Chapter 5 -Understanding Supply Or how Apple sold over 13 million iPhone 6s and 6s Plus smartphones over the launch weekend, and T-Mobile has them on back order…with a price of $649 for the 6s Plus…hmmm Students will define and/or identify the following: Supply Law of Supply Supply & Market Supply Supply Curve Elastic & Inelastic Supply

The Supply Curve-The law of demand alone is not enough to explain what determines price. We must also look at supply. E. 11-Supply is the willingness and ability of producers to provide goods and services at different prices in the marketplace. The Law of Supply states, as the price of a good rises, the quantity supplied rises. As the price of a good falls, quantity supplied falls.

Price of Red Noses w/Glasses $2.00 Quantity Supplied 100 Quantity Supplied 200 Quantity Supplied 300 Quantity Supplied 400 Price of Red Noses w/Glasses $3.00 Price of Red Noses w/Glasses $4.00 Price of Red Noses w/Glasses $5.00 The Law of Supply states, as the price of a good rises, the quantity supplied rises.

E-15. What is the function of profit in a market economy as an incentive for entrepreneurs to accept the risks of business failure?

Look carefully at this graph. How does price influence supply?

Law of Supply The Law of Supply is the tendency of suppliers to offer more of a good at higher prices. Why do producers of goods and services love higher prices? How did the O’Jays impact the supply and demand of polyester suits in the 70s? The Law of Supply is the opposite of the Law of Demand.

Why is the Law of Supply True? Supply increases as price rises because existing firms will produce more to make greater profits… Or new firms will enter the market to take advantage of the high prices. For example, the fast food industry.

A Supply Curve A supply curve is a graphic representation showing the tendency of suppliers to supply more at higher prices. A supply curve will always rise left to right. Why do the supply and demand curves move in different directions? If you were the supplier of a good or service when would YOU produce more when the price is high or low?

Supply moves in the direction of price.

Supply Schedule is a table that list the quantity of a good a supplier will supply at various prices in a market. DO YOU REMEMBER THE DIFFERENCE IN DEMAND AND MARKET DEMAND???? MARKET SUPPLY WORKS THE SAME WAY AS MARKET DEMAND-IT IS THE TOTAL SUPPLIED AT EACH AVAILABLE PRICE.

Elasticity of Supply Like Demand, Supply can be elastic or inelastic. In general, supply tends to be inelastic at the onset, because it takes time to increase supply.

Inelastic supply means an increase in price causes a smaller % change in supply. It means firms have difficulty increasing supply in response to a rise in price. Potatoes in the short term. If the price of potatoes goes up, farmers cannot increase supply because it depends how many seeds they put in the ground in March. Nuclear Power. It would take considerable time to increase the supply of nuclear power because you need skilled labor, and it would take a long time to build.

Elastic Supply Elastic supply means an increase in price causes a bigger % change in supply. It means firms can easily increase supply in response to a change in price. Firms operating below full capacity. If a car factory is operating at 70% capacity, then it can easily increase supply and produce more cars in response to changes in price. Some goods are more elastic than others.

Questions for Reflection: Define Supply. Define the Law of Supply. How does the Law of Supply differ from the Law of Demand? Why does supply increase as prices increase? Why does it take time to increase supply?

Fixed Costs Variable Costs Marginal Product of Labor Costs of Production Fixed Costs Variable Costs Marginal Product of Labor

A Fixed Cost A fixed cost is a cost that does not change much no matter how much is produced. An example of a fixed cost is rent. Regardless of how many goods a producer sells, the rent must be paid each month. The rent does not change based on the producer’s sales.

A Variable Cost A variable cost is a cost that rises or falls based on production. An example of a variable cost is the cost of raw materials. The more pizzas sold, the more money spent on cheese.

Total Costs Fixed costs + variable costs = Total costs A producer’s total costs include his fixed costs and his variable costs. Therefore, total costs change every month because variable costs change each month.

The Marginal Product of Labor Businesses can increase output by hiring more workers. The change in output resulting from adding one more worker is the marginal product of labor. Thinking at the margins is deciding whether to add or subtract one additional unit. Hiring a worker may increase production.

