Principles of EconomicsPrinciples of EconomicsEL Dorado High SchoolEL Dorado High School

Spring, 2015Spring, 2015 Mr. Ruiz Mr. Ruiz

Chapter 5

Law of Supply

Retrieved from: http://browardism.com/supply-demand-home-prices/

Section OneUnderstanding Supply:Objectives

• Explain the Law of Supply

• Interpret a supply graph using

a supply schedule

• Explain the relationship between

elasticity of supply and timeRetrieved from: https://lumen.instructure.com/courses/196787/pages/Section6-11?module_item_id=4541509

Terms you will need to know:

• Supply

• Law of Supply

• Quantity supplied

• Supply Schedule

• Market Supply Schedule

• Supply Curve

• Market Supply Curve

• Variable

• Elasticity of SupplyRetrieved from: http://faculty.icc.edu/instructionaldesign/econ/math/econGraphs.html

What would you do?• You are the owner of a company

that produces sunglasses. The market has seen a recent increase in the price of sunglasses. Would you produce more sunglasses, less, or the same as before?

• Remember:• In a market system, the interaction of

buyers and sellers determines the prices of most goods as well of what quantity of a good will be produced

• Buyers demand goods, and sellers supply those goods.

Supply: The amount of goods available.

Retrieved from: http://www.equialt.com/influence-buyers-sellers-supply-demand/

Law of Supply• Law of Supply: The inclination of most suppliers

to offer more of a good at a higher price. (i.e., the higher the price, the more quantity produced)

$$$$ Law of Supply$$$$

↑As price increases, ↑ Quantity supplied increases

↑As price falls, ↑ Quantity supplied falls

Retrieved from: https://www2.yk.psu.edu

Law of Supply (Cont.)• Quantity supplied- The amount a

supplier is willing and able to supply at a certain price.

• In simple terms: If a product’s price increases, businesses will produce more in order to make more money

• (Ex. If the price of oranges goes up, producers will set out to grow more to increase their profit.)

If a product’s price drops, businesses will make less and some business may stop producing certain items all together.

• (Ex. If the price of producing mp3 devices experiences a drop some produces will make less and several may stop production all together.)

Remember: The search for profit drives a businesses’ (supplier) decision.

Examples of supply driven choices include: •The music industry, clothing fads, and food services. (When the going gets good, everyone jumps on board to make profit)

Retrieved from: http://azanrza.blogspot.com/2011/03/sales-department-orginization-complete.html

Supply Schedule

Supply Schedule: •A chart that lists how much of a good a supplier will offer at different prices. (Two variables, (factors), that can change are compared: #1 price & #2 quantities)

•like the demand schedule, the supply schedule only reflects how the changes in PRICE affect the quantity produced.

•Market supply schedule: A chart that lists how much of a good all suppliers will offer at different prices. Hint:

• Shows the relationship between prices and the total quantity supplied by all firms in the market.( In other words, it takes into consideration not just one producer of DVDs but all producers of DVDs)

• Supply Schedule

• Retrieved from: http://whyseemath.com/wp/finitemathematics/chapter-1/section-1-2/section-1-2-question-5/

• Remember: The relationship between both variables is direct (positive).

Supply Curve• Supply Curve: The information from the

Supply Schedule is plotted on a graph to reflect the relationship between price and quantities producers are willing to produce.

• $$ Hint: The Supply Schedule/ Supply Curve are very much like the Demand Schedule/ Demand Curve. The difference is that the focus on Demand is on the Consumer and the focus on Supply is on the producers.

• Market Supply Curve: A graph representing the quantity of a good by all suppliers at different prices.

• * An individual supply curve- Shows data for one producer

• * A market supply curve – Shows data for all producers

• Supply Schedule and Supply Curve

Retrieved from: http://ecolan.sbs.ohio-state.edu/Aly/classes/powerpoint/ch3_2/sld006.htm

Supply and ElasticityElasticity of supply: Basically, measures the way suppliers respond to a change in price.

•Inelastic- When supply is not very responsive to changes in price.( i.e., a change in price does not drastically affect supply)

•Elastic- When supply is very sensitive to change in price.( i.e. a small change in price has a big effect on

supply)

Time and Elasticity Time is the key factor that determines whether

the supply will be elastic or inelastic:Short run: •Supply is inelastic because a business will

have difficulty changing its output.• supply can be elastic if a business can

quickly adapt its output.

Long Run: •Supply can become elastic over time as

producers change their output.

