Chapter 5 Section 3

Just as several factors can affect demand at all price levels, a separate set of factors can affect supply supply, or shift an entire supply curve to the left or right.

Any change in the cost of raw materials, machinery, or labor will affect supply. If production costs increase, the marginal cost may become higher than the price.

A rise in the cost of resources will cause a fall in supply at all price levels because the good has been more expensive to produce. A fall in the cost of resources will cause an increase in supply at all price levels.

If a firm has no control over the price, the only solution is to cut production and lower marginal cost until marginal cost equals the lower price.

Computers have simplified tasks and cut cost in fields as diverse as journalism, and architecture. For Example- Email can be sent and received in an instant rather than slowly delivered letters and expensive long distance phone calls.

Technology lowers costs and increases supply at all price levels. The government has the power to affect the supplies of many goods. Raising or lowering the cost of producing goods, the government can encourage or discourage an industry, or entrepreneur.

One method used by governments to affect supply is to give subsidies to the producers of a good, particularly food. A subsidy is a government payment that supports a business or market. The government pays a producer a set subsidy for each unit of a good produced.

Governments have several reasons for subsidizing producers. Governments in developing countries often subsidize manufacturers to protect young, growing industries from strong foreign competition.

In the past, countries such as Indonesia and Malaysia have subsidized a national car company as a source of pride, even though American and Japanese cars were less expensive to build.

In Western Europe, banks and national airlines were allowed to suffer huge losses with the assurance that the government would cover their debt. By lowering marginal cost at all levels of output, subsidies allow the supply of a good to increase.

In many countries, governments have stopped providing industrial subsidies in the interest of free trade and fair competition. A gov’t can reduce the supply of some goods by placing an excise tax on them.

In the U.S., the federal government subsidizes miners, cattle ranchers, tobacco growers, and producers in many industries. An excise tax is a tax on the production or sale of a good.

An excise tax increases production costs by adding an extra cost for each unit sold. Excise taxes are built into the prices of these and other goods, so consumers may not realize that they are paying them.

Excise taxes are sometimes used to discourage the sale of goods that the government thinks are harmful to the public-good, like cigarettes, alcohol, and high-pollutant gasoline.

One final factor to consider when looking at changes in supply is the # of suppliers in the market. If more suppliers enter a market to produce a certain good, the market supply of the good will rise.

Like any increase in cost, an excise tax causes the supply of a good to decrease at all price levels. Regulation- government intervention in the market that affects the production of a good.

Subsidies and excise taxes represent ways that governments directly affect supply by changing revenue or production costs. Governments can also raise or lower supply through indirect means.

Government regulation often has the effect of raising costs. Regulations such as lead-free fuel increased the cost of manufacturing cars and reduced the supply. The supply curve shifted to the left.

The United States imports telephones from Japan The United States imports telephones from Japan. A technological innovation that decreases the cost of producing phones would increase the supply of phones to the U.S. market.

An import ban on sugar would eliminate foreign sugar suppliers from the market, shifting the market supply curve to the left. At any price, a smaller quantity of sugar would be supplied.

If the government restricted imports by establishing an import quota, the supply curve would shift to the left, but the shift would be smaller than it would be for an absolute ban on sugar imports.

While government can have an important influence on the supply of goods, there are also other important factors that influence supply. Like producer’s expectations of future prices.

Second, the supply of goods increase with the number of firms producing the good. If a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future.

If the price of the good is expected to drop in the near future, sellers will earn more money by placing goods on the market immediately before the price falls.

Inflation is a chronic condition of rising prices Inflation is a chronic condition of rising prices. During periods of inflation the value of cash in a person’s pocket decreases from day to day as prices rise.

Ch.5 Sec.3 questions

How does a subsidy effect supply? Question #1 How does a subsidy effect supply? The government gives money for more products.

Why does the government impose excise taxes? Question #2 Why does the government impose excise taxes? It increases production costs.

How can regulation affect a producer’s output decisions? Question #3 How can regulation affect a producer’s output decisions? It could give the government more control over what is produced.

What is regulation? Question #4 A government intervention in a market that affects the price, quantity, or quality of food.

Question #5 What does an excise tax do for the economy? It increases production cost by adding an extra cost for each unit sold.

What is a subsidy and what is its purpose? Question #6 What is a subsidy and what is its purpose? A government payment that supports a business or market. To help problems such as food shortages.

Question #7 What affect does technology have on the economy? It speeds up production and makes a lot of the work easier but on the flip side it takes jobs away.

Question #8 What effects does input cost have on the relationship between marginal revenue and marginal cost? It makes products cost more.

Why do governments subside producers? Question #9 Why do governments subside producers? Food shortages, to protect young, Etc.

Question #10 The numbers of suppliers in a market is a factor of what? Changes in supply.