Principles of Economics
EL Dorado High School
Spring, 2015
Mr. Ruiz
Chapter 5
Law of
Supply
Retrieved from: http://browardism.com/supply-demand-home-prices/
Section One
Understanding Supply:
Objectives
• Explain the Law of Supply
• Interpret a supply graph
using
a supply schedule
• Explain the relationship
between
elasticity of supply and time
Retrieved from: https://lumen.instructure.com/courses/196787/pages/Section6-11?module_item_id=4541509
Terms you will need to know:
• Supply
• Law of Supply
• Quantity supplied
• Supply Schedule
• Market Supply Schedule
• Supply Curve
• Market Supply Curve
• Variable
• Elasticity of Supply
Retrieved from: http://faculty.icc.edu/instructionaldesign/econ/math/econGraphs.html
What would you do?
Supply: The amount of goods
• You are the owner of a company
that produces sunglasses. The
market has seen a recent increase in
the price of sunglasses. Would you
produce more sunglasses, less, or the
same as before?
available.
• Remember:
• In a market system, the interaction of
buyers and sellers determines the
prices of most goods as well of what
quantity of a good will be produced
• Buyers demand goods, and sellers
supply those goods.
Retrieved from: http://www.equialt.com/influence-buyers-sellers-supply-demand/
Law of Supply
• Law of Supply: The inclination of most suppliers
to offer more of a good at a higher price. (i.e., the higher
the price, the more quantity produced)
$$$$
Law of Supply$$$$
↑As price increases, ↑ Quantity supplied
increases
↑As price falls,
↑ Quantity supplied
falls
Retrieved from: https://www2.yk.psu.edu
Law of Supply (Cont.)
•
•
Quantity supplied- The amount a
supplier is willing and able to supply
at a certain price.
In simple terms:
If a product’s price increases, businesses will produce
more in order to make more money
•
(Ex. If the price of oranges goes up, producers
will set out to grow more to increase their
profit.)
If a product’s price drops, businesses will make less
and some business may stop producing certain items
all together.
•
(Ex. If the price of producing mp3 devices
experiences a drop some produces will make
less and several may stop production all
together.)
Remember: The search for profit drives a businesses’ (supplier)
decision.
Examples of supply driven choices include:
•
The music industry, clothing fads, and food services.
(When the going gets good, everyone jumps on board to
make profit)
Retrieved from: http://azanrza.blogspot.com/2011/03/sales-department-orginizationcomplete.html
Supply Schedule
• Supply Schedule
Supply Schedule:
• A chart that lists how much of a good a
supplier will offer at different prices. (Two
variables, (factors), that can change are
compared: #1 price & #2 quantities)
• like the demand schedule, the supply
schedule only reflects how the changes in
PRICE affect the quantity produced.
• Market supply schedule: A chart that lists
how much of a good all suppliers will offer
at different prices.
Hint:
•
Shows the relationship between prices and the total
quantity supplied by all firms in the market.( In
other words, it takes into consideration not just one
producer of DVDs but all producers of DVDs)
•
Retrieved from: http://whyseemath.com/wp/finitemathematics/chapter1/section-1-2/section-1-2-question-5/
• Remember: The relationship between
both variables is direct (positive).
Supply Curve
• Supply Curve: The information from the
Supply Schedule is plotted on a graph to
reflect the relationship between price and
quantities producers are willing to
produce.
• Supply Schedule and Supply Curve
• $$ Hint: The Supply Schedule/ Supply
Curve are very much like the Demand
Schedule/ Demand Curve. The difference
is that the focus on Demand is on the
Consumer and the focus on Supply is on
the producers.
• Market Supply Curve: A graph
representing the quantity of a good by all
suppliers at different prices.
• * An individual supply curve- Shows data
for one producer
• * A market supply curve – Shows data for
all producers
Retrieved from: http://ecolan.sbs.ohio-state.edu/Aly/classes/powerpoint/ch3_2/sld006.htm
Supply and Elasticity
Elasticity of supply: Basically, measures the way
suppliers respond to a change in price.
•
Inelastic- When supply is not very responsive to changes
in price.( i.e., a change in price does not drastically affect
supply)
•
Elastic- When supply is very sensitive to change in price.
( i.e. a small change in price has a big effect on supply)
Time and Elasticity
Time is the key factor that determines whether
the supply will be elastic or inelastic:
Short run:
•
•
Supply is inelastic because a business will
have difficulty changing its output.
supply can be elastic if a business can
quickly adapt its output.
Long Run:
•
Supply can become elastic over time as
producers change their output.
