CH 5.1 Supply Law of Supply Supply Curve Elasticity of supply Law of Supply Supply Curve Elasticity of supply

The Law of Supply  Tendency of suppliers to offer more goods at higher prices  Quantity supplied - amount a supplier is willing to make at certain prices  Tendency of suppliers to offer more goods at higher prices  Quantity supplied - amount a supplier is willing to make at certain prices $ $ Supply

 As price goes up  Firms will make more goods to make more $  more firms have incentive to get into the market  As price falls  Some firms will produce less  Some firms may drop out entirely  As price goes up  Firms will make more goods to make more $  more firms have incentive to get into the market  As price falls  Some firms will produce less  Some firms may drop out entirely

Increase in Production  When a firm increases its price ceteris paribus - it increases profit  Decreases price - Decrease profit  Search for profit drives the supplier’s decision to change price  When a firm increases its price ceteris paribus - it increases profit  Decreases price - Decrease profit  Search for profit drives the supplier’s decision to change price

Profit  Appeals to firms in the market, and also to those who may want to get into a market  New companies may get into a market  Existing companies may alter what they make  Appeals to firms in the market, and also to those who may want to get into a market  New companies may get into a market  Existing companies may alter what they make

Supply Schedule  Shows the relationship between price and quantity supplied for a specific good p. 103 PriceSupply

Supply Curve  Data from supply schedule represented on a graph  Horizontal now measures quantity supplied  Always rises from left to right  Data from supply schedule represented on a graph  Horizontal now measures quantity supplied  Always rises from left to right Supply curve $ Quantity supplied

Elasticity of Supply  <1 = Elastic  Sensitive to changes in price  >1 = Inelastic  Not sensitive to change  =1, unitary elastic  % change in price = % change in supply  <1 = Elastic  Sensitive to changes in price  >1 = Inelastic  Not sensitive to change  =1, unitary elastic  % change in price = % change in supply

Short run vs Long run  Short term - harder to change output level  Much more inelastic  Long Term - much more flexible  Supply becomes more elastic  Short term - harder to change output level  Much more inelastic  Long Term - much more flexible  Supply becomes more elastic

Short run  Farmers - Oranges  Hard to grow more crops right away  Takes time to see a bigger return in investment  This keeps more people from farming  Takes longer to make a profit  No matter what the price,there will still be crops  Supply is inelastic - hard to change output quickly  Farmers - Oranges  Hard to grow more crops right away  Takes time to see a bigger return in investment  This keeps more people from farming  Takes longer to make a profit  No matter what the price,there will still be crops  Supply is inelastic - hard to change output quickly

Short Run  Elastic supply -  Price of haircuts goes up, hire more barbers  Quick way to make more money  More businesses may open  Much larger increase in quantity supplied  Price of haircuts goes down, quick change  Fire some workers, close early, leave the market entirely  Elastic supply -  Price of haircuts goes up, hire more barbers  Quick way to make more money  More businesses may open  Much larger increase in quantity supplied  Price of haircuts goes down, quick change  Fire some workers, close early, leave the market entirely

Long Run  Farmer  Increase production- plant more  Over time, more crops would be available  More time to respond to price change, more elastic  Farmer  Increase production- plant more  Over time, more crops would be available  More time to respond to price change, more elastic

CH 5.2 Costs of Production  How much labor to hire  How much to make  Production costs  When do businesses shut down  How much labor to hire  How much to make  Production costs  When do businesses shut down

Labor and Output  How many workers hired determines production  More workers = Higher Production (to a point)  How much capital do you have?  Marginal product of labor - change in output from hiring one more worker  How many workers hired determines production  More workers = Higher Production (to a point)  How much capital do you have?  Marginal product of labor - change in output from hiring one more worker

 Increasing Marginal Returns  With every new worker, marginal product of labor increases  Specialization  Diminishing Marginal Returns  Output still grows  Marginal product of labor goes down  Negative Marginal Returns  Workers preventing each other from completing work  Increasing Marginal Returns  With every new worker, marginal product of labor increases  Specialization  Diminishing Marginal Returns  Output still grows  Marginal product of labor goes down  Negative Marginal Returns  Workers preventing each other from completing work

LABOROUTPUT Marginal Product of Labor Increasing Marginal Returns Decreasing Marginal Returns

Production Costs  Costs must be factored into setting prices  2 types of costs  1. Fixed costs - does not change  Rent, taxes, salaries  Costs must be factored into setting prices  2 types of costs  1. Fixed costs - does not change  Rent, taxes, salaries

Production Costs  Variable Costs - rise and fall depending on different factors  Production  # of employees  Electricity, Heating/cooling costs  TOTAL COST = Fixed + Variable  Variable Costs - rise and fall depending on different factors  Production  # of employees  Electricity, Heating/cooling costs  TOTAL COST = Fixed + Variable

Marginal Cost  The cost of producing one more good  Costs continue to rise when more goods are produced  Search for profit will decide output level  Profit = T. Revenue - T. Cost  The cost of producing one more good  Costs continue to rise when more goods are produced  Search for profit will decide output level  Profit = T. Revenue - T. Cost

Profit  Most profitable level  Where the gap between total revenue and total cost is the greatest OR  Where marginal revenue is equal to marginal cost  Most profitable level  Where the gap between total revenue and total cost is the greatest OR  Where marginal revenue is equal to marginal cost

Shutting Down / Leaving the Market  A company should shut down when operating costs are greater than total revenue  Operating costs do not include fixed costs  Fixed costs need to be paid if the firm is in operating or not  A company should shut down when operating costs are greater than total revenue  Operating costs do not include fixed costs  Fixed costs need to be paid if the firm is in operating or not

5.3Changes in Supply How does cost affect supply Govt influence on goods Supply and demand on the global scale Factors that affect supply

Affect of Costs  Any change in cost of inputs will affect supply  Cost of materials goes down = more profit  Costs go up = less profit made  Maximize profits by setting price equal to marginal cost

New Technology  Advancements in technology will lower production costs  No longer have to pay workers  More efficient  Work faster  Shifts curve to the right

Govt Influence  Govt has the power to affect supply  Raising/Lowering the price can encourage or discourage firms from getting into the market  Subsidy - Govt payment that supports a business  Most often associated with food  Also in manufacturing to promote business  Helps protect against foreign companies

Subsidy  Govt money lowers the marginal cost  Allows for an increase in supply as well  Supply curve shifts to the right $ Output

TAXES  By placing an excise tax on goods, Govt can reduce supply  Tax on the production or sale of a good  Can be used to discourage the purchase or use of goods  Causes a shift to the left

Regulation  Govt intervention in a market that affects price, quantity, or quality of a good  Car industry - pollution control  Prohibition  Causes a shift to the left

Global Economy  When a nation imports products, prices reflect change in costs in that country Raise in wages Supply imported decreases Cause : Effect: Curve Shifts

Cause: Effect: Curve Shifts Investment in Technology More Imported

Cause: Effect: Curve Shifts: New Oil field Discovered More oil imported

Import Restrictions  A country can limit or exclude goods from a country to promote domestic consumption

Other influences on Supply  Future expectations  Seller expects price to rise - store good to sell later  Reduce the total supply now  Price drop - place goods on market now  Increase the total supply now

Other Influences of Supply  Number of Suppliers  More firms get into a market  Supply goes up  Curve shifts right  Firms leave the market or limit production  Supply declines  Curve shifts left