Chapter 5

Chapter 5Chapter 5

Section 1Section 1

The Law of SupplyThe Law of Supply

Supply: the amount of goods availableSupply: the amount of goods availableThe law of supply is when goods are produced according The law of supply is when goods are produced according to their price. to their price. The law of supply begins with the producers, if prices are The law of supply begins with the producers, if prices are high, they have to produce more to make a profit. When high, they have to produce more to make a profit. When prices drop, they must make less. prices drop, they must make less.

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Supplyincrease

Pricesincrease Prices

decrease Supplydecrease

Higher ProductionHigher Production

When prices go high, in order to make a profit, When prices go high, in order to make a profit, more of that good needs to be produced. If more of that good needs to be produced. If prices are dropped, less need to be produced. prices are dropped, less need to be produced. That is when entrepreneurs become That is when entrepreneurs become discouraged. discouraged.

If ceteris paribus applies, the raising of the profit If ceteris paribus applies, the raising of the profit benefits the entrepreneur and the producer. benefits the entrepreneur and the producer.

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The Supply ScheduleThe Supply ScheduleThe supply schedule shows the relationship between The supply schedule shows the relationship between the price and the quantity supplied for a certain good. the price and the quantity supplied for a certain good.

The supply schedule compares two factors that are not The supply schedule compares two factors that are not necessarily constant. necessarily constant.

The schedule shows specific sets of conditionsThe schedule shows specific sets of conditions

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Supply graphSupply graph

Price per slice of pizza Slices supplied per day

$ 0.50 100

$ 1.00 150

$ 1.50 200

$ 2.00 250

$ 2.50 300

$ 3.00 350

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A rise or fall, will change the input and A rise or fall, will change the input and output of a supply schedule.output of a supply schedule.

When a factor besides the price has an affect, When a factor besides the price has an affect, a whole new supply schedule needs to be a whole new supply schedule needs to be made. made.

To generalize a supply schedule within the To generalize a supply schedule within the market, a market supply schedule is created. market, a market supply schedule is created.

A market supply schedule shows the A market supply schedule shows the relationship between the prices and quantities relationship between the prices and quantities of a product within firms in a market.of a product within firms in a market.

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David L. PerezDavid L. Perez

Ch. 5 Sec. 1Ch. 5 Sec. 1

03-21-201103-21-2011

Period 2Period 2

Supply and ElasticitySupply and Elasticity

Elasticity of demand measures how consumers will react Elasticity of demand measures how consumers will react to change in price. Elasticity of supply is based on the to change in price. Elasticity of supply is based on the same concept.same concept.Elasticity of supply is a measure of the way supplies Elasticity of supply is a measure of the way supplies respond to a change in price.respond to a change in price.The labels elastic, inelastic, and unitary elastic represent The labels elastic, inelastic, and unitary elastic represent the same values of elasticity of supply as those of the same values of elasticity of supply as those of elasticity of demandelasticity of demandWhen a percentage change in price is perfectly matches When a percentage change in price is perfectly matches by an equal percentage change in quantity supplies, by an equal percentage change in quantity supplies, elasticity is exactly one, and supply is unitary elasticelasticity is exactly one, and supply is unitary elastic

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Elasticity of Supply and TimeElasticity of Supply and Time

The key factor in determining whether the supply of a The key factor in determining whether the supply of a good will be elastic or inelastic is time.good will be elastic or inelastic is time.

In short runs, a firm cant easily change its output level, In short runs, a firm cant easily change its output level, so supply is inelastic.so supply is inelastic.

In long runs, firms are more flexible, so supply is more In long runs, firms are more flexible, so supply is more elastic.elastic.

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Elasticity of Supply in the Short RunElasticity of Supply in the Short Run

A example of a business that has difficulty adjusting to a A example of a business that has difficulty adjusting to a change in price in the short term is an orange grove.change in price in the short term is an orange grove.In the short term, the grower could take smaller steps to In the short term, the grower could take smaller steps to increase output.increase output.In the short run, supply is inelastic whether the price In the short run, supply is inelastic whether the price increases or decreases.increases or decreases.

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Elasticity in the Long RunElasticity in the Long Run

Just like demand, supply can become ore elastic Just like demand, supply can become ore elastic over time.over time.An example is a farmer that sells tomatoes that An example is a farmer that sells tomatoes that cant increase his output. So he begins to plant cant increase his output. So he begins to plant more and more trees overtime until he increases more and more trees overtime until he increases his supply. As this process becomes more his supply. As this process becomes more effective, he will be able to sell more tomatoes at effective, he will be able to sell more tomatoes at a higher market price.a higher market price.

