Understanding Supply: Quick Quiz
1. What is the law of supply?
2. Choose a product
a) create/draw a 4 price supply schedule and
b) create/draw supply curve for that product?
3. What is elasticity of supply?
Chapter 5
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The Law of Supply
• According to the law of supply, suppliers will offer
more of a good at a higher price.
Chapter 5
Section
Price
Supply
As price
increases…
Quantity
supplied
increases
Price
Supply
As price
falls…
Quantity
supplied
falls
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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.
• Bottom Line: Profits drive producers (Profit Motive).
Chapter 5
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Supply Schedules
• A market supply schedule is a chart that lists how
much of a good all suppliers will offer at different
prices.
Market Supply Schedule
Chapter 5
Price per slice of pizza
Slices supplied per day
$.50
1,000
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500
Section
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Supply Curves
• A market supply curve
is a graph of the
quantity supplied of a
good by all suppliers at
different prices.
Market Supply Curve
3.00
Supply
Price (in dollars)
2.50
2.00
1.50
1.00
.50
YUM!
0
0
500
1000 1500 2000 2500 3000 3500
Output (slices per day)
Chapter 5
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Elasticity of Supply
Elasticity of supply is a measure of the way quantity
supplied reacts to a change in price.
• If supply is not very
responsive to changes in
price, it is considered
inelastic.
• An elastic supply is very
sensitive to changes in price.
•Do you think Pizza is
Elastic or Inelastic? Cars?
T shirts? Apples?
Chapter 5
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Inelastic vs. Elastic Supply
What Factors Determine Elasticity?
•Are there Readily Available Resources?
•Can the product be made Cheaply?
•Can it be made Quickly? (Time)
•
Inelastic: Apples’ price from $1 to
$3/lb
•
Elastic: Giants World Series T’s
•
•
T-Shirts of all colors are abundant.
Trees can only grow so many
(resources)
•
T’s, labor and ink is cheap.
•
Cheaply (not a factor)
•
Can be printed over night.
•
No. Tree needs to grow for years
(Time)
•
Therefore Producers cannot
increase production with price
changes.
Chapter 5
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Inelastic vs. Elastic Supply
•
Inelastic: Apples’
price from $1 to $3/lb.
•
Cannot increase
quantity Supplied
(much) when price
increases
Chapter 5
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•
Elastic: Giants
Championship T’s
•
Can Easily Increase
quantity supplied
when price goes up.
What Affects Elasticity of Supply?
Time
• In the short run, a firm
cannot easily change
its output level, so
supply is inelastic.
Chapter 5
Section
• In the long run, firms
are more flexible, so
supply can become
more elastic.
Main Menu
Section 1 Assessment
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
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Chapter 5
Section
Main Menu
Section 1 Assessment
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
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Chapter 5
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Costs of Production
• How do firms decide how much labor to hire?
• What are production costs?
• How do firms decide how much to produce?
Chapter 5
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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.
Chapter 5
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Marginal Product of Labor
Labor
(number of
workers)
Output
(beanbags
per hour)
Marginal
product
of labor
0
0
—
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
–1
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Marginal Returns
Increasing, Diminishing, and
Negative Marginal Returns
Increasing marginal returns occur
when marginal production levels
increase with new investment.
8
7
Increasing
marginal
returns
Diminishing
marginal
returns
Negative marginal returns occur when
the marginal product of labor
becomes negative.
Marginal Product of labor
(beanbags per hour)
6
Diminishing marginal returns occur
when marginal production levels
decrease with new investment.
5
4
3
Negative
marginal
returns
2
1
0
–1
1
2
3
4
5
6
7
–2
–3
Labor
(number of workers)
Chapter 5
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8
9
Production Costs
• A fixed cost is a cost that does not change, regardless
of how much of a good is produced. Examples: rent,
insurance, loan payments and salaries
• Variable costs are costs that rise or fall depending on
how much is produced. Examples: costs of raw
materials, some hourly wage labor costs and energy
costs.
• The total cost equals fixed costs plus variable costs.
• Total Costs = Fixed Costs + Variable Costs
• The marginal cost is the cost of producing one more
unit of a good.
Chapter 5
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Setting Output
• 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 (p111).
