Agenda- 4/20
1.
2.
3.
4.
5.
Pass back quiz
Finish Ch. 5 Lecture (RS)
Diminishing Marginal Returns Demo
Ch. 5 Summary Book Work (LS)
HW: Complete unfinished work
Ch. 5 - Supply
Or, when Producers control the
market…
SUPPLY
• Quantity supplied (Qs) is the amount of a
good that sellers are willing and able to sell.
• Law of Supply
– The law of supply states that, other things
equal, the quantity supplied of a good rises
when the price of the good rises.
• Direct relationship between price & supply.
P , Qs
P , Qs
Supply Curve:
• Supply Schedule: shows the quantity
supplied at each given price.
• Supply Curve: graphs the Supply
Schedule (quantities supplied at each
possible price.)
• Relationship between quantity and price is
direct and always moves in the same
direction.
Supply Schedule/Curve
Graph of Supply
S1
Quantity Supplied
Ben’s Supply Schedule
Supplied
Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
Supplied
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
• Change in Quantity Supplied
– Movement along the supply curve.
– Caused by a change in anything that alters
the quantity supplied at each price.
Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
Warm-up
• Book Questions:
– P. 118 – “Economic Analysis”
– P. 119 – “Economic Analysis”
– P. 120 – “Reading Check” & “Economic Analysis”
– P. 123 – “Reading Check”
– P. 125 – “Reading Check”
– P. 125 – “Main Idea” #2, 3, & 4
(Left-Side)
Left–side Warm-up:
• What happens to the price of pumpkins
after Halloween? Why?
• Answer: The price of pumpkins falls
because the supply exceeds demand.
• Write down 5 other examples of situations
or markets that are similar
Law of Supply
Market Supply
• Market supply refers to the sum of all
individual supplies for all sellers of a
particular good or service.
Difference between Supply &
Demand
• Demand is Consumer driven. (What are
people willing/able to buy?)
• Supply is Producer driven. (What are
people willing/able to produce?)
• Demand Graph vs. Supply Graph
Shifts in the Supply Curve
• Change in Supply
– A shift in the supply curve, either to the left or
right.
– Caused by a change in a determinant other
than price.
Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
Determinants of Supply
• Cost of inputs
• Number of sellers (market curve only)
(Competition)
• Expectations
• Taxes and subsidies / Govt. regulations
• Technology / Productivity
Determinants of Supply:
• Price of inputs : How much does it cost to
make a product? An increase in an input will
decrease supply (land, labor, capital)
– Think—What costs are involved in the production of
the t-shirt you’re wearing?
• Competition: the number of companies in an
industry can cause an increase in supply.
Companies exiting the market will decrease the
supply
– Think- What would happen to the supply of the
Nintendo Wii if several companies got manufacturing
rights? What would happen to the price?
Determinants cont.
• Expectations: If a supplier anticipates an
economic downturn, they will decrease supply
(and vice-versa)
• Govt. Regulation: an increase in taxes or
decrease in subsidies can cause a decrease in
supply (and vice-versa)
• An improvement in technology / increased
productivity can cause an increase in supply.
*** Not all technology improves productivity ; )
PLAY: Cheaper / Free not always better!
Part II
Table 2 Variables That Influence Sellers
Copyright©2004 South-Western
Quantity supplied vs. supply:
• A change in quantity supplied is caused by
a change in price or
•
P=
Q
• Something other than price can cause a
change in supply as a whole to increase or
decrease.
S
Example/Thought:
• When something other than price causes
the supply to increase, what do you think
happens to price?
• Answer: The price will decrease because
the supply will be too great.
s1
s2
Incentive of Greater Profits:
• Increase in price and increase in
production leads to an increase in profits.
•
P & Production =
Profits
• Higher prices encourage more competitors
to join the market.
• Higher prices encourage potential
suppliers to turn into actual suppliers,
adding to the total output.
Example/Thought:
• Why do higher prices encourage more
competitors to enter an industry? Think
about it in terms of risk and profit.
• Answer: If prices go up, possible
competitors now see that there is more
money to be made than before. The gain
seems more worth the risk than before.
Whiteboards!!!
The price of wood drops by
50% – graph the change in
Supply for boats made of
wood.
Cost of Inputs
S1
Price
S2
Quantity
The Federal Govt. adds a $2
tax per cigarette pack on
the Producer – graph the
change in Supply for
cigarettes.
Taxes & Subsidies
S2
Price
S1
Quantity
New technology allows shoe
producers to cut costs by
20% – graph the change in
Supply for shoes.
2 reasons why – Change in
technology & Increased Productivity;
change in cost of inputs
S1
Price
S2
Quantity
The Federal Govt. raise
minimum wage by 20% –
graph the change in Supply
for any product.
2 reasons why – Govt. regulation &
cost of inputs
S2
Price
S1
Quantity
The Federal Govt. removes
the requirement to get
licensed to sell snow-cones
– graph the change in
Supply of snow-cones.
3 reasons why – cost of input,
de-regulation, & change in # of
competitors
S1
Price
S2
Quantity
Supply Summary
Summary
Law of Diminishing Returns:
• Adding units of INPUT to increase
production increases total output (TO) for
a limited time period.
• The extra output for each additional unit
will eventually decrease.
• Businesses will continue to add units of a
factor of production until doing so no
longer increases revenue.
Production Theory
(stop @ 4:02)
• Think about working on a project in groups
in class. How many students make up a
productive team? When is adding more
group members actually going to make
your project worse?
Three Stages of Production
• Stage I: Increasing Returns (we are doing
better and better with each worker added)
• Stage II: Diminishing Returns (we are
doing better and better with each worker
added but the gains are starting to get
smaller.
• Stage III: Negative Returns (yikes, all
these workers are making a mess!)
• Total Product (TP): The total output the
company produces
• Marginal Product (MP): The EXTRA
output or change in total product caused
by adding one more unit of variable input.
Volunteers???
Everyone – left-side chart:
Input
Marg. Output
Total Output
PBJ Time! Background Intro music for Activity
• In general, changes that lower the total
cost of production or improve productivity
will allow the seller to produce more goods
or services at each and every price in the
market.
(Shift-right)
• (Think about)In general, the opposite
occurs when productions costs increase or
productivity goes down. The producer
would then likely bring fewer goods to the
market at every possible price.
(Shift left)
Theory of Production
• Producing an economic good or service
requires a combination of land, labor and
capital. The theory of production deals
with the relationship between the factors of
production and the output of goods and
services.
Short Run
• This is the period of production that allow
producers to change only the amount of
variable inputs, usually labor.
Long Run
• A period of production time long enough
for all inputs, including land & capital, to
vary.
Fixed Costs vs. Variable Costs
FC v. VC
Homework (left-side)
• P. 140 - #19 – 28
• P. 146 - #1 - 5