CH 5.1Supply CH 5.1Supply

Law of SupplySupply Curve

Elasticity of supply

Law of SupplySupply Curve

Elasticity of supply

The Law of SupplyThe Law of Supply

Tendency of suppliers to offer more goods at higher pricesQuantity supplied - amount a supplier

is willing to make at certain prices

Tendency of suppliers to offer more goods at higher pricesQuantity supplied - amount a supplier

is willing to make at certain prices

$$ Supply

Supply

As price goes upFirms will make more goods to make

more $more firms have incentive to get into

the market

As price fallsSome firms will produce lessSome firms may drop out entirely

As price goes upFirms will make more goods to make

more $more firms have incentive to get into

the market

As price fallsSome firms will produce lessSome firms may drop out entirely

Increase in ProductionIncrease in Production

When a firm increases its price ceteris paribus - it increases profit

Decreases price - Decrease profit

Search for profit drives the supplier’s decision to change price

When a firm increases its price ceteris paribus - it increases profit

Decreases price - Decrease profit

Search for profit drives the supplier’s decision to change price

ProfitProfit

Appeals to firms in the market, and also to those who may want to get into a marketNew companies may get into a

marketExisting companies may alter what

they make

Appeals to firms in the market, and also to those who may want to get into a marketNew companies may get into a

marketExisting companies may alter what

they make

Supply ScheduleSupply Schedule

Shows the relationship between price and quantity supplied for a specific good

Shows the relationship between price and quantity supplied for a specific good

p. 103

Price Supply.501.001.50

2.002.503.00

100150200

250300350

Supply CurveSupply CurveData from supply schedule

represented on a graphHorizontal now measures quantity

suppliedAlways rises from left to right

Data from supply schedule represented on a graphHorizontal now measures quantity

suppliedAlways rises from left to right

Supply curve$

Quantity supplied

Elasticity of SupplyElasticity of Supply

<1 = Elastic Sensitive to changes in price

>1 = InelasticNot sensitive to change

=1, unitary elastic% change in price =

% change in supply

<1 = Elastic Sensitive to changes in price

>1 = InelasticNot sensitive to change

=1, unitary elastic% change in price =

% change in supply

Short run vs Long runShort run vs Long run

Short term - harder to change output levelMuch more inelastic

Long Term - much more flexibleSupply becomes more elastic

Short term - harder to change output levelMuch more inelastic

Long Term - much more flexibleSupply becomes more elastic

Short runShort run

Farmers - OrangesHard to grow more crops right awayTakes time to see a bigger return in

investmentThis keeps more people from farming

Takes longer to make a profit

No matter what the price,there will still be cropsSupply is inelastic - hard to change

output quickly

Farmers - OrangesHard to grow more crops right awayTakes time to see a bigger return in

investmentThis keeps more people from farming

Takes longer to make a profit

No matter what the price,there will still be cropsSupply is inelastic - hard to change

output quickly

Short RunShort Run

Elastic supply - Price of haircuts goes up, hire more

barbers Quick way to make more moneyMore businesses may open

Much larger increase in quantity supplied

Price of haircuts goes down, quick change Fire some workers, close early, leave the

market entirely

Elastic supply - Price of haircuts goes up, hire more

barbers Quick way to make more moneyMore businesses may open

Much larger increase in quantity supplied

Price of haircuts goes down, quick change Fire some workers, close early, leave the

market entirely

Long RunLong Run

FarmerIncrease production- plant moreOver time, more crops would be

available

More time to respond to price change, more elastic

FarmerIncrease production- plant moreOver time, more crops would be

available

More time to respond to price change, more elastic

CH 5.2Costs of Production

CH 5.2Costs of Production

How much labor to hireHow much to makeProduction costs When do businesses shut down

How much labor to hireHow much to makeProduction costs When do businesses shut down

Labor and OutputLabor and Output

How many workers hired determines productionMore workers = Higher Production (to

a point)How much capital do you have?

Marginal product of labor - change in output from hiring one more worker

How many workers hired determines productionMore workers = Higher Production (to

a point)How much capital do you have?

Marginal product of labor - change in output from hiring one more worker

Increasing Marginal ReturnsWith every new worker, marginal

product of labor increasesSpecialization

Diminishing Marginal ReturnsOutput still growsMarginal product of labor goes down

Negative Marginal ReturnsWorkers preventing each other from

completing work

Increasing Marginal ReturnsWith every new worker, marginal

product of labor increasesSpecialization

Diminishing Marginal ReturnsOutput still growsMarginal product of labor goes down

Negative Marginal ReturnsWorkers preventing each other from

completing work

LABOR OUTPUT

Marginal Product of

Labor

0 0 -

1

1

-1

3

3

2

4

4 4

5

6

7

8

10

17

23

28

31

31

32

6

6

5

7

Increasing

Marginal

Returns

Decreasing

Marginal

Returns

Production CostsProduction Costs

Costs must be factored into setting prices

2 types of costs

1. Fixed costs - does not changeRent, taxes, salaries

Costs must be factored into setting prices

2 types of costs

1. Fixed costs - does not changeRent, taxes, salaries

Production CostsProduction Costs

Variable Costs - rise and fall depending on different factorsProduction # of employeesElectricity, Heating/cooling costs