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““Chapter 5, Section 2”Chapter 5, Section 2”Danny BaezaDanny Baeza

March 23March 23rdrd, 2011, 2011

Period 2Period 2EconomicsEconomicsMrs. MitatMrs. Mitat

Labor and Output.Labor and Output.

The owners of firms need to consider the The owners of firms need to consider the number of employees they decide to hire number of employees they decide to hire because it will have an effect on the firm’s because it will have an effect on the firm’s total production. At one point in time, the total production. At one point in time, the hiring period, the total production of the hiring period, the total production of the firm will decrease, in conjunction to the firm will decrease, in conjunction to the amount of people the owner decides to amount of people the owner decides to hire.hire.

Prentice Hall Book

Increasing Marginal Returns.Increasing Marginal Returns.““Increasing Marginal Returns” are when workers find a Increasing Marginal Returns” are when workers find a specialization in something. For example, a firm that specialization in something. For example, a firm that produces beanbags, have workers specifically dealing produces beanbags, have workers specifically dealing with the physical production of the bean bag while the with the physical production of the bean bag while the other workers are specified in “tailoring” and sew up the other workers are specified in “tailoring” and sew up the bean bag. Each worker has a specific set of skill that bean bag. Each worker has a specific set of skill that pertains to certain tasks in the firm. pertains to certain tasks in the firm.

Prentice Hall Book

Diminishing Marginal Returns.Diminishing Marginal Returns.

Diminishing Marginal Returns is when the Diminishing Marginal Returns is when the marginal production is decreasing. marginal production is decreasing.

Why? – The reason of the decrease of Why? – The reason of the decrease of production is because a firm has a limited production is because a firm has a limited amount of resources. For example, lets assume amount of resources. For example, lets assume the firm has two sewing machines but there are the firm has two sewing machines but there are three workers, the first two workers will be able three workers, the first two workers will be able to use the machines but the third one will not, to use the machines but the third one will not, decreasing the marginal production of that firm.decreasing the marginal production of that firm.

Prentice Hall Book

Negative Marginal Returns.Negative Marginal Returns.

Is when the firm does not realize when the Is when the firm does not realize when the marginal production is going down and marginal production is going down and they continue hiring people. The workers they continue hiring people. The workers then have to wait more, so the marginal then have to wait more, so the marginal production will become negative.production will become negative.

Setting Output.Setting Output.

Marginal Revenue and Marginal Cost:Marginal Revenue and Marginal Cost:

- The Marginal Revenue is the money that the - The Marginal Revenue is the money that the firm has to spend to make the product and the firm has to spend to make the product and the marginal cost is the money that the people pay marginal cost is the money that the people pay for the product. So if the firm wins $12 dollars in for the product. So if the firm wins $12 dollars in the fourth beanbag, and just spend $7 to make a the fourth beanbag, and just spend $7 to make a new one, they are going to make more bags and new one, they are going to make more bags and earn more money. earn more money.

Prentice Hall Book

Responding to Price Changes.Responding to Price Changes.

Responding to Price Changes is when the Responding to Price Changes is when the people buy too much of the product, people buy too much of the product, making the demand higher and the price making the demand higher and the price increase. Instead of winning $12 per bag, increase. Instead of winning $12 per bag, one will win, $22 per bag, so the firm will one will win, $22 per bag, so the firm will start making more and more money per start making more and more money per bag per hour.bag per hour.

Prentice Hall Book

““Resources”Resources”

All the information found in this All the information found in this presentation was retrieved from the presentation was retrieved from the Prentice Hall Book of Economics. Prentice Hall Book of Economics.

Chapter 5 Section 2Chapter 5 Section 2

Production CostsProduction Costs

&&

The Shutdown DecisionThe Shutdown Decision

Production CostsProduction Costs

Consists of two types of costsConsists of two types of costs

Fixed costsFixed costs

Variable costsVariable costs

Fixed CostsFixed CostsDefinition: A cost that does not change, no matter how Definition: A cost that does not change, no matter how much of a cost is produced.much of a cost is produced.

Most involve the production facility, the cost of building Most involve the production facility, the cost of building and equipping a factory, office, store, or restaurant.and equipping a factory, office, store, or restaurant.

Examples: rent, machinery repairs, property taxes on a Examples: rent, machinery repairs, property taxes on a factory, and the salaries who keep the business factory, and the salaries who keep the business running even when production temporarily stops. running even when production temporarily stops.

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Variable CostsVariable CostsDefinition: A cost that rises or falls depending on how much Definition: A cost that rises or falls depending on how much is produced.is produced.

Increase costs to produce more: Purchase more resources Increase costs to produce more: Purchase more resources and hire workers to produce more.and hire workers to produce more.

Cut back costs: Stop purchasing resources or cut back Cut back costs: Stop purchasing resources or cut back workers hours weekly.workers hours weekly.

