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CHAPTER 5
: SUPP
LY
HO
W D
O S
UP
PLI E
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SECTION 1: UNDERSTANDING SUPPLY
Objectives:
Explain the law of supply.
Interpret a supply schedule and a supply graph.
Examine the relationship between elasticity of supply and time.
THE LAW OF SUPPLY 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
Quantity Supplied
the amount that a supplier is willing and able to supply at a specific price
THE LAW OF SUPPLY
Higher Production
higher prices = more production
lower prices = less production
Market Entry
SUPPLY AND DEMAND
Price DemandSupply
THE SUPPLY SCHEDULE Supply Schedule
a chart that lists how much a good a supplier will offer at various prices
Variables
a factor that can change
A Change in Quantity Supplied
Relationship between price and quantity (supply)
Market Supply Schedule
Chart that lists how much of a good all suppliers will offer at various prices
The Supply Graph
supply curve – a graph of the quantity supplied of a good at various prices
always rises from left to right
SUPPLY AND ELASTICITY Elasticity of Supply
measure of the way quantity supplied reacts to a change in price
Elasticity of Supply and Time
will a good be elastic or inelastic?
Elasticity in the short run
- an orange grove
- inelastic…why?
Elasticity in the long run
- overtime supply becomes more elastic if the supplier has a longer time to respond to change
REVIEW – CHAPTER 5, SECTION 1
SECTION 2: COSTS OF PRODUCTION
Explain how firms decide how much labor to hire in order to produce a certain level of output.
Analyze the production costs of a firm.
Explain how a firm chooses to set output.
Identify the factors that a firm must consider before shutting down an unprofitable business.
According to some reports, supermarkets make a profit of three to six cents for every dollar of revenue. Where does the rest of the money go?
LABOR AND OUTPUT
Marginal Product of Labor The change in output from hiring one additional unit of labor
Output at the margin = hired or fired
Increasing Marginal Returns Level of production in which the marginal product of labor
increases as the number of workers increases The role of specialization
Increases productivity
Diminishing Marginal Returns A level of production at which the marginal product of labor decreases as
the number of workers increases
Negative Marginal Returns When adding an extra worker actually decreases marginal return
PRODUCTION COSTS
Fixed CostsCost that does not change EX: rent, machinery repairs, salaries, property taxes
Variable CostsCosts that rise and fall depending on the quantity produced EX: cost of workers, electricity, heating
GETTING STARTED
Your family is having guests over. Create columns that would show fixed cost and variable costs of having the guest stay for a week.
Total CostThe sum of the fixed cost and variable cost
Marginal Cost The additional cost of adding one more unit
SETTING OUTPUT
Marginal Cost and Marginal Revenue
Marginal Revenue – additions income from selling one more unit of a good; sometimes equal to the price
Average Cost – total cost divided by the quantity produced
EX: 10 beanbags
Average Cost = $14.20 ($142/10 )
Profit is the difference between the market price and the average cost $24 - $14.20 = $9.80 x the quantity (10) = $98
Responding to Price Change
What happens if the price of beanbags rises from $24 to $37
- Increase quantity supplied!
The Shutdown Decision
Most profitable level of output = Marginal Revenue = marginal cost
TO MAXIMIZE PROFIT
M A N A G I N G L A B O R
Increased marginal return
Look for highest marginal return
Buy capital to increase marginal return
S E T T I N G O U T P U T
Set output where marginal revenue equals marginal cost
SECTION 3:
Explain how factors such as input costs creates changes in supply.
Identify three ways that the government can influence the supply of goods.
Analyze the other factors that affect supply.
Explain how firms choose a location to produce goods.
INPUT COSTS
Effect of Rising Costs Price = marginal cost (most profitable level ) Remember marginal cost…raw materials, labor etc.
Rising costs?Cut production – that will lower marginal cost until it equals cost of production
Technology Can lower production costs Lower costs and increase in supply
GOVERNMENT’S INFLUENCE ON SUPPLY
Subsidies A government payment that supports a business or market
Producer is paid for each unit Lower costs Allows a firm to produce more EX: Developing companies in underdeveloped countries
Taxes Excise tax - A tax on the production or sale of a good
Increase production costs Can be used to discourage sale
Tobacco, alcohol, high pollutant gasoline
Regulation The government intervention in a market that affects the production of a good
EX: Pollution
OTHER INFLUENCES ON SUPPLY
Changes in the Global Economy EX: The US imports carpets from India. An increase in the wages of Indian workers would decrease the supply of carpets to the US market, shifting the supply curve to the left.
EX: The US imports oil from Russia. A new oil discovery in Russia could increase the supply of oil in the US market and shift the supply curve to the right.
Future Expectation of Prices
Number of Suppliers
WHERE DO FIRMS PRODUCE?
Location. Location. Location. Transporting goods Closer to suppliers? Raw materials are expensive to transport
Closer to consumers? Output is expensive to transport