law of supply - highpeak€¦ · law of supply • law of supply- refers to the relationship...
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Law of Supply
Students will explain how the Law of Supply, prices, and profit work to
determine production and distribution in an economy
Law of Supply• Law of Supply- refers to the relationship between price and
the quantity of a good or service that firms are willing to produce. The higher the price of the product leads to more supplies and more companies making the product.
Price As price increases…
SupplyQuantity supplied
increases
PriceAs price falls…
SupplyQuantity supplied
falls
How does the Law of Supply work? • Quantity supplied- describes how much of a good is offered
for sale at a specific price.
• Elasticity of supply- is a measure of the way a quantity supplied reacts to a change in price, it is very sensitive.
1. Inelastic- not sensitive to changes in prices. (Bread)2. What effects Elasticity?- TIME, in the short term a firm
can not change its supply level, but in the long term a firm is more flexible.
• Supply Curve- is a graph of the quantity supplied of a good by all suppliers at different prices. ALWAYS GOING UP
Market Supply Schedule• Market supply schedule- is a chart that lists how much of a
good all suppliers will offer at different prices
$.50 1,000
Price per slice of pizza Slices supplied per day
Market Supply Schedule
$1.00 1,500
$1.50 2,000$2.00 2,500
$2.50 3,000
$3.00 3,500
Market Supply Curve
Pric
e (in
dol
lars
)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
0
0 500 1000 1500 2000 2500 3000 3500
Supply
Cost of Production• Firms- always look at how the number of workers they hire
will affect production. 1. Marginal Cost of Production- represents the change in
output for hiring one additional workerMarginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 —1 4 42 10 63 17 74 23 6
5 28 56 31 37 32 18 31 –1
Increasing, Diminishing, and Negative Marginal Returns
Labor(number of workers)
Mar
gina
l Pro
duct
of l
abor
(bea
nbag
s pe
r hou
r)
8
7
6
5
4
3
2
1
0
–1
–2
–3
Diminishing marginal returns- occurs when marginal production levels decrease with new investment.
4 5 6 7
Diminishing marginal returns
Negative marginal returns- occurs when the marginal product of labor becomes negative.
8 9
Negative marginal returns
Marginal Returns
1 2 3
Increasing marginal returns
Increasing marginal returns- occurs when marginal production levels increase with new investment.
Production Costs• Fixed cost- is a cost that does not change,
regardless of how much of a good is produced. 1.Examples: Rent & Salaries
• Variable costs- are costs that rise or fall depending on how much is produced.
1. Examples: costs of raw materials & some labor costs.
• Total cost- is the fixed costs plus variable costs.
How do Production Costs Affect Supply?
• Changes- any change in the cost of an input such as raw materials, labor, cost.
1. Increase- a rise in cost will cause a fall in supply as the product becomes more expensive to make
2. Decrease- the fall of input costs causes supplies to increase.
Government Influences on Supply
• Subsidy- is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.
Government Influences on Supply
• Regulation- occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs.
Government Influences on Supply
• Excise Tax- tax on the production or sale of a good. This increases production costs by adding extra costs for every item sold. Causes the supply of the item to decrease on all levels.
• Examples- some are used to discourage the buying of a good considered harmful to the public good.
1. Cigarettes2. Alcohol3. Tariff on Imported Goods (Foreign Food) makes them
more expensive to buy
Influences on Supply
• 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.
Influences on Supply
• Number of Suppliers- if more firms enter a market and sell a good the supply increases, if more leave the supply decreases.