TOTAL COST = Fixed + Variable

Variable Costs - rise and fall depending on different factorsProduction # of employeesElectricity, Heating/cooling costs

TOTAL COST = Fixed + Variable

Marginal CostMarginal Cost

The cost of producing one more good Costs continue to rise when more

goods are produced

Search for profit will decide output level

Profit = T. Revenue - T. Cost

The cost of producing one more good Costs continue to rise when more

goods are produced

Search for profit will decide output level

Profit = T. Revenue - T. Cost

ProfitProfit

Most profitable levelWhere the gap between total

revenue and total cost is the greatest ORWhere marginal revenue is equal to

marginal cost

Most profitable levelWhere the gap between total

revenue and total cost is the greatest ORWhere marginal revenue is equal to

marginal cost

Shutting Down / Leaving the Market

Shutting Down / Leaving the Market

A company should shut down when operating costs are greater than total revenue

Operating costs do not include fixed costs

Fixed costs need to be paid if the firm is in operating or not

A company should shut down when operating costs are greater than total revenue

Operating costs do not include fixed costs

Fixed costs need to be paid if the firm is in operating or not

5.3Changes in Supply5.3Changes in SupplyHow does cost affect

supplyGovt influence on goods

Supply and demand on the global scale

Factors that affect supply

How does cost affect supply

Govt influence on goods

Supply and demand on the global scale

Factors that affect supply

Affect of CostsAffect of Costs

Any change in cost of inputs will affect supplyCost of materials goes down = more

profitCosts go up = less profit madeMaximize profits by setting price

equal to marginal cost

Any change in cost of inputs will affect supplyCost of materials goes down = more

profitCosts go up = less profit madeMaximize profits by setting price

equal to marginal cost

New TechnologyNew TechnologyAdvancements in technology will lower

production costs

No longer have to pay workersMore efficientWork faster

Shifts curve to the right

Advancements in technology will lower production costs

No longer have to pay workersMore efficientWork faster

Shifts curve to the right

Govt InfluenceGovt InfluenceGovt has the power to affect supply

Raising/Lowering the price can encourage or discourage firms from getting into the market

Subsidy - Govt payment that supports a businessMost often associated with foodAlso in manufacturing to promote

businessHelps protect against foreign

companies

Govt has the power to affect supplyRaising/Lowering the price can

encourage or discourage firms from getting into the market

Subsidy - Govt payment that supports a businessMost often associated with foodAlso in manufacturing to promote

businessHelps protect against foreign

companies

SubsidySubsidyGovt money lowers the marginal

costAllows for an increase in supply as

wellSupply curve shifts to the right

Govt money lowers the marginal cost

Allows for an increase in supply as well

Supply curve shifts to the right

$

Output

TAXESTAXES

By placing an excise tax on goods, Govt can reduce supplyTax on the production or sale of a

goodCan be used to discourage the

purchase or use of goodsCauses a shift to the left

By placing an excise tax on goods, Govt can reduce supplyTax on the production or sale of a

goodCan be used to discourage the

purchase or use of goodsCauses a shift to the left

RegulationRegulationGovt intervention in a market that

affects price, quantity, or quality of a goodCar industry - pollution controlProhibitionCauses a shift to the left

Govt intervention in a market that affects price, quantity, or quality of a goodCar industry - pollution controlProhibitionCauses a shift to the left

Global EconomyGlobal Economy

When a nation imports products, prices reflect change in costs in that country

When a nation imports products, prices reflect change in costs in that country

Raise in wages

Supply importeddecreases

Cause :

Effect:

Curve Shifts

Cause:

Effect:

CurveShifts

Investment inTechnology

MoreImported

Cause:

Effect:

Curve Shifts:

New Oil field Discovered

More oil imported

Import RestrictionsImport Restrictions

A country can limit or exclude goods from a country to promote domestic consumption

A country can limit or exclude goods from a country to promote domestic consumption

Other influences on SupplyOther influences on Supply

Future expectations Seller expects price to rise - store

good to sell laterReduce the total supply now

Price drop - place goods on market nowIncrease the total supply now

Future expectations Seller expects price to rise - store

good to sell laterReduce the total supply now

Price drop - place goods on market nowIncrease the total supply now

Other Influences of SupplyOther Influences of Supply

Number of SuppliersMore firms get into a market

Supply goes upCurve shifts right

Firms leave the market or limit productionSupply declinesCurve shifts left

Number of SuppliersMore firms get into a market

Supply goes upCurve shifts right

Firms leave the market or limit productionSupply declinesCurve shifts left