Increasing Marginal Returns Increasing marginal returns occurs when hiring one additional worker increases production. Ideally, hiring one additional worker will lead to greater efficiency and production. Producers want to increase production.

Diminishing Marginal Returns Diminishing marginal returns occurs when hiring one additional worker decreases production. Think about it. If you hire too many workers, there will not be enough machines or equipment to keep everyone busy. Some workers will have nothing to do or get in the way of other workers.

Questions for Reflection: What are a producer’s total costs? How do fixed costs differ from variable costs? Define marginal product of labor. Define increasing marginal returns. Why do producers try to avoid diminishing marginal returns? What is thinking at the margins?

Subsidy Excise Tax Regulation Changes in Supply Subsidy Excise Tax Regulation

The determinants of supply: The price of inputs- Any change in the cost of an input will affect supply. An example of an input is a raw material. A rise in the cost of an input will affect supply at all price levels because the good has become more expensive to produce. The supply curve will shift Left, a decrease in supply. Conversely, a fall in the cost of an input will cause an increase in supply at all price levels. The supply curve will shift Right, an increase in supply.

2. Technology-if there are improvements in technology, the supply of the good will increase-especially when the improvement in technology allows the supplier to produce the good or service for less money… Technology is the use of science to develop new products and new methods for producing and distributing goods and services. 3. Number of firms in the industry-when there is a decrease or increase in the number of firms producing the good or service, there will be either a decrease or an increase in the supply of the good or service being supplied.

Government policies can also affect supply. 4.Taxes-If the government decides to increase taxes on businesses, they will not be willing to supply as much as before unless they can increase price.

A Subsidy A subsidy is a government payment that supports a business or a market. Subsidies increase supply because subsidies increase supplier’s profits. Typically, the government provides subsidies to farmers. A farmer profits from the subsidy as well as the sale. Farmers receive government subsidies because farm products are cheap. Farmers would go out of business without subsidies.

Excise Tax An excise tax is a government tax on the production or sale of a good. The government places excise taxes on harmful or dangerous products. The government places an excise tax on cigarettes to discourage consumption.

Regulation Regulation is a government intervention in the market that affects the price, quantity, and quality of a good. An example of regulation is requiring car manufacturers to install pollution reducing devices on cars. Regulation can reduce supply. Government regulations require car manufacturers to install pollution reducing devices.

Shifts in Supply Curves If the supply curve shifts left, fewer goods will be supplied at all price levels. If a supply curve shifts right, more goods will be supplied at all price levels. Excise taxes shift a supply curve to the left while subsidies shift a supply curve to the right.

When a supply curve shifts to the left, supply is reduced at all price levels.

When the supply curve shifts to the right, supply is increased at all price levels.

Questions for Reflection: Why does the government place excise taxes on products and how do excise taxes affect supply? Why does the government provide subsidies to some industries and how do subsidies affect supply? How does regulation affect supply? Why does a rise in the cost of an input affect supply?

Price per pound Quantity Supplied Ground beef per 1,000 pounds/mth 2.49---------------------------------------------------1000 2.39---------------------------------------------------900 2.29---------------------------------------------------800 2.19---------------------------------------------------700 2.09---------------------------------------------------600 1.99---------------------------------------------------500 1.89---------------------------------------------------400 1.79---------------------------------------------------300 1.69---------------------------------------------------200 1.59--------------------------------------------------100

2.49 2.39 2.29 2.19 2.09 1.99 1.89 1.79 1.69 1.59 P R I C E O U N D F B SUPPLY CURVE FOR BEEF PER MONTH SUPPLY CURVE 100 200 300 400 500 600 700 800 900 1000 QTY SUPPLIED/PER 1,000 POUNDS/MONTH

2.49 2.39 2.29 2.19 2.09 1.99 1.89 1.79 1.69 1.59 S SUPPLY And DEMAND CURVE FOR BEEF PER MONTH P R I C E O U N D F B EQUILIBRIUM PRICE D 100 200 300 400 500 600 700 800 900 1000 QTY DEMANDED/SUPPLIED/PER 1,000 POUNDS/MONTH