a firm’s
production costs?
Supply Quiz
9. What are “sin taxes” and
why does the government
implement them?
Supply Quiz
10. True or False: Property
taxes, rent, and salaried labor
are all examples of fixed
costs for a business.