What do you think supply is?

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Presentation transcript:

What do you think supply is?

Supply Supply - Ability and willingness of sellers to make goods and sell products or services Quantity supplied – amount supplied by a company. Labor adds to supply Services

Law of supply As prices of goods increase so does the quantity supplied. Ex. Farmer and corn supply. Ex music industry.

Supply curve and supply schedule Q 1 6 2 9 3 12 4 15 5 18

Elasticity of supply Measures how firms will respond to changes in the price of a good Elastic (sensitive to price increase) Inelastic (less sensitive to price increase) Unitary elastic ( moves on a 1/1 basis Time is a key factor elasticity of supply

Elasticity of Supply in the Short Run Production of goods are usually inelastic in the short run. Tough to get materials in time to produce more goods Ex oranges Production of services are usually elastic in the short run Hire more workers to get larger supply of services Barber shop.

Elasticity in the Long Run Time gives suppliers the ability to respond better to price changes Ex planting more trees

Do now What is the law of supply What does elasticity of Supply explain? What is a factor in elasticity of supply? Give two reasons why the supply curve shifts?

Why does the Supply Curve Shifts Input costs Costs of production increase or decrease will cause a shift in the curve Technology (automation) Lower costs and increases supply Government influence Subsidies – a government payment to support a business or market Excise Taxes – reduce supply by adding an extra cost on each unit produced Regulation – is a government intervention in a market that effects price, quantity, or quality of a good.

Why does the Supply Curve Shifts Change in global economy Imports Tariffs and quotas Future expectations Number of suppliers in the market

Shifts in the Supply curve

How do firms decide to hire workers Marginal product of labor- the change in output from hiring one additional unit of labor.

Marginal Return of Labor Output Mar. prod. of labor 1 4 2 10 6 3 17 7 4 23 6 5 28 31

Increasing Marginal Returns A level of production in which the marginal product of labor increases as numbers of workers increases. Diminishing Marginal Returns A level of production at which the marginal product of labor decreases as the number of workers increase

Marginal Return of Labor Output Mar. prod. of labor 1 4 2 10 6 3 17 7 4 23 6 5 28 31

Fixed Costs or overhead Costs that stay the same no matter how much is produced. Ex rent Insurance Taxes Loans Machines and capital goods

Variable Costs or operating costs Change with the amount of production. Spending on raw materials Labor Overtime Electric and gas bills merchandise

Total Cost of Production Is the combination of fixed costs and variable costs.

Marginal costs + Marginal Revenue Marginal Costs are the extra costs of producing one more unit. Marginal Revenue the additional income from selling one more unit of a good Average costs The total cost divided by the quantity produced

When are company’s most profitable? Production costs: When price is = to marginal costs, company’s are most profitable Biggest margin. Between total costs and total revenues.

bb fc vc tc mc 36 1 8 44 2 12 48 4 M revs T revs profit 24 -36 -20 48 3 36 15 51 4 20 56 5 27 63 7 6 72 9 24 72 21 96 40 120 57 144 7 36 48 84 12 8 63 99 15 9 82 118 19 10 106 142 24 24 168 84 192 93 216 98 240 11 36 136 172 30 24 264 93

When should a company close a factory? When total revenue is less than operating costs average variable costs