Supply Unit 2 Ch. 5

Objectives Be able to explain the law of supply Be able to explain what supply is Know the factors that shift the supply curve Know the purpose of supply and demand curves

Law of Supply Tendency of suppliers to offer more of a good at a higher price less of a good at lower price Price Quantity Supplied

Law of Supply Price Quantity Supplied

Quantity Supplied The amount a supplier is willing and able to supply based on price and consumer demand.

Example: If pizza hut is selling pizza and the price of pizza goes up while the cost of production stays the same – Are they going to try and sell more or less pizza?

Supply Curve

Supply Shifters?

“Energy crisis results in doubling of fuel prices” Does this make you want to produce more or less wheat?

Supply Shifter #1: Input Prices Producers will alter the amount they produce based on costs of production

“GPS Technology become available for your operation” Does this make you want to produce more or less hay?

Supply Shifter #2: Inputs - Technology Producers are able to increase production, and do it more efficiently with technology

Technology Process used to produce a good or service – Why is technology important to businesses? Increases efficiency and output Uses the same or a smaller quantity of inputs, or resources Ex: Light Bulb

Technology

“A new construction company moves in to the Treasure Valley.” Does this make you want to start a new business or take more risk?

Supply Shifter #3: Number of Suppliers More suppliers in the marketplace – More competition – Reduced prices for the same good

“Water rights problems arise in your area.” Does this make you want to produce more or less potatoes?

Supply Shifter #4: Risk & Future Expectation of Price If a product is going to be ‘risky’ to produce, they will generally decrease production

Land in Conservation Reserve Program (CRP) New law doubles acreage for CRP Does this make you want to use this land for production?

Land in Conservation Reserve Program (CRP) Supply Shifter #5 &#6: Government Influences Government/ company makes decision – affects producers’ supply

Elasticity of Supply Similar to Elasticity of Demand, shows how suppliers will react to a change in price. Elastic - supply is very sensitive to changes in price Inelastic - supply is not very responsive to changes in price

What are all of these costs? Fixed Costs Variable Costs Operating Costs Total Cost Marginal Cost

Operating Costs: Fixed Cost – Cost does not change no matter how much of a good is produced Variable cost – Cost that rises or falls depending on how much is produced – Examples?

FixedVariable

Cost Total Cost – FC + VC = TC Marginal Cost – The cost of producing one more unit of a good

Marginal Returns Increasing: A level of production in which the product output increases as the number of workers (input) increases Output Input

Marginal Returns Diminishing: A level of production in which product (output) decreases as the number of workers (input) increases Output Input

Costs of Production Why is this Important? – Explains why firms hire a certain amount of employees – Marginal Product of Labor: Change in output from hiring one additional unit of labor