1. How do suppliers decide what goods and services to offer?
Chapter 5: Supply
How do suppliers decide what goods and services to offer?

2. Section 1: Understanding Supply
Objectives: Explain the law of supply. Interpret a supply schedule and a supply graph. Examine the relationship between elasticity of supply and time.

3. The Law of Supply
Supply the amount of goods available Law of Supply producers offer more of a good as its price increases and less as its price falls Quantity Supplied the amount that a supplier is willing and able to supply at a specific price

4. The law of Supply
Higher Production higher prices = more production lower prices = less production Market Entry

5. Supply and Demand
Price Demand Supply

6. The Supply Schedule
Supply Schedule a chart that lists how much a good a supplier will offer at various prices Variables a factor that can change

8. A Change in Quantity Supplied Relationship between price and quantity (supply) Market Supply Schedule Chart that lists how much of a good all suppliers will offer at various prices The Supply Graph supply curve – a graph of the quantity supplied of a good at various prices always rises from left to right

10. Supply and Elasticity
Elasticity of Supply measure of the way quantity supplied reacts to a change in price Elasticity of Supply and Time will a good be elastic or inelastic? Elasticity in the short run - an orange grove - inelastic…why? Elasticity in the long run - overtime supply becomes more elastic if the supplier has a longer time to respond to change

15. Review – Chapter 5, Section 1

19. Section 2: Costs of Production
Explain how firms decide how much labor to hire in order to produce a certain level of output. Analyze the production costs of a firm. Explain how a firm chooses to set output. Identify the factors that a firm must consider before shutting down an unprofitable business.

20. According to some reports, supermarkets make a profit of three to six cents for every dollar of revenue. Where does the rest of the money go?

21. Labor and Output Marginal Product of Labor
The change in output from hiring one additional unit of labor
Output at the margin = hired or fired

23. Increasing Marginal Returns
Level of production in which the marginal product of labor increases as the number of workers increases
The role of specialization
Increases productivity

24. Diminishing Marginal Returns
A level of production at which the marginal product of labor decreases as the number of workers increases

25. Negative Marginal Returns
When adding an extra worker actually decreases marginal return

27. Production Costs Fixed Costs Cost that does not change
EX: rent, machinery repairs, salaries, property taxes
Variable Costs
Costs that rise and fall depending on the quantity produced EX: cost of workers, electricity, heating

28. Getting started
Your family is having guests over. Create columns that would show fixed cost and variable costs of having the guest stay for a week.

30. Total Cost
The sum of the fixed cost and variable cost
Marginal Cost
The additional cost of adding one more unit

34. Setting Output
Marginal Cost and Marginal Revenue Marginal Revenue – additions income from selling one more unit of a good; sometimes equal to the price Average Cost – total cost divided by the quantity produced EX: 10 beanbags Average Cost = $14.20 ($142/10 ) Profit is the difference between the market price and the average cost $24 - $14.20 = $9.80 x the quantity (10) = $98

36. Responding to Price Change What happens if the price of beanbags rises from $24 to $37 - Increase quantity supplied!

37. The Shutdown Decision Most profitable level of output = Marginal Revenue = marginal cost

38. To Maximize Profit
Managing Labor
Setting Output
Increased marginal return Look for highest marginal return Buy capital to increase marginal return
Set output where marginal revenue equals marginal cost

40. Section 3:
Explain how factors such as input costs creates changes in supply. Identify three ways that the government can influence the supply of goods. Analyze the other factors that affect supply. Explain how firms choose a location to produce goods.

41. Input Costs Effect of Rising Costs
Price = marginal cost (most profitable level )
Remember marginal cost…raw materials, labor etc.
Rising costs?
Cut production – that will lower marginal cost until it equals cost of production

42. Technology
Can lower production costs
Lower costs and increase in supply

43. Government’s Influence on Supply
Subsidies
A government payment that supports a business or market
Producer is paid for each unit
Lower costs
Allows a firm to produce more
EX: Developing companies in underdeveloped countries

44. Taxes
Excise tax - A tax on the production or sale of a good
Increase production costs
Can be used to discourage sale
Tobacco, alcohol, high pollutant gasoline

45. Regulation
The government intervention in a market that affects the production of a good
EX: Pollution

46. Other Influences on Supply
Changes in the Global Economy
EX: The US imports carpets from India. An increase in the wages of Indian workers would decrease the supply of carpets to the US market, shifting the supply curve to the left.
EX: The US imports oil from Russia. A new oil discovery in Russia could increase the supply of oil in the US market and shift the supply curve to the right.

47. Future Expectation of Prices Number of Suppliers

48. Where do Firms Produce?
Location. Location. Location.
Transporting goods
Closer to suppliers? Raw materials are expensive to transport
Closer to consumers? Output is expensive to transport