Examples: Cost of labor, electricity, and heating bills.Examples: Cost of labor, electricity, and heating bills.

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Total CostTotal Cost

Definition: The total of fixed costs and Definition: The total of fixed costs and variable costs.variable costs.

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Marginal CostMarginal Cost

Definition: The cost of producing one more Definition: The cost of producing one more unit of a good.unit of a good.

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The Shutdown DecisionThe Shutdown Decision

Decision made when a factory is losing money Decision made when a factory is losing money constantly. Whether to keep it running or constantly. Whether to keep it running or shutdown.shutdown.

The factory should stay open when the total The factory should stay open when the total money made from the good or service produced money made from the good or service produced is greater than the operating cost.is greater than the operating cost.

2727

Chapter 5Chapter 5

Section 3Section 3

Alfredo Alfredo RodriguezRodriguez

Period 2Period 2

EconomicsEconomics

Changes in Changes in SupplySupply

Source: Economics Book Source: Economics Book 2828

Input CostInput Cost

Any change in the cost of an input used to Any change in the cost of an input used to produce a good. produce a good.

Rise in Cost: Supply will fallRise in Cost: Supply will fall

Fall of Cost: Increase of Supply Fall of Cost: Increase of Supply


Effects of Rising CostEffects of Rising Cost

Suppliers set output (Products or Service) Suppliers set output (Products or Service) where $ = Marginal Cost where $ = Marginal Cost

Marginal Cost includes the cost of input that Marginal Cost includes the cost of input that go into production. go into production.

Increase in Input will = Marginal Cost to rise. Increase in Input will = Marginal Cost to rise.


TechnologyTechnology

Input cost can also drop. Input cost can also drop.

Advances in technology can lower production Advances in technology can lower production costcost

Technology: Technology: --LowersLowers CostCost --Increase Supply at all price levels.Increase Supply at all price levels.


Government Influence on SupplyGovernment Influence on Supply

Government can affect supplies.Government can affect supplies.

By rising or lowering costs -They encourage By rising or lowering costs -They encourage Entrepreneurs or Industries.Entrepreneurs or Industries.


SubsidiesSubsidies

A method government uses: Government A method government uses: Government pays or supports a business or market. pays or supports a business or market.

Government in developing countries protect Government in developing countries protect growing industries with subsidies.growing industries with subsidies.

In the US, Farm subsidies are controversial, In the US, Farm subsidies are controversial, since government pays farmers to take land since government pays farmers to take land out of cultivation to keep prices high. out of cultivation to keep prices high.


Taxes Taxes Government can reduce the supply of some Government can reduce the supply of some goods by placing an Excise tax. goods by placing an Excise tax.

Excise Tax: Is tax that is placed upon the Excise Tax: Is tax that is placed upon the production or sales of a good.production or sales of a good.

It increases production cost by adding an It increases production cost by adding an extra cost for each unit sold. extra cost for each unit sold.

An increase in cost, produces that excise tax An increase in cost, produces that excise tax decrease the price level for supplied goodsdecrease the price level for supplied goods


Regulation Regulation

Government regulation often has the effect of Government regulation often has the effect of rising costs. rising costs.

Regulation is when government intervenes in Regulation is when government intervenes in the market, affecting price, quantity or quality the market, affecting price, quantity or quality

of goods.of goods.


Supplying the Global Supplying the Global EconomyEconomy

A country produces goods and services, and A country produces goods and services, and these can later be imported to another, to be these can later be imported to another, to be sold to consumers. sold to consumers.

Supply of Imported Goods is affected by any Supply of Imported Goods is affected by any changes within the import country. changes within the import country.

Total supply of a product equals the sum of Total supply of a product equals the sum of imports and domestically produced products. imports and domestically produced products.


Future Expectations of Future Expectations of PricesPrices

Expectations of higher prices will reduce Expectations of higher prices will reduce supplies and increase them later in time. supplies and increase them later in time. Expectations of Lower Prices, will have an Expectations of Lower Prices, will have an opposite effect. opposite effect. According to Inflation (Which is the increase According to Inflation (Which is the increase of prices, as the value of money lowers); of prices, as the value of money lowers); Suppliers decide to withhold their goods, so Suppliers decide to withhold their goods, so their value rises. their value rises. This method of storing goods, can This method of storing goods, can dramatically drop supply. dramatically drop supply.


Number of SuppliersNumber of Suppliers

If more suppliers enter the market to produce If more suppliers enter the market to produce a certain good, the market supply of the good a certain good, the market supply of the good will rise. will rise.

If suppliers stop producing a good or leave If suppliers stop producing a good or leave the market, the supply of a certain good the market, the supply of a certain good (depending on what was produced) will (depending on what was produced) will

decline.decline.

Chapter 5

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