1. According to the law of supply, suppliers will offer more of a good at a higher price and less at a lower price. This helps prices stay stable in the long run.
Law of Supply
Price
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls

2. 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.
EX: Beluga Caviar $120/oz.
New “Kentucky Spoonfish” caviar- $10/oz.
Rising prices draw new firms into a market and add to the quantity supplied of a good.
Firms or sellers are “price takers”
When supply looks like it’s fixed—PRICES RISE

3. An example of Supply
The 1970s energy crisis encouraged countries to look to nuclear power.
Public utility companies stockpiled Uranium.
Uranium prices rose.
Entrepreneur-explorers discovered new deposits in Australia, Africa, and North America that were worth mining at the higher prices.
Slow expansion of nuclear power, combined with bulging stockpiles brought the pirce back down—to 1/8 of their highest price.

4. Price per slice of pizza Slices supplied per day
A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.
$.50
1,000
Price per slice of pizza
Slices supplied per day
Market Supply Schedule
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500

5. Output (slices per day)
A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
Supply
Chapter 5, Section 1

6. Comparing Terminology
Supply
A shift of the supply curve due to a change in ceteris paribus conditions.
Quantity Supplied
Movements along the supply curve due to changes in the price of a good.

7. What are the ceteris paribus Assumptions that affect “Supply?”
Input Prices (if the price of batteries increases, car manufacturers will make fewer cars—they can’t afford to make more)
Technology (Bessemer process for making steel made it much cheaper to produce)
Taxes or the level of subsidies
Expectations
Government regulations (cigarette production)
“Z-factor”: Weather for crops, etc.

8. Elasticity of Supply
Elasticity of supply is a measure of the way quantity supplied reacts to a change in price
An elastic supply is very sensitive to changes in price
If supply is not responsive to changes in price, demand is considered inelastic.
Elasticity is affected by TIME. In the short run, a firm cannot easily change its output level, so supply is inelastic. In the long run, firms are more flexible, so supply can become more elastic.
Elasticity of Supply= (∆ % Quantity Supplied) / (∆% Price)

9. Section 1 Review 1. What is the law of supply?
(a) The lower the price, the larger the quantity supplied.
(b) The higher the price, the larger the quantity supplied.
(c) The higher the price, the smaller the quantity supplied.
(d) The lower the price, the more manufacturers will produce the good.
2. What happens when the price of a good with an elastic supply goes down?
(a) Existing producers will expand and some new producers will enter the market.
(b) Some producers will produce less and others will drop out of the market.
(c) Existing firms will continue their usual output but will earn less.
(d) New firms will enter the market as older ones drop out.

10. Production worksheet

11. A Firm’s Labor Decisions
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor
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. — 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1

12. Stages of Production
Stage I (increasing returns): Marginal output increases with each new worker. Companies are tempted to hire more workers.
Stage II (diminishing returns): total production keeps growing with each new worker, but the rate of increase is smaller
Stage III (negative returns): Marginal product become negative, decreasing total plant output. Yes, this can really happen.

13. Labor (number of workers) Marginal Product of labor
Marginal Returns
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 –1 –2 –3
Increasing marginal returns occur when marginal production levels increase with new investment. 1 2 3
Increasing marginal returns
Diminishing marginal returns occur when marginal production levels decrease with new investment. 4 5 6 7
Diminishing marginal returns
Negative marginal returns occur when the marginal product of labor becomes negative. 8 9
Negative marginal returns

14. 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.
EX: A self-service gas station has high fixed costs but low variable costs.

15. Total revenue is the number of units sold multiplied by the average price per unit.
Marginal revenue is the additional income from selling one more unit of a good. It is usually equal to price. To determine the best level of output, firms determine the output level at which marginal revenue is equal to marginal cost.
Production Costs
Total revenue
Profit (total revenue – total cost)
Marginal revenue (market price)
Marginal cost
Total cost (fixed cost + variable cost)
Variable cost
Fixed cost
Beanbags (per hour)
$ –36
–20 21 40 1 2 3 4 $0 24 48 72 96
$24 — $8 5
$36 44 51 56 8 12 15 20 36 57 72 84 93 5 6 7 8
120
144
168
192 24 9 12 15 63 99 27 36 48 98 92 79
216
240
264
288 24 19 30 37 36 9 10 11 12 82
106
136
173
118
142
172
209

16. Section 2 Review 1. What are diminishing marginal returns of labor?
(a) Some workers increase output but others have the opposite effect.
(b) Additional workers increase total output but at a decreasing rate.
(c) Only a few workers will have to wait their turn to be productive.
(d) Additional workers will be more productive.
2. How does a firm set his or her total output to maximize profit?
(a) Set production so that total revenue plus costs is greatest.
(b) Set production at the point where marginal revenue is smallest.
(c) Determine the largest gap between total revenue and total cost.
(d) Determine where marginal revenue and profit are the same.

17. 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.

18. Gov’t Influences on Supply
By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.
A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.
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 occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs.

19. 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 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
If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.

20. Section 3 Review
1. What affect does a rise in the cost of raw materials have on the cost of a good?
(a) A rise in the cost of raw materials lowers the overall cost of production.
(b) The good becomes cheaper to produce.
(c) The good becomes more expensive to produce.
(d) This does not have any affect on the eventual price of a good.
2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good?
(a) It shifts to the left.
(b) It shifts to the right.
(c) It reverses direction.
(d) The supply curve is unaffected.

21. Long and Short Run Aggregate Supply
Many economists believe that costs ultimately move with the price level, and that as a result, in the long run the AS curve is vertical
Initially the economy is in equilibrium at a price level of P0 and an aggregate output of Y0 (the point at which AD0 and AS0 intersect). Now imagine a shift in AD from AD0 to AD1. In response to the shift both, the price level and aggregate output rise in the short run, to P1 and Y1. Now suppose costs fully adjust to price in the long run. AS will shift left, from AS0 to AS1, and in the final analysis, if costs and prices have increased by the same percentage, then aggregate output will be back at Y0. Connecting the two long-run equilibrium points in the figure above yields the long-run aggregate supply curve, labeled LRAS in the figure above.