understanding supply (5-1) what is the law of supply? what are supply schedules and supply curves?...
TRANSCRIPT
Understanding Supply (5-1)
•What is the law of supply?
•What are supply schedules and supply curves?
•What is elasticity of supply?
•What factors affect elasticity of supply?
Opening Question
Imagine you own a factory that produces sunglasses and the price of sunglasses begins to rise rapidly (the price people are willing to buy at). Would you produce more, less, or the same amount? Why?
• More! For example… suppose a lemonade stand owner sees the price of lemonade rising. The owner will naturally produce and offer more to make more revenue. In addition, several other lemonade stands may open.
Price
As price
increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied
falls
The Law of Supply
•According to the law of supply, suppliers will offer more of a good at a higher price.
How Does the Law of Supply Work?
•Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price.
•The promise of increased revenues when prices are high encourages firms to produce more.
•Rising prices draw new firms into a market and add to the quantity supplied of a good. As prices fall, firms produce less or drop out.
Market Entry
• In the early 1990’s “grunge” music emerged from Seattle to become widely popular among high school and college students across the country. How did the market react?
• Record labels soon hired many grunge groups. Music stores devoted more and more space to this music style. After a few years, grunge lost its appeal, and many groups disbanded or moved to new styles.
• Many musicians joined the market for a particular style of music to profit from a trend. Their actions reflected the law of supply, which says that the output or quantity supplied of a good increases ad the price increases.
Difference Between Law of Supply and Demand
How is the law of supply different from the law of demand?
• The law of supply describes how price affects producers. The law of demand describes how price affects consumers.
As prices rise, firms are willing to supply more of a good or service. What are some examples of this?
$.50 1,000
Price per slice of pizza Slices supplied per day
Market Supply Schedule
$1.00 1,500
$1.50 2,000
$2.00 2,500
$2.50 3,000
$3.00 3,500
Supply Schedules
•A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.
Market Supply Curve
Pri
ce
(in
do
lla
rs)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
0
0 500 1000 1500 2000 2500 3000 3500
Supply
Supply Curves
•A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.
Note that a price change will cause a change in quantity supplied. It would take an outside factor, like inclement weather, to cause a change in supply.
Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.
Elasticity of Supply
•If supply is not very responsive to changes in price, it is considered inelastic.
•An elastic supply is very sensitive to changes in price (some will drop out of market if P goes down).
Time•In the long run, firms
are more flexible, so supply can become more elastic.
What Affects Elasticity of Supply?
•In the short run, a firm may not be able to easily change its output level, so supply might be inelastic.
Section 1 Assessment
1. What is the law of supply?
(a) the lower the price, the larger the quantity supplied
(b) the higher the price, the larger the quantity supplied
(c) the higher the price, the smaller the quantity supplied
(d) the lower the price, the more manufacturers will produce the good
2. What happens when the price of a good with an elastic supply goes down?
(a) existing producers will expand and some new producers will enter the market
(b) some producers will produce less and others will drop out of the market
(c) existing firms will continue their usual output but will earn less
(d) new firms will enter the market as older ones drop out
Section 1 Assessment
1. What is the law of supply?
(a) the lower the price, the larger the quantity supplied
(b) the higher the price, the larger the quantity supplied
(c) the higher the price, the smaller the quantity supplied
(d) the lower the price, the more manufacturers will produce the good
2. What happens when the price of a good with an elastic supply goes down?
(a) existing producers will expand and some new producers will enter the market
(b) some producers will produce less and others will drop out of the market
(c) existing firms will continue their usual output but will earn less
(d) new firms will enter the market as older ones drop out
In Class Assignment
• In a group of 4-5, create and then perform a skit that illustrates the law of supply. Make sure all members of the group are involved in some way. You will have a few minutes work and practice before beginning.
Costs of Production (5-2)
•How do firms decide how much labor to hire?
•What are production costs?
•How do firms decide how much to produce?
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 —
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31
7 32
8 31
A Firm’s Labor Decisions
•Business owners have to consider how the number of workers they hire will affect their total production.
•The marginal product of labor is the change in output from hiring one additional unit of labor, or worker.
Finish the last 3 for the marginal product of labor… 3, 1, -1
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 —
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 –1
A Firm’s Labor Decisions
•Increasing marginal returns occur when marginal production levels increase with new investment. Increases for first 3 workers because there are 3 tasks involved in making this beanbag. Specialization.
•Diminishing marginal returns occur when marginal production levels decrease with new investment. From 4-7 benefits of specialization dwindle due to limited capital.
•Negative marginal returns occur when the marginal product of labor becomes negative. At 8 workers output decreases. Workers get in each others way and disrupt production process.
Production Costs
•A fixed cost is a cost that does not change, regardless of how much of a good is produced. Ex: rent, taxes, cost to maintain.
•Variable costs are costs that rise or fall depending on how much is produced. Ex: costs of raw materials, some labor costs, electricity.
•The total cost = fixed costs + variable costs.
•If we know the total cost at several levels, we can determine the marginal cost, the cost of producing one more unit of a good.
