Module-7. Supply: doing well by doing good firm behavior and supply

Transcription

1 Module-7 : doing well by doing good

2 TEACHER S GUIDE P. 195 Defined P. 199 Content standards P. 200 Materials P. 200 Procedure P. 206 Closure P. 207 Assessment P. 209 Overheads P Answer key Visuals N Visuals for overhead projector. Copy to transparent paper for overhead. P. 210 N Visual-1: defined P. 211 N Visual-2: P. 212 N Visual-3: Increase in supply P. 213 N Visual-4: Decrease in supply P. 214 N Visual-5: of babysitting P. 215 N Visual-6: Da Donut Shoppe production activities P. 216 N Visual-7: Da Donut Shoppe P. 217 N Visual-8: What is Profit? P. 218 N Visual-9: Doing well by doing good Lessons 2 Copy and handout to students. P Lesson-I: and price P Lesson-II: shifters P Lesson-III: Skater Boardss P Lesson assessment

3 Teacher DEFINED How does society decide how much of a commodity should be produced? In a communist regime, or a command and control economy, a planning board determines how much of each good will be produced. In a market-oriented economy, production is determined through the coordination of consumer and producer decisions in the market. Consumers purchase the desired goods and services provided by producers. Producers, or firms, decide how much is going to be produced and how it is going to be produced. In general, firms making these decisions are motivated by the desire to earn profits. Firms will produce a commodity as long as they believe they can earn revenues that are greater than, or at least equal to, their costs of production. When the prospects for profits in an industry increase, firms are likely to produce more or increase output. To earn profits, firms must produce commodities that consumers want and are willing to buy. The following example illustrates the idea. John is a high school student with a gift for commercial art. He paints, block-prints, and tie dyes T-shirts to earn spending money. John produces two types of T-shirts. One is a save-the-environment shirt using a block print of the globe surrounded by various animals, insects, and plant species around it. The other is a shirt with a flaming soccer ball on an orange background. The design is the logo for a local soccer team, the Firing Pumpkins. Both shirts take about the same amount of time and materials to produce. Soccer is very popular in John s community and most of John s customers want the flaming orange T-shirt. John allocates most of his resources to producing flaming orange shirts. John is doing good in the sense that he is satisfying consumer wants. At the same time he is doing well meeting his own goals. Just like John, who wants to make money from his small scale commercial enterprise, firms create goods and services they believe can be sold with the intention of charging prices that exceed or at least cover their production costs. In general, the owners and managers of firms want to make profits and so they seek to produce goods and services that consumers need and want. Lets take a look at an expanding coffee enterprise Starbucks. Starbucks was opened in 1971 as a coffee roasting facility. The original Starbucks sold gourmet coffee beans and the accessories to make a great cup of joe. They did not sell hot coffee to go. The insight of one employee, Howard Schultz (who became owner), led the company to start producing Copyright 2008 by MCEE ( Economics: The Study of Choices 195

4 Teacher coffee Italian style. Schultz believed that Seattle consumers would like the atmosphere and culture of the Italian espresso bar. His vision expanded into the largest, most successful coffee venture, with more than 11,000 stores in 37 countries, 100,000 employees, and revenues in excess of $7.5 billion annually. Profit motivated Schultz to provide what he believed consumers desired. Profit motivates the entrepreneur to provide better goods and services desired by the consumer and to minimize costs. Indeed, the introduction of the gourmet coffee café by Starbucks has led many other entrepreneurs into the same field. Espresso bars are everywhere. Profit is a reward to producers and firms for producing what consumers want at a cost less than revenues. Profit is simply the difference between a firm s total revenues and its total costs. When a firm produces a single commodity, its total revenue (TR) is equal to the per unit price of the commodity (P) multiplied by the quantity (Q) that the firm has sold. TR = P x Q [Total Revenue = Price x Quantity]. If you sold 6 CDs to your friend for $5, each what is your total revenue? $5x6 = $30. Profit is the difference between total revenue and total cost. Profit equals total revenue (TR) minus total costs (TC). Profit = TR-TC [Profit = Total Revenue-Total Cost]. If you paid $25 for the CDs you sold to your friend, how much profit did you earn? $30-$25 = $5 To understand how much of a product will be supplied in a market, it is useful to assume that firms serving that market are seeking to maximize their profits. Even most non-profit organizations, such as Red Cross or Boy Scouts, behave as though they are trying to maximize profits. Any change that increases firms profits at current output levels will encourage them to increase production. The opposite also holds true. Events that reduce profits at current output levels will generally lead firms to reduce production. Many factors can influence a firm s profit. Several of these will be discussed. Importantly, in each case we will change one and only one factor, 196 Copyright 2008 by MCEE ( Economics: The Study of Choices