Retrieved from: http://thismatter.com/economics/supply-elasticity.htm
Chapter Five
Supply
Cost of Production
Section Two
Objectives
• Analyze the production
costs of a firm.
• Understand how a
firm chooses to set
output.
• Explain how a firm
decides to shut down an
unprofitable business.
Terms you will need to know:
• Marginal Production Labor
• Increasing Marginal Returns
• Diminishing Marginal Returns
• Fixed cost
• Variable cost
• Total cost
• Marginal cost
• Marginal revenue
• Operating cost
Labor and Output
Basic questions to answer by business owners:
• How many workers do I hire?
• How will my number of workers affect
total production?
•
Marginal Product of Labor: The change in output
from hiring one additional unit of labor.
•
Increasing Marginal Returns: A level of production
in which the marginal product of labor increases as the
number of workers increases.
•
Diminishing Marginal Returns: A level of production
in which the marginal product of labor decreases as the
number of workers increases.
•
Negative Marginal Returns: At this level of
production the production process is disrupted because
workers simply begin to get in each others way ( The
cost of labor exceeds production output)
•
Retrievedfrom:http://www.independent.org/publications/working_papers/article.asp?id=1369
Production Costs
•
Paying workers and purchasing capital are all costs of
producing goods.
•
Economists divide a producer’s costs into two
categories: fixed costs and variable costs.
Fixed costs: A costs that does not change, no matter how much of a good
is produced.
Example: Production facility, cost of building and
equipment: rent, machinery, property taxes, and salary of
base employees.
Variable costs: A costs that rises or falls depending on how
much is produced.
Example: Cost of raw material/some labor. Also, electricity
and heating cost (utilities).
Total Costs: Fixed costs plus variable costs.
Simply FC + VC = TC
Marginal Costs: The cost of producing one more
unit of a good.
•
Retrieved from:
http://www.wyzant.com/resources/lessons/accounting/management-accounting
Setting Output
Marginal Revenue and
Marginal Cost
• Assessing the best level of output can be
done by determining when marginal
revenue is equal to marginal cost.
• Marginal cost is the additional cost of
producing one more unit.
• Marginal revenue is the additional
income from selling one more unit of a
good; sometimes equal to price.
• Simply, the idea is to determine how much
of a good/ service a firm may produce at
the lowest marginal cost.
The Shutdown Decision
Many firms incur money lose when total revenue
falls below total cost. Firms at this stage must
determine whether to keep their doors open or shut
down their business as a result of increased
operation costs.
Retrieved from: http://blog.cleveland.com/business/2008/12/retail_experts_predict_more_st.html
Changes in Supply
Section Three
How much does the United States subsidize
energy:
$70.2 Billion Fossil Fuels
$16.8 Billion Corn Ethanol
$12.2 Billion Renewable Energy
$2.3 Billion Carbon Capture and Storage
SOURCE: The Environmental Law Institute.
Changes in Supply
Input Costs
• A rise in the cost of input will cause a fall in
supply at all price levels simply because the
good has become more expensive to produce.
• On the other hand, a fall in the cost of an
output will cause an increase in the supply at
all price levels.
• Technology can help lower a firms costs and
increase supply at all price levels.
• Example(s):
• Robotics replacing many assembly line
workers.
• Computers simplifying tasks (e-mail rather
than mail delivery can offer instantaneous
exchange of information critical to a firm.
Government’s Influence on Supply
The power of a government to affect the supply of goods by
raising or lowering the cost of producing goods can
encourage or discourage domestic/ foreign industry.
Subsidies:
• A subsidy is a government payment or discount loan that
supports a business or a market (The government will
often pay producers set subsidies for each unit of a good
produced).
Excise Taxes:
• A government can reduce the supply of some goods by
placing a excise tax (A tax on the production or sale of a
good).
Regulation:
• A government can raise/lower supply through indirect
means. Regulation by governments on industry can have
the effect of raising costs.
Other Influences on Supply
Future expectations of prices
• If a seller expects the price of a good to rise in the
future, the seller will store the goods now in order
to sell more in the future.
On the other hand.
• If the price of the good is expected to drop in the
near future, sellers will earn more money by
placing goods on the market immediately before
the price falls.
Simply:
• Expectations of higher prices will reduce supply
now and increase supply later, where lower prices
will have the opposite effect.
Number of suppliers
• The number of suppliers in the market can
impact supply in the following ways:
• If more suppliers enter a market to produce
a certain good, the market supply of the
good will rise and the supply curve will
shift to the right
On the other hand.
• If suppliers stop producing a good and
leave the market, the supply will decline
and the curve will shift to the left.