Production Costs
Beanbags
(per hour)
Fixed
cost
Variable
cost
0
$36
$0
1
36
8
2
36
3
36
4
5
Chapter 5
Marginal
cost
Marginal
revenue
(market price)
Total
revenue
$36
—
$24
$0
$ –36
44
$8
24
24
–20
12
48
4
24
48
0
15
51
3
24
72
21
36
36
20
27
56
63
5
7
24
24
96
120
40
57
6
36
36
72
9
24
144
72
7
36
48
84
12
24
168
84
8
36
63
99
15
24
192
93
9
36
82
118
19
24
216
98
10
36
106
142
24
24
240
98
11
36
136
172
30
24
264
92
12
36
173
209
37
24
288
79
Section
Total cost
(fixed cost +
variable cost)
Main Menu
Profit
(total revenue –
total cost)
Section 2 Assessment
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 its 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
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Chapter 5
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Section 2 Assessment
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 its 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
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Chapter 5
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Changes in Supply
• How do input costs affect supply?
• How can the government affect the supply of a good?
• What other factors can influence supply?
Chapter 5
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Factors Influencing Supply
are Also known as determinants of Supply
• Any CHANGES in the the determinants of supply will SHIFT the
supply curve to the left or the right.
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
TAXES: Government Influences on Supply
• By raising or lowering the cost of producing goods, the
government can encourage or discourage an entrepreneur or
industry, (income or excise).
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.
The Government can also encourage an increase of
production by reducing taxes.
Increased taxes tends to reduce supply, decreased taxes tend
to increase supply.
Costs+taxes=lower profits, Costs-taxes=higher profits.
Higher profits encourage producers to produce more.
Chapter 5
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Changes in Taxes Influence Supply Factors
• Increase Taxes shift LEFT
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
Decrease Taxes Shift RIGHT
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
EXPECTATIONS (of future prices)
• 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.
– For example: if farmers expect the price of pork to increase next
month, they will hold and fatten up their pigs, until next month,
then put their pigs on the market
Chapter 5
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Changes in expectations Influence Supply
Expect HIGHER Prices in the Future
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
LOWER Prices in the future
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
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Subsidies
• A subsidy is a government payment that supports a
business or market. Subsidies cause the supply of a
good to increase.
Chapter 5
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Changes in Subsidies Influence Supply
• Decrease Subsidies shift LEFT
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
Increase Subsidies Shift RIGHT
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
TECHNOLOGY
New technology can greatly decrease production costs
and increase productivity and supply.
Chapter 5
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Changes Technology Influence Supply
• New Tech tends to increase Supply, shifting supply RIGHT
• Tech tends NOT to decrease
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
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Price of Related Goods:
• When the price of a related good changes, it can affect
the supply of that product:
• For example, if the price of tea decreases, Peet’s Coffee
and Tea will want increase its supply of coffee and will
shift its supply coffee.
Chapter 5
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Changes in the Price of Related Goods
Influence Supply
• Any CHANGES in the the determinants of supply will SHIFT the
supply curve to the left or the right.
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
Input Costs:
• 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.
Next: Government Regulations
Chapter 5
Section
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Changes in Input Prices Influence Supply
Increase Input prices shift LEFT
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
Decrease Input prices Shift RIGHT
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
Government Regulations:
• Regulation occurs when the government steps into a market to
affect the price, quantity, or quality of a good. Regulation usually
raises costs.
• Examples: safety, pollution and product standards.
Chapter 5
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Regulations:
Chapter 5
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Changes in Government Regulations Influence
Supply
Increase Reg’s shift LEFT
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
Decrease Reg’s Shift RIGHT
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
Sellers/Suppliers:
• 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.
• 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.
Chapter 5
Section
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Sellers/Suppliers:
• Ipads lead to Kindle, Nook…
Chapter 5
Section
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Changes in Sellers/Suppliers Supply
Producers leave the market shift LEFT
T-axes
E-xpectations
Subsidies
T-echnology
Chapter 5
Section
Enter the market Shift RIGHT
P-rice of Related Goods
I-nput prices (labor, materials, machinery)
G-overnment Regulations
S-ellers (suppliers)
Main Menu
Section 3 Assessment
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.
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Chapter 5
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