1. Chapter 5SectionMain Menu Supply The sellers side of the equation Supply—the amount producers are willing to offer at various prices at a given time Quantity supplied—the amount producers are willing to offer at each particular price rr

2. Chapter 5SectionMain Menu Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply According to the law of supply, suppliers will offer more of a good at a higher price.

3. Chapter 5SectionMain Menu How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. Rising prices draw new firms into a market and add to the quantity supplied of a good.

4. Chapter 5SectionMain Menu Profit Motive Profit—the amount producers have left after paying all of their costs –Businesses make a profit when total revenue is greater than the costs of production –Costs include wages, electric bills, materials, etc. –To make profit, producers have to offer goods people want –Profit helps to direct the use of resources in a market The level of profit effects the level of supply; high profit leads to an increase in supply, low profit leads to a decrease in supply

5. Chapter 5SectionMain Menu $.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500 Supply Schedules A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.

6. Chapter 5SectionMain Menu Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.

7. Chapter 5SectionMain Menu Elasticity of supply is a measure of the way quantity supplied reacts to a change in price. Elasticity of Supply If supply is not very responsive to changes in price, it is considered inelastic. An elastic supply is very sensitive to changes in price. Supply

8. Chapter 5SectionMain Menu What Affects Elasticity of Supply? 1. Time 2. Money 3. Resources that are not readily available Ex: gold, fine art, and space shuttles 1.Quickly 2.Inexpensively 3.Using a few, readily available resources Ex: sport team souvenirs (t- shirts, posters, and hats) Inelastic— goods tend to require a lot of: Elastic— products tend to be made:

9. Chapter 5SectionMain Menu Productivity Amount of goods and services produced per unit of input Tells how efficiently resources are being used Look at productivity to maximize efficiency and profit Look at total product and marginal product and how they change when inputs change

10. Chapter 5SectionMain Menu A Firm’s Labor Decisions Business owners have to consider how the number of workers they hire will affect their total production. The marginal product of labor is the change in output from hiring one additional unit of labor, or worker. Skateboard Production Schedule Labor InputTotal ProductMarginal Product 000 133 274 3125 4208 53010 64515 75712 8669 9682 1065-3

11. Chapter 5SectionMain Menu Skateboard Production Schedule Labor Input Total Product Marginal Product 000 133 274 3125 4208 53010 64515 75712 8669 9682 1065-3

12. Chapter 5SectionMain Menu Increasing, Diminishing, and Negative Marginal Returns Labor (number of workers) Marginal Product of labor (beanbags per hour) 8 7 6 5 4 3 2 1 0 –1 –2 –3 Diminishing marginal returns occur when marginal production levels decrease with new investment. 4567 Diminishing marginal returns Negative marginal returns occur when the marginal product of labor becomes negative. 89 Negative marginal returns Marginal Returns 123 Increasing marginal returns Increasing marginal returns occur when marginal production levels increase with new investment.

13. Chapter 5SectionMain Menu Production Costs A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs. The total cost equals fixed costs plus variable costs. The marginal cost is the cost of producing one more unit of a good.

14. Chapter 5SectionMain Menu Input Costs and Supply Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply. –As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply. Input costs can also decrease. New technology can greatly decrease costs and increase supply. Prices of related goods can cause a shift in supply as producers move into or out of related products based on which one can provide the highest profits.

15. Chapter 5SectionMain Menu Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry. Subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. Taxes The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. Regulation Regulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs.

16. Chapter 5SectionMain Menu Other Factors Influencing Supply The Global Economy –The supply of imported goods and services has an impact on the supply of the same goods and services here. –Government import restrictions will cause a decrease in the supply of restricted goods. Future Producer Expectations of Prices –Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect. Number of Suppliers (Competition) –If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.