Chapter 4 SUPPLY

How are the roles of producers and consumers different? Brainstorm 2 examples of decisions made by producers and consumers.

TINSTAAFL There is no such thing as a free lunch.

Supply quantity of goods and services producers would be willing to offer for sale at various possible prices during a given time period A supplier is anyone who offers an economic product for sale

How do we show supply? Supply schedule- lists each quantity of a product that producers are willing to supply at various possible market prices. Supply curve- plots the information from a supply schedule. Law of supply- tendency of suppliers to offer more for sale at higher prices and less at lower prices. quantity varies directly with price.

Quantity Supplied- Quantity Supplied- amount of a good or service that a producer is willing to sell at each particular price. Change in quantity supplied-Change in quantity supplied- change in the amount offered for sale in response to a change in price. ProfitProfit- money remaining after producers have paid costs. Costs of production-Costs of production- wages, salaries, rent, interest on loans, etc.- any goods and services used to manufacture a product.

Price Elasticity of Supply Elasticity of Supply-Elasticity of Supply- degree to which price changes affect the quantity supplied Elastic supply Elastic supply: when a small change in price causes a major change in the quantity supplied. Can be elastic when made: Quickly Inexpensively Using a few, readily available resources

Inelastic Supply when a change in a good’s price has little impact on the quantity supplied. Product’s supply is inelastic if production requires much: time money difficult resources to obtain

4.2 Changes in Supply Imagine that you own a coffee plantation. A recent strike by coffee bean pickers has resulted in an increase in your costs of production reducing your profit. How will this situation effect the amount of coffee that you supply at each price? The amount supplied will decrease

Non- Price Determinants of supply non price factors (things besides price) that can shift the entire supply curve of a product 1. Technology 2. Competition 3. Prices of Related Goods 4. Producer Expectations 5. Prices of resources 6. Government tools Subsidies Regulation Taxes

SUPPLY SHIFTS Which way would the supply curve for coffee shift in the following scenarios? 1. This year’s coffee bean harvest is the largest to date. 2. Coffee bean pickers go on strike. 3. Congress approves a tax cut for small businesses. 4. Agricultural subsidies for coffee bean plantations are decreased. 5. Congress passes a new law regulating how brewed coffee must be stored until it is served. 6. A new invention makes it easier and faster to harvest coffee beans. 7. Coffee shops increase in popularity, and their numbers increase rapidly. 8. The price of herbal teas increases because of their popularity with college students. 9. Producers expect the popularity of coffee shops to continue to increase.

1. This year’s coffee bean harvest is the largest to date. (right) 2. Coffee bean pickers go on strike. (left) 3. Congress approves a tax cut for small businesses. (right) 4. Agricultural subsidies for coffee bean plantations are decreased. (left) 5. Congress passes a new law regulating how brewed coffee must be stored until it is served. (left) 6. A new invention makes it easier and faster to harvest coffee beans. (right) 7. Coffee shops increase in popularity, and their numbers increase rapidly. (right) 8. The price of herbal teas increases because of their popularity with college students. (left) 9. Producers expect the popularity of coffee shops to continue to increase. (right)

4.3 Making Production Decisions

What is productivity? What is productivity? amount of goods and services produced per unit of input Why do producers examine productivity to make supply decisions?Why do producers examine productivity to make supply decisions? to maximize efficiency and profits What do producers look at when trying to increase productivity?What do producers look at when trying to increase productivity? how various levels of inputs affect total product and marginal product

Total v. Marginal Product Total product- all of the products a company makes with a given amount of input during a given period of time Marginal product- the change in output generated by adding one more unit of input. Marginal product = total level of input -total product at the previous level of input.

Supply: Should we produce? Profit: make a profit firms must determine if their total revenue will be greater than their total cost. Total revenue: total money that firms receive from consumers (price X unit sold) Total costs: includes wages, rents, price for capital, interest on loans, insurance, utilities, etc

Costs of Production Fixed costs- business incurs these even if the plant is idle and output is 0. They do not change as the level of output changes -Ex. Insurance, property taxes, rent, salaries, interest on loans, depreciation Types of Fixed Costs -Depreciation- gradual wear and tear on capital goods over time through use. (machines will not last forever b/c they will eventually wear out and break) reduction in value on capital goods. -Overhead- total of a business’s fixed costs minus wages and material costs.

Variable v. Marginal costs Variable costs- change when the business rate of operation or output changes Marginal costs- extra cost incurred when a business produces one additional unit of product

Law of diminishing returns Law of diminishing returns -describes the effect that varying the level of input has on total marginal product. As more of 1 input is added to a fixed supply of other resources, productivity increases up to a point. Ex: Suppose that 1 lb of seed applied to a plot of land of a fixed size produces 1 ton of harvestable crop. You might expect that an additional lb of seed would produce an add’l ton of output. However, if there are diminishing marginal returns, that additional pound will produce less than 1 add’l ton of harvestable crop (on the same land, during the same growing season, and w/ nothing else but the amount of seeds planted changing).

For example: the 2nd lb. of seed may only produce a half ton of extra output. And diminishing marginal returns also implies that a 3rd lb. of seed will produce an additional crop that is even less than a 1/2 ton of additional output. Assume that it is 1/4 of a ton.

Another Example through the 3 stages of production: 1st stage: Adding each new worker to a factory causes an increase in the total product for the factory. Increasing marginal returns- additional input (labor) increases returns because workers can specialize

What happens if you add more workers to this factory?

2 nd stage: at this stage adding add’l workers causes an increase in product, but a smaller increase because workers are getting in each other’s way. Diminishing marginal returns- add’l input is causing less of an increase in output 3 rd stage: At this stage each new worker overcrowds the factory so much that the output decreases. Negative marginal returns- additional input actually decreases output usually because overcrowded workers get in each other’s way.