ch 5.1 supply law of supply supply curve elasticity of supply law of supply supply curve elasticity...
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CH 5.1Supply CH 5.1Supply
Law of SupplySupply Curve
Elasticity of supply
Law of SupplySupply Curve
Elasticity of supply
The Law of SupplyThe Law of Supply
Tendency of suppliers to offer more goods at higher pricesQuantity supplied - amount a supplier
is willing to make at certain prices
Tendency of suppliers to offer more goods at higher pricesQuantity supplied - amount a supplier
is willing to make at certain prices
$$ Supply
Supply
As price goes upFirms will make more goods to make
more $more firms have incentive to get into
the market
As price fallsSome firms will produce lessSome firms may drop out entirely
As price goes upFirms will make more goods to make
more $more firms have incentive to get into
the market
As price fallsSome firms will produce lessSome firms may drop out entirely
Increase in ProductionIncrease in Production
When a firm increases its price ceteris paribus - it increases profit
Decreases price - Decrease profit
Search for profit drives the supplier’s decision to change price
When a firm increases its price ceteris paribus - it increases profit
Decreases price - Decrease profit
Search for profit drives the supplier’s decision to change price
ProfitProfit
Appeals to firms in the market, and also to those who may want to get into a marketNew companies may get into a
marketExisting companies may alter what
they make
Appeals to firms in the market, and also to those who may want to get into a marketNew companies may get into a
marketExisting companies may alter what
they make
Supply ScheduleSupply Schedule
Shows the relationship between price and quantity supplied for a specific good
Shows the relationship between price and quantity supplied for a specific good
p. 103
Price Supply.501.001.50
2.002.503.00
100150200
250300350
Supply CurveSupply CurveData from supply schedule
represented on a graphHorizontal now measures quantity
suppliedAlways rises from left to right
Data from supply schedule represented on a graphHorizontal now measures quantity
suppliedAlways rises from left to right
Supply curve$
Quantity supplied
Elasticity of SupplyElasticity of Supply
<1 = Elastic Sensitive to changes in price
>1 = InelasticNot sensitive to change
=1, unitary elastic% change in price =
% change in supply
<1 = Elastic Sensitive to changes in price
>1 = InelasticNot sensitive to change
=1, unitary elastic% change in price =
% change in supply
Short run vs Long runShort run vs Long run
Short term - harder to change output levelMuch more inelastic
Long Term - much more flexibleSupply becomes more elastic
Short term - harder to change output levelMuch more inelastic
Long Term - much more flexibleSupply becomes more elastic
Short runShort run
Farmers - OrangesHard to grow more crops right awayTakes time to see a bigger return in
investmentThis keeps more people from farming
Takes longer to make a profit
No matter what the price,there will still be cropsSupply is inelastic - hard to change
output quickly
Farmers - OrangesHard to grow more crops right awayTakes time to see a bigger return in
investmentThis keeps more people from farming
Takes longer to make a profit
No matter what the price,there will still be cropsSupply is inelastic - hard to change
output quickly
Short RunShort Run
Elastic supply - Price of haircuts goes up, hire more
barbers Quick way to make more moneyMore businesses may open
Much larger increase in quantity supplied
Price of haircuts goes down, quick change Fire some workers, close early, leave the
market entirely
Elastic supply - Price of haircuts goes up, hire more
barbers Quick way to make more moneyMore businesses may open
Much larger increase in quantity supplied
Price of haircuts goes down, quick change Fire some workers, close early, leave the
market entirely
Long RunLong Run
FarmerIncrease production- plant moreOver time, more crops would be
available
More time to respond to price change, more elastic
FarmerIncrease production- plant moreOver time, more crops would be
available
More time to respond to price change, more elastic
CH 5.2Costs of Production
CH 5.2Costs of Production
How much labor to hireHow much to makeProduction costs When do businesses shut down
How much labor to hireHow much to makeProduction costs When do businesses shut down
Labor and OutputLabor and Output
How many workers hired determines productionMore workers = Higher Production (to
a point)How much capital do you have?
Marginal product of labor - change in output from hiring one more worker
How many workers hired determines productionMore workers = Higher Production (to
a point)How much capital do you have?
