economics next chapter 5 copyright © by houghton mifflin harcourt publishing company supply

Economics

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Chapter 5

Copyright © by Houghton Mifflin Harcourt Publishing Company

Supply


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Economics

Chapter 5

KEY CONCEPT• Supply is the willingness and ability of producers to offer goods and services for sale.

Chapter 5: Demand

WHY THE CONCEPT MATTERS• Most people are producers. Doing household chores, working at a job, providing rides to

others are ways of producing goods and services. Participating on a team is a way of supplying skills, knowledge, and support to one’s school. Producers incur costs and receive rewards for the work they do.


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Economics

Chapter 5

Section-1

KEY CONCEPTS• Supply—willingness and ability of producers to offer goods, services• Anyone who provides goods or services is a producer• Law of supply: — producers willing to sell more of product at higher than at lower price

What Is Supply? The Law of Supply


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Economics

Chapter 5

The Law of Supply

EXAMPLE: Price and Supply• Smiths sell tomatoes at farmers’ market — willing to offer 24 pounds at standard price of $1 per pound

— willing to offer 50 pounds at $2 per pound — willing to offer 10 pounds at 50 cents per pounds

— not willing to supply any tomatoes below 50 cents


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Economics

Chapter 5

KEY CONCEPTS• Supply schedule shows — amount of product individual willing, able to offer at each price• Market supply schedule shows — amount of product all producers willing, able to offer at each price

Supply Schedules


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Economics

Chapter 5

EXAMPLE: Individual Supply Schedule• Supply schedule is two-column table — left-hand column lists various prices of a good or service — right-hand column shows quantity supplied at each price

Supply Schedules


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Economics

Chapter 5

EXAMPLE: Market Supply Schedule• Market supply schedule format similar to supply schedule — quantities supplied are much larger — market quantity supplied also depends on price• Market supply schedule format similar to supply schedule — some producers want to learn prices, amount offered by all in market

Supply Schedules


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Economics

Chapter 5

KEY CONCEPTS• Supply curve shows data from supply schedule in graph form• Market supply curve shows data from market supply schedule

Supply Curves


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Economics

Chapter 5

EXAMPLE: Individual Supply Curve• Supply curve is graphic representation of law of supply• Supply schedule and curve based on following assumption: — all economic factors except price remain the same

Supply Curves


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Economics

Chapter 5

EXAMPLE: Market Supply Curve• Market supply curve differs in scope from individual supply curve — both constructed same way• Supply curves for all types of producers follow law of supply — will provide more at higher prices although costs more to produce more — reason: higher prices signal potential for higher profits

Supply Curves


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Economics

Chapter 5

Explain the differences between the terms in each of these pairs:• supply and law of supply• supply schedule and supply curve• market supply schedule and market supply curve

Reviewing Key Concepts


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Economics

Chapter 5

Section-2

KEY CONCEPTS• Marginal product—change in total output caused by adding one worker• Specialization—having a worker focus on one aspect of production

What Are the Costs of Production? Labor Affects Production


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Economics

Chapter 5

EXAMPLE: Marginal Product Schedule• Marginal product schedule—relation between labor, marginal product• Increasing returns—new workers cause marginal product increase• Diminishing returns—total output grows at decreasing rate• Negative returns—output decreases through crowding, disorganization

Labor Affects Production


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Economics

Chapter 5

KEY CONCEPTS• Fixed costs—expenses owners incur no matter how much they produce• Variable costs—expenses that vary as level of output changes• Total cost—the sum of fixed and variable costs• Marginal cost—additional cost of making one more unit of the product

Production Costs


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Economics

Chapter 5

EXAMPLE: Fixed and Variable Costs• Fixed costs: mortgage, insurance, manager salaries, machinery• Variable costs: workers’ wages, electricity, materials, shipping — the more a business produces, the more variable costs increase — cutting back hours or workers, vacation closings decrease costs

Production Costs


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Economics

Chapter 5

EXAMPLE: Production Costs Schedule• Fixed costs remain the same no matter what total product amounts to• Calculating marginal cost: — divide change in total cost by change in total product• Diminishing returns result in increase in marginal cost

Production Costs


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Economics

Chapter 5

KEY CONCEPTS• Marginal revenue—money made from sale of each additional unit sold — same as price• Total revenue—income from selling a product — Total revenue = P (price) x Q (quantity purchased at that price)

Earning the Highest Profit


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Economics

Chapter 5

EXAMPLE: Production Costs and Revenues Schedule• To make most profit, owner decides number workers hired, units made• To decide, owner performs marginal analysis — comparison of costs, benefits of adding a worker, making another unit• Profit-maximizing output—level of production yielding highest profit — marginal cost and marginal revenue are equal

Earning the Highest Profit


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Economics

Chapter 5

Explain the differences between the terms in each of these pairs:• marginal product and profit-maximizing output• increasing returns and diminishing returns• fixed cost and variable cost



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Economics

Chapter 5

Section-3

KEY CONCEPTS• Change in quantity supplied: — rise or fall in amount offered for sale because of change in price• Different points on supply curve show change in quantity supplied

What Factors Affect Supply?

