chapter 5 the law of supply when prices go up, quantity supplied goes up when prices go down,...
TRANSCRIPT
The Law of SupplyThe Law of Supply
When prices go up, quantity When prices go up, quantity supplied goes upsupplied goes up
When prices go down, quantity When prices go down, quantity supplied goes downsupplied goes down
Why Does it Work That Why Does it Work That Way?Way? Every company has a certain Every company has a certain
amount of resourcesamount of resources Companies will use the resources Companies will use the resources
they have to produce the most they have to produce the most profitable goods and servicesprofitable goods and services
If the price goes up and people still If the price goes up and people still buy it, businesses make more buy it, businesses make more money!money!
Supply ScheduleSupply Schedule
Works just like a demand Works just like a demand schedule, with a column for price schedule, with a column for price and a column for quantity and a column for quantity suppliedsupplied
Supply CurveSupply Curve
Graphs the Graphs the supply supply scheduleschedule
The line is The line is opposite the opposite the demand curve!demand curve!
Supply and ElasticitySupply and Elasticity
Supply is elastic when a small Supply is elastic when a small price change leads to a big price change leads to a big change in quantity suppliedchange in quantity supplied
Supply is inelastic when a big Supply is inelastic when a big price change still has little effect price change still has little effect on quantity suppliedon quantity supplied
Elasticity in the Short Elasticity in the Short RunRun
Some business Some business cannot respond cannot respond to price changes to price changes quicklyquickly Producers of Producers of
goods (farmers, goods (farmers, factories, etc.)factories, etc.)
Elasticity in the Short Elasticity in the Short RunRun Other business Other business
respond very respond very quickly to price quickly to price changeschanges Service industry Service industry
can hire more can hire more workers to workers to produce more produce more immediatelyimmediately
Elasticity in the Long RunElasticity in the Long Run
When businesses have a long When businesses have a long time to respond to price time to respond to price changes, supply is even more changes, supply is even more elasticelastic
Time is the most important factor Time is the most important factor in determining elasticity of supplyin determining elasticity of supply
Labor and OutputLabor and Output
How do companies decide how How do companies decide how many people to hire?many people to hire?
Marginal Product of Labor – the Marginal Product of Labor – the change in production output from change in production output from hiring one more workerhiring one more worker
Marginal Product of Marginal Product of LaborLabor
Increasing Marginal Returns – Increasing Marginal Returns – when adding workers increases when adding workers increases productionproduction
Marginal Product of Marginal Product of LaborLabor Diminishing Marginal Returns – Diminishing Marginal Returns –
when adding workers still when adding workers still increases production, but at a increases production, but at a slower rateslower rate
Marginal Product of Marginal Product of LaborLabor
Negative Marginal Returns – Negative Marginal Returns – when adding more workers when adding more workers decreases productiondecreases production
Production CostsProduction Costs
Production costs are any Production costs are any expenses that go into making a expenses that go into making a productproduct
Electricity, Worker’s Wages, Electricity, Worker’s Wages, Worker’s Benefits, Rent, Gas, Worker’s Benefits, Rent, Gas, Raw Materials, etc. Raw Materials, etc.
Production CostsProduction Costs Fixed Cost – does Fixed Cost – does
not change, no not change, no matter how little matter how little or much is or much is producedproduced
For example: For example: machinery machinery repairs, rent, repairs, rent, salaried salaried employeesemployees
Production CostsProduction Costs Variable Costs – Variable Costs –
costs that rise or costs that rise or fall based on fall based on how much is how much is producedproduced
For example: For example: Raw Materials, Raw Materials, Hourly Workers, Hourly Workers, Gas, ElectricityGas, Electricity
Calculating Total CostCalculating Total Cost
Total Cost = Fixed Cost + Variable Total Cost = Fixed Cost + Variable CostCost
TC = FC + VCTC = FC + VC
Calculating Average Total Calculating Average Total CostCost
Average Total Cost = Average Total Cost = Total CostTotal Cost Total Output Total Output
ATC = TC / QsATC = TC / Qs
Production CostsProduction Costs
Marginal Cost – the additional Marginal Cost – the additional total cost of producing one more total cost of producing one more unitunitSo if producing one Sweet So if producing one Sweet
Onion Chicken Teriyaki costs Onion Chicken Teriyaki costs $1.50, and producing two costs $1.50, and producing two costs $2.50, marginal cost is $1.00.$2.50, marginal cost is $1.00.