Marginal product of labor - change in output from hiring one more worker
Increasing Marginal ReturnsWith every new worker, marginal
product of labor increasesSpecialization
Diminishing Marginal ReturnsOutput still growsMarginal product of labor goes down
Negative Marginal ReturnsWorkers preventing each other from
completing work
Increasing Marginal ReturnsWith every new worker, marginal
product of labor increasesSpecialization
Diminishing Marginal ReturnsOutput still growsMarginal product of labor goes down
Negative Marginal ReturnsWorkers preventing each other from
completing work
LABOR OUTPUT
Marginal Product of
Labor
0 0 -
1
1
-1
3
3
2
4
4 4
5
6
7
8
10
17
23
28
31
31
32
6
6
5
7
Increasing
Marginal
Returns
Decreasing
Marginal
Returns
Production CostsProduction Costs
Costs must be factored into setting prices
2 types of costs
1. Fixed costs - does not changeRent, taxes, salaries
Costs must be factored into setting prices
2 types of costs
1. Fixed costs - does not changeRent, taxes, salaries
Production CostsProduction Costs
Variable Costs - rise and fall depending on different factorsProduction # of employeesElectricity, Heating/cooling costs
TOTAL COST = Fixed + Variable
Variable Costs - rise and fall depending on different factorsProduction # of employeesElectricity, Heating/cooling costs
TOTAL COST = Fixed + Variable
Marginal CostMarginal Cost
The cost of producing one more good Costs continue to rise when more
goods are produced
Search for profit will decide output level
Profit = T. Revenue - T. Cost
The cost of producing one more good Costs continue to rise when more
goods are produced
Search for profit will decide output level
Profit = T. Revenue - T. Cost
ProfitProfit
Most profitable levelWhere the gap between total
revenue and total cost is the greatest ORWhere marginal revenue is equal to
marginal cost
Most profitable levelWhere the gap between total
revenue and total cost is the greatest ORWhere marginal revenue is equal to
marginal cost
Shutting Down / Leaving the Market
Shutting Down / Leaving the Market
A company should shut down when operating costs are greater than total revenue
Operating costs do not include fixed costs
Fixed costs need to be paid if the firm is in operating or not
A company should shut down when operating costs are greater than total revenue
Operating costs do not include fixed costs
Fixed costs need to be paid if the firm is in operating or not
5.3Changes in Supply5.3Changes in SupplyHow does cost affect
supplyGovt influence on goods
Supply and demand on the global scale
Factors that affect supply
How does cost affect supply
Govt influence on goods
Supply and demand on the global scale
Factors that affect supply
Affect of CostsAffect of Costs
Any change in cost of inputs will affect supplyCost of materials goes down = more
profitCosts go up = less profit madeMaximize profits by setting price
equal to marginal cost
Any change in cost of inputs will affect supplyCost of materials goes down = more
profitCosts go up = less profit madeMaximize profits by setting price
equal to marginal cost
New TechnologyNew TechnologyAdvancements in technology will lower
production costs
No longer have to pay workersMore efficientWork faster
Shifts curve to the right
Advancements in technology will lower production costs
No longer have to pay workersMore efficientWork faster
Shifts curve to the right
Govt InfluenceGovt InfluenceGovt has the power to affect supply
Raising/Lowering the price can encourage or discourage firms from getting into the market
Subsidy - Govt payment that supports a businessMost often associated with foodAlso in manufacturing to promote
businessHelps protect against foreign
companies
Govt has the power to affect supplyRaising/Lowering the price can
encourage or discourage firms from getting into the market
Subsidy - Govt payment that supports a businessMost often associated with foodAlso in manufacturing to promote
businessHelps protect against foreign
companies
SubsidySubsidyGovt money lowers the marginal
costAllows for an increase in supply as
wellSupply curve shifts to the right
Govt money lowers the marginal cost
Allows for an increase in supply as well
Supply curve shifts to the right
$
Output
TAXESTAXES
By placing an excise tax on goods, Govt can reduce supplyTax on the production or sale of a
goodCan be used to discourage the
purchase or use of goodsCauses a shift to the left
By placing an excise tax on goods, Govt can reduce supplyTax on the production or sale of a
goodCan be used to discourage the
purchase or use of goodsCauses a shift to the left
RegulationRegulationGovt intervention in a market that
affects price, quantity, or quality of a goodCar industry - pollution controlProhibitionCauses a shift to the left
Govt intervention in a market that affects price, quantity, or quality of a goodCar industry - pollution controlProhibitionCauses a shift to the left
Global EconomyGlobal Economy
When a nation imports products, prices reflect change in costs in that country
When a nation imports products, prices reflect change in costs in that country
Raise in wages
Supply importeddecreases
Cause :
Effect:
Curve Shifts
Cause:
Effect:
CurveShifts
Investment inTechnology
MoreImported
Cause:
Effect:
Curve Shifts:
New Oil field Discovered
More oil imported
Import RestrictionsImport Restrictions
A country can limit or exclude goods from a country to promote domestic consumption
A country can limit or exclude goods from a country to promote domestic consumption
Other influences on SupplyOther influences on Supply
Future expectations Seller expects price to rise - store
good to sell laterReduce the total supply now
Price drop - place goods on market nowIncrease the total supply now
Future expectations Seller expects price to rise - store
good to sell laterReduce the total supply now
Price drop - place goods on market nowIncrease the total supply now
Other Influences of SupplyOther Influences of Supply
Number of SuppliersMore firms get into a market
Supply goes upCurve shifts right
Firms leave the market or limit productionSupply declinesCurve shifts left
Number of SuppliersMore firms get into a market
Supply goes upCurve shifts right
Firms leave the market or limit productionSupply declinesCurve shifts left