Retrieved from: http://thismatter.com/economics/supply-elasticity.htm

Chapter Five Supply

Cost of Production

Section Two

Objectives• Analyze the production

costs of a firm.

• Understand how a firm chooses to set output.

• Explain how a firm decides to shut down an unprofitable business.

Terms you will need to know:• Marginal Production Labor

• Increasing Marginal Returns

• Diminishing Marginal Returns

• Fixed cost

• Variable cost

• Total cost

• Marginal cost

• Marginal revenue

• Operating cost

Labor and OutputBasic questions to answer by business owners:

• How many workers do I hire?• How will my number of workers affect

total production?

•Marginal Product of LaborMarginal Product of Labor: The change in output from hiring one additional unit of labor.

•Increasing Marginal ReturnsIncreasing Marginal Returns: A level of production in which the marginal product of labor increases as the number of workers increases.

•Diminishing Marginal ReturnsDiminishing Marginal Returns: A level of production in which the marginal product of labor decreases as the number of workers increases.

•Negative Marginal ReturnsNegative Marginal Returns: At this level of production the production process is disrupted because workers simply begin to get in each others way ( The cost of labor exceeds production output) • Retrievedfrom:http://www.independent.org/publications/working_papers/article.asp?id=1369

Production Costs

• Paying workers and purchasing capital are all costs of producing goods.

• Economists divide a producer’s costs into two categories: fixed costs and variable costs.

Fixed costs: A costs that does not change, no matter how much of a good is produced.

Example: Production facility, cost of building and equipment: rent, machinery, property taxes, and salary of base employees.

Variable costs: A costs that rises or falls depending on how much is produced.

Example: Cost of raw material/some labor. Also, electricity and heating cost (utilities).

Total Costs: Fixed costs plus variable costs. Simply FC + VC = TC

Marginal Costs: The cost of producing one more unit of a good.

• Retrieved from: http://www.wyzant.com/resources/lessons/accounting/management-accounting

Setting OutputMarginal Revenue and Marginal Cost

• Assessing the best level of output can be done by determining when marginal revenue is equal to marginal cost.

• Marginal cost is the additional cost of producing one more unit.

• Marginal revenue is the additional income from selling one more unit of a good; sometimes equal to price.

• Simply, the idea is to determine how much of a good/ service a firm may produce at the lowest marginal cost.

The Shutdown DecisionMany firms incur money lose when total revenue falls below total cost. Firms at this stage must determine whether to keep their doors open or shut down their business as a result of increased operation costs.

Retrieved from: http://blog.cleveland.com/business/2008/12/retail_experts_predict_more_st.html

Changes in SupplySection Three

How much does the United States subsidize energy:$70.2 Billion Fossil Fuels$16.8 Billion Corn Ethanol$12.2 Billion Renewable Energy$2.3 Billion Carbon Capture and Storage

SOURCE: The Environmental Law Institute.

Changes in SupplyInput Costs

• A rise in the cost of input will cause a fall in supply at all price levels simply because the good has become more expensive to produce.

• On the other hand, a fall in the cost of an output will cause an increase in the supply at all price levels.

• Technology can help lower a firms costs and increase supply at all price levels.

• Example(s):

• Robotics replacing many assembly line workers.

• Computers simplifying tasks (e-mail rather than mail delivery can offer instantaneous exchange of information critical to a firm.

Government’s Influence on Supply

The power of a government to affect the supply of goods by raising or lowering the cost of producing goods can encourage or discourage domestic/ foreign industry.

Subsidies:

•A subsidy is a government payment or discount loan that supports a business or a market (The government will often pay producers set subsidies for each unit of a good produced).

Excise Taxes:

•A government can reduce the supply of some goods by placing a excise tax (A tax on the production or sale of a good).

Regulation:

•A government can raise/lower supply through indirect means. Regulation by governments on industry can have the effect of raising costs.

Other Influences on Supply

Future expectations of prices

• 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.

On the other hand.

• If the price of the good is expected to drop in the near future, sellers will earn more money by placing goods on the market immediately before the price falls.

Simply:

• Expectations of higher prices will reduce supply now and increase supply later, where lower prices will have the opposite effect.

Number of suppliers

• The number of suppliers in the market can impact supply in the following ways:

• If more suppliers enter a market to produce a certain good, the market supply of the good will rise and the supply curve will shift to the right

On the other hand.

• If suppliers stop producing a good and leave the market, the supply will decline and the curve will shift to the left.