Production CostsProduction Costs
At first, the more you produce, At first, the more you produce, the cheaper it is per item to the cheaper it is per item to produce themproduce them
Later on, increasing production Later on, increasing production will actually will actually hurthurt the company’s the company’s profitsprofits
That’s Right!That’s Right!
Because eventually, diminishing Because eventually, diminishing and negative marginal returns and negative marginal returns set in when you have too many set in when you have too many workers!workers!
Setting OutputSetting Output
Businesses, thus, base their Businesses, thus, base their hiring decisions on maximizing hiring decisions on maximizing profit – they study marginal costprofit – they study marginal cost
How can I line my pockets with more
indescribable wealth?
Marginal Revenue and Marginal Revenue and Marginal CostMarginal Cost Marginal Revenue is the Marginal Revenue is the
additional income from selling additional income from selling one more productone more product Typically, MR = PriceTypically, MR = Price
The best formula for a business The best formula for a business to use is for their marginal to use is for their marginal revenue to = their marginal costrevenue to = their marginal cost
Responding to Price Responding to Price ChangesChanges
When the price goes up for a When the price goes up for a good, how do businesses good, how do businesses respond?respond?
Responding to Price Responding to Price ChangesChanges
Remember: Your marginal revenue is now way above
marginal cost
When to ShutdownWhen to Shutdown
If marginal revenue = marginal If marginal revenue = marginal cost and you are still losing cost and you are still losing money…money…
You are in big trouble!You are in big trouble! Profit is already maximized and Profit is already maximized and
you are still behind!you are still behind!
5 Factors that Shift 5 Factors that Shift SupplySupply
1. Input Costs – costs that go into 1. Input Costs – costs that go into producing your goodproducing your good The business would naturally produce The business would naturally produce
less if the product is less profitableless if the product is less profitable Higher input costs shift supply left, Higher input costs shift supply left,
lower input costs shift it rightlower input costs shift it right
5 Factors that Shift 5 Factors that Shift SupplySupply 2. Technology - can decrease 2. Technology - can decrease
input costsinput costs Email has virtually eliminated Email has virtually eliminated
many long distance phone bills many long distance phone bills and mail delivery charges for and mail delivery charges for some businessessome businesses
Better technology shifts supply to Better technology shifts supply to the rightthe right
5 Factors that Shift 5 Factors that Shift SupplySupply
3. Market Entry/Exit3. Market Entry/Exit New businesses entering the New businesses entering the
market shifts supply to the rightmarket shifts supply to the right Businesses closing down and Businesses closing down and
leaving the market shift supply to leaving the market shift supply to the leftthe left
5 Factors that Shift 5 Factors that Shift SupplySupply
4. Government4. Government Can encourage Can encourage
or discourage or discourage production of production of certain goodscertain goods
5 Factors that Shift 5 Factors that Shift SupplySupply
If the government If the government wants to shift supply wants to shift supply left, it uses:left, it uses:
Excise Taxes – a Excise Taxes – a tax on the tax on the production or production or sale of a goodsale of a good
5 Factors that Shift 5 Factors that Shift SupplySupply If the government If the government wants to shift supply wants to shift supply left, it uses:left, it uses: Regulations – Regulations –
government government intervention that intervention that affects the price, affects the price, quantity, or quality quantity, or quality of a goodof a good
5 Factors that Shift 5 Factors that Shift SupplySupply If the government wants to push If the government wants to push
the supply curve to the right, it the supply curve to the right, it uses: uses: Subsidies- pays the producer a Subsidies- pays the producer a
set amount per goodset amount per goodDeregulation – gets rid of Deregulation – gets rid of
existing gov. regulationsexisting gov. regulations
5 Factors that Shift 5 Factors that Shift SupplySupply
5. Producer Expectations5. Producer Expectations If producers expect prices to If producers expect prices to
go up in the future, they store go up in the future, they store their goods now until they can their goods now until they can sell them for the higher pricesell them for the higher price
Shifts current supply leftShifts current supply left
5 Factors that Shift 5 Factors that Shift SupplySupply
5. Producer Expectations5. Producer Expectations If producers expect prices to If producers expect prices to
go down in the future, they go down in the future, they flood the market now to get rid flood the market now to get rid of them before the price dropsof them before the price drops
Shifts current supply rightShifts current supply right