•Profit = total revenue – total cost
Production Costs
Total revenue
Profit(total revenue –
total cost)
Marginal revenue
(market price)
Marginal cost
Total cost (fixed cost +
variable cost)
Variable cost
Fixed cost
Beanbags (per hour)
$ –36
–20
0
21
40
0
1
2
3
4
$0
24
48
72
96
$24
24
24
24
24
—
$8
4
3
5
$36
44
48
51
56
$0
8
12
15
20
$36
36
36
36
36
57
72
84
93
5
6
7
8
120
144
168
192
24
24
24
24
7
9
12
15
63
72
84
99
27
36
48
63
36
36
36
36
98
98
92
216
240
264
24
24
24
24
19
24
30
36
36
36
36
9
10
11
12
82
106
136
173
118
142
172
Setting Output•Marginal revenue is the additional income from selling one more unit of a good. It is equal to price.
•To determine the best level of output, firms determine the output level at which 1.) marginal revenue (price) is equal to marginal cost or 2.) where the gap is biggest between total revenue and total cost.
Finish the blank spaces in the table…206, 34, 288, 82
Section 2 Assessment
1. What are diminishing marginal returns of labor?
(a) some workers increase output but others have the opposite effect
(b) additional workers increase total output but at a decreasing rate
(c) only a few workers will have to wait their turn to be productive
(d) additional workers will be more productive
2. How does a firm set its total output to maximize profit?
(a) set production so that total revenue plus costs is greatest
(b) set production at the point where marginal revenue is smallest
(c) determine the largest gap between total revenue and total cost
(d) determine where marginal revenue and profit are the same
Section 2 Assessment
1. What are diminishing marginal returns of labor?
(a) some workers increase output but others have the opposite effect
(b) additional workers increase total output but at a decreasing rate
(c) only a few workers will have to wait their turn to be productive
(d) additional workers will be more productive
2. How does a firm set its total output to maximize profit?
(a) set production so that total revenue plus costs is greatest
(b) set production at the point where marginal revenue is smallest
(c) determine the largest gap between total revenue and total cost
(d) determine where marginal revenue and profit are the same
OW - Thursday
• Please read 5-3 on page 116 (10 minutes).
• Then, answer #’s 1-3 and # 5
Changes in Supply (5-3)
•How do input costs affect supply?
•How can the government affect the supply of a good?
•What other factors can influence supply?
Factors That Change Supply
Resource/input costs: Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply (shift).
•As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply at all price levels (shift left).
Technology: New technology (email, robots, computers) can cut costs and increase supply at all price levels. (shift right).
Shifts in the supply curve
Government Influences on Supply•By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.
SubsidiesA subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase (farmers during WWII, up and starting business in developing nations).
Government Influences on SupplyTaxesThe government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good (alcohol, cigarettes). Increases production costs.
Government Influences on SupplyRegulationRegulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs (new cars that burned lead–free gas raised price of cars and decreased supply).
Other Factors Influencing Supply
The Global Economy
• The supply of imported goods and services has an impact on the supply of the same goods and services here.
• Government import restrictions will cause a decrease in the supply of restricted goods
Examples
• The U.S. imports telephones from Japan. A new technology that decreases the cost of producing telephones would increase the supply of telephones to the U.S. market, shifting the supply curve to the right.
• The U.S. imports oil from Russia. A new oil discovery in Russia would increase the supply of oil to the U.S. market and shift the supply curve to the right.
Other Influences on Supply
Future Expectations of Prices
• Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will increase supply now and decrease supply later.
Example
• If you were a soybean farmer, and you expected the price of soybeans to double next month, what should you do with the crop that you just harvested? Most farmers would store it until the price rose, cutting back supply in the short run and increase supply later.
Other Influences on Supply
Number of Suppliers
If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.
More pizza supplied at every price.
Affect on supply of luxury jets
1. The cost of premium leather rises sharply
2. The gov’t subsidizes the manufacture of jet engines
3. Congress passes a law that greatly increases the number of safety devices required on airliners
4. The number of luxury jet manufacturers in the US doubles
5. Computer simulation programs enable manufacturers to design and test aircraft before parts are built
6. The US gov’t imposes an import ban on private jets
Homework
• Read page 121 – “Are Baseball Players Paid Too Much?”
After reading, answer #’s 1-2.
Then – writing assignment: Answer the following question in at least 1 paragraph: Do you believe current salaries for athletes are justified on the basis of supply and demand, and why? Then, explain whether salaries should be based instead on the importance of the job to society or not.
Section 3 Assessment
1. What affect does a rise in the cost of raw materials have on the cost of a good?
(a) A rise in the cost of raw materials lowers the overall cost of production.
(b) The good becomes cheaper to produce.
(c) The good becomes more expensive to produce.
(d) This does not have any affect on the eventual price of a good.
2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good?
(a) It shifts to the left.
(b) It shifts to the right.
(c) It reverses direction.
(d) The supply curve is unaffected.
Section 3 Assessment
1. What affect does a rise in the cost of raw materials have on the cost of a good?
(a) A rise in the cost of raw materials lowers the overall cost of production.
(b) The good becomes cheaper to produce.
(c) The good becomes more expensive to produce.
(d) This does not have any affect on the eventual price of a good.
2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good?
(a) It shifts to the left.
(b) It shifts to the right.
(c) It reverses direction.
(d) The supply curve is unaffected.