Changes in Quantity Supplied


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Economics

Chapter 5

EXAMPLE: Changes Along a Supply Curve• Change in quantity supplied does not shift the supply curve — movement to right means increase in price and quantity supplied — movement to left means decrease in price and quantity supplied• Market supply curves show larger changes than individual curves

Changes in Quantity Supplied


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Economics

Chapter 5

KEY CONCEPTS• Change in supply—producers offer different amounts at every price• As production costs rise, supply drops; as costs drop, supply rises• Change in supply shifts the supply curve• Six factors cause change in supply — input costs, labor productivity, technology, government action, producer

expectations, number of producers

Changes in Supply


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Economics

Chapter 5

Factor 1: Input Costs• Input costs—price of resources needed to produce good or service — if price of resource increases, costs increase — if price of resource decreases, costs decrease

Changes in Supply


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Economics

Chapter 5

Factor 2: Labor Productivity• Labor productivity—amount of product worker can produce in set time• Rise in productivity lowers production costs; supply increases• Specialization can allow producer to make more goods at lower cost• Better-trained workers produce more in less time; decrease costs

Changes in Supply


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Economics

Chapter 5

Factor 3: Technology• Technology—use of scientific methods, discoveries in production — results in new products or manufacturing techniques• Manufacturers use technology to make goods more efficiently• Technology enables workers to be more productive

Changes in Supply


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Economics

Chapter 5

Factor 4: Government Action• Excise tax—tax on production or sale of specific good or service — often placed on items that government wants to discourage use of — taxes increase producers’ costs; decrease supply• Regulation—set of rules, laws designed to control business behavior — examples: banning use of certain resources, worker safety laws

Changes in Supply


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Economics

Chapter 5

Factor 5: Producer Expectations• Producers have expectations about future price of their product — expectations affect how much they will supply at present• Expectations of higher price in future may lead to different actions — Farmer may withhold part of current crop and decrease supply — Manufacturer may buy more equipment to increase future supply

Changes in Supply


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Economics

Chapter 5

Factor 6: Number of Producers• When one producer has successful new idea, others enter the market — supply of good or service increases• Increase in number of producers leads to increased competition — may drive less-efficient producers out of market

Changes in Supply


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Economics

Chapter 5

EXAMPLE: Expanding the Number of Producers• Johnson recognized cable TV industry ignored African-American market• 1980, launched Black Entertainment Television: music, public affairs• Cable operators in U.S., Canada, Caribbean began to buy BET’s shows• Started BET.com—number one Internet portal for African Americans• In 2001, Johnson sold BET, became first black billionaire

Robert Johnson: Supplying African-American Entertainment


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Economics

Chapter 5

Explain the differences between the terms in each of these pairs:• change in quantity supplied and change in supply• input costs and technology• excise tax and regulation



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Economics

Chapter 5

Section-4

KEY CONCEPTS• Elasticity of supply—measures producer response to price changes• Elastic—price change leads to larger change in quantity supplied• Inelastic—price change leads to smaller change in quantity supplied• Unit elastic—price and quantity supplied change by same percentage

What Is Elasticity of Supply?

Elasticity of Supply


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Economics

Chapter 5

EXAMPLE: Elastic Supply• As product gains popularity, shortage develops, price goes up• Producers can increase supply if — resources are easy to come by, inexpensive — production uncomplicated, easy to increase



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Economics

Chapter 5

EXAMPLE: Inelastic Supply• Producers can increase supply if — availability of resources limited — production capacity cannot be increased — shipping too costly or unavailable



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Economics

Chapter 5

KEY CONCEPTS• Main factor determining elasticity is ease of changing production — given enough time, elasticity rises for most goods and services• Industries that respond quickly to rising or falling prices: — do not need much capital, skilled labor, hard-to-obtain resources• Other industries need a lot of time to shift resources

What Affects Elasticity of Supply?


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Economics

Chapter 5

Use each of the terms in a sentence that gives an example of how the term relates to supply:• elastic• inelastic• elasticity of supply



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Economics

Chapter 5

Background• Robots—machines that can be programmed to perform a variety of tasks—perform

numerous functions in industry. Half of all industrial robots are used in the automobile industry. Robots are ideal for lifting heavy objects and doing repetitive tasks humans find boring but can perform more refined tasks as well.

What’s the Issue?• How does technology increase supply?

Case Study: Robots—Technology Increases Supply


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Economics

Chapter 5

Case Study: Robots—Technology Increases Supply {continued}

Thinking Economically1. Which of the six factors that can cause a change in supply is highlighted in the three

documents? Does this factor generally increase or decrease supply?2. Which document, B or C, addresses the issue of elasticity? Explain.3. In which article, A or C, are the robots an example of variable costs? Why?


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Chapter 5

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