1. Chapter 5: Supply Section 1

2. Introduction How does the law of supply affect the quantity supplied?
As prices rise, producers will offer more of a good and new suppliers will enter the market in the hopes of making a profit.
The law of supply states that as prices rise, so will the quantity supplied.

3. The Law of Supply Supply is the amount of goods available.
As the price of a good increases, producers will offer more of it and as the price decreases, they will offer less.
The law of supply includes two movements:
Individual firms changing their level of production
Firms entering or exiting the market

4. What is the Law of Supply?

5. Higher Production
If a firm is earning a profit from the sale of a good or service, then an increase in the price will, in turn, increase the firm’s profits.
In general, the search for profit drives the choices made by the producer.

6. The Supply Graph
A supply schedule can be represented graphically by plotting points on a supply curve.
A supply curve always rises from left to right because higher prices leads to higher output.
Checkpoint Answer: price and quantity supplied

7. Chapter 5: Supply Section 2

8. Introduction How can a producer maximize profits?
When thinking about how to maximize profits, producers think about the cost involved in producing one more unit of a good.
Costs producers take into consideration are:
Operating cost
Variable cost
Total cost
Marginal cost

9. Labor and Output
All business owners must decide how many workers they will hire.
The addition of new workers will increase production until it reaches its peak, at which point, production actually decreases.

10. Marginal Returns
The addition of more workers to a firm allow for a greater amount of specialization.
Specialization increases the output and the firm enjoys increasing marginal returns.

11. Marginal Returns, cont.
Eventually, though, the benefits of specialization end and the addition of more workers increases total output but at a diminishing rate.
A firm with diminishing marginal returns will produce less and less output from each additional unit of labor.
Answer: 5 beanbags per hour
What is the marginal product of labor when the factory employs five workers?

12. Fixed Costs
Production costs are divided into two categories - fixed costs and variable costs.
Fixed costs mainly involve the production facility and include:
Rent
Machinery repair
Property taxes
Worker’s salaries

13. Variable Costs Variable costs include:
Price of raw materials
Some labor
Electricity and heating bills
Fixed costs and variable costs are added together to find the total cost.

14. Chapter 6: Prices Section 1

15. Introduction What factors affect price?
Prices are affected by the laws of supply and demand.
They are also affected by actions of the government.
Often times the government will intervene to set a minimum or maximum price for a good or service.

16. What is Equilibrium?

17. Disequilibrium
If the market price or quantity supplied is anywhere but at equilibrium, the market is said to be at disequilibrium.
Disequilibrium can produce two possible outcomes:
Shortage—A shortage causes prices to rise as the demand for a good is greater than the supply of that good.
Surplus—A surplus causes a drop in prices as the supply for a good is greater than the demand for that good.
Checkpoint Answer: A surplus

18. Shortage and Surplus
Shortage and surplus both lead to a market with fewer sales than at equilibrium.
Answers: The shortage is 100 slices of pizza.

19. Price Ceiling
While markets tend toward equilibrium on their own, sometimes the government intervenes and sets market prices. Price ceilings are one way the government controls prices.
Rent Control
Sets a price ceiling on apartment rent
Prevents inflation during housing crises
Helps the poor cut their housing costs
Can lead to poorly managed buildings because landlords cannot afford the upkeep.

20. The Effects of Rent Control

21. Price Floors
A price floor is a minimum price set by the government. The minimum wage is an example of a price floor.
Minimum wage affects the demand and the supply of workers.
At what wage is the labor market at equilibrium?
Answer: $6.60.