5 Teacher assuming that other factors which could affect profits remain unchanged. Ch a n g e in t h e p r i c e o f t h e c o m m o d i t y Most obviously, profits will increase at current output levels when the price of the commodity (the good or service produced) goes up but no other prices or input costs change. An increase in the price of the commodity will increase total revenue, and with costs remaining the same profits (TR-TC) will go up. Thus an increase in the commodity s price will encourage firms to increase the quantity supplied or produced. Quantity is the number of units produced over a specified period of time. At a given price, a firm may produce 100 units of a commodity per month or 1200 units per year (which, of course, is the same rate of production). A commodity s supply curve shows the quantity supplied to a market at each price over a fixed period of time. The supply curve is constructed under the assumption that among all the factors that can affect profits and firms production decisions, the price of the commodity itself is the only factor that changes. The supply schedule below shows the quantity of donuts producers are willing to provide at different prices. Plotting these points on the graph demonstrates that price and the quantity supplied have a positive relationship. As the per unit price (on the vertical axis) increases, the quantity firms are willing to produce (on the horizontal axis) will also increase. As price rises from $1.50 to $2.00 per donut, firms are willing to produce 25 more donuts. This is a movement along the supply curve from a quantity supplied of 50 to a quantity supplied of 75 donuts. Ch a n g i n g t h e p r i c e o f a n i n p u t Profits (TR-TC) will change when the price of an input, a resource used to produce the commodity, changes. At a given level of output, a fall in the price of an input will decrease the total costs of production. Typically, other things remaining unchanged, a decrease in input prices will result in higher levels of output. At a fixed price for the commodity, a decrease in an input price results in expanded output, causing a shift in the supply curve (outwards to the right in this case, as more will be produced at the given price). Input prices are often called supply shifters, as are other variables that affect production decisions when Copyright 2008 by MCEE ( Economics: The Study of Choices 197

6 Teacher the price of the commodity has not changed. If the cost of sugar used to produce donuts is reduced, but everything else remains the same, most firms will be willing to supply more donuts at a given price. The graph below shows a shift to the right of the supply curve for donuts. At any given price, say $1.50, firms will now produce more, 70 instead of only 50 donuts. If everything else remains the same but input costs decline, potential profits will increase and output will also increase. Similarly, the introduction of new technologies typically lowers production costs and will increase profits at current output levels. Therefore, firms will increase quantities supplied at the current price of the commodity, shifting the supply curve to the right. Other supply shifters In addition to input prices and technological advancements, other events or factors can also cause supply to change or shift for given commodity prices. These other supply shifters include: 1. Changes in the number of firms producing the product: a. An increase in the number of firms will increase supply, shifting the curve to the right. b. A decrease in the number of firms will decrease supply, shifting the curve to the left. 2. Natural disasters: a. A freeze in Florida will decrease the supply of oranges, forcing the supply curve for oranges to shift to the left. b. Hurricane Katrina destroyed a large proportion of the U.S. sugar cane crop, shifting the supply curve of sugar cane to the left. 3. Policy driven changes (such as a tax increase or new regulations on the production of a commodity): a. An increase in taxes on a commodity will increase production costs and decrease potential profit. This will shift the supply curve to the left and reduce quantities supplied at current prices. b. A regulation requiring stricter safety standards for construction may increase the cost of building houses, reduce the production of new houses at current prices, and shift the supply curve for new houses to the left. 198 Copyright 2008 by MCEE ( Economics: The Study of Choices

7 Teacher CONCEPTS 1. and supply curve 2. Quantity supplied 3. shifters (shifts in supply or change in supply) 4. Profit 5. Total revenue 6. Total cost OBJECTIVES 1. Understand the Law of. 2. Realize that firms behave as though they are maximizing profits. 3. Know that an increase in price will motivate an increase in quantity supplied. 4. Understand that an increase in potential profit will likely increase production. 5. Recognize supply shifters and their effects on the supply curve. 6. Recognize the difference between a change in quantity supplied and a change in supply. CONTENT STANDARDS National Content Standards in Economics 1. (Standard 1) Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others. 2. (Standard 2) Effective decision making requires comparing the additional costs of alternatives with the additional benefits. 3. (Standard 3) Different methods can be used to allocate goods and services. 4. (Standard 4) People respond predictably to positive and negative incentives. 5. (Standard 7) Markets exist when buyers and sellers interact. 6. (Standard 8) Prices send signals and provide incentives to buyers and sellers. 7. (Standard 14) Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Copyright 2008 by MCEE ( Economics: The Study of Choices 199

8 Teacher Montana Social Studies Content (Standard 5) 1. (Benchmark 1) Identify and explain basic economic concepts. 2. (Benchmark 2) Use basic economic concepts to explain current and historical events. TIME REQUIRED 2-4 class periods MATERIALS Overhead projector Transparency pen Overheads: Copy to transparency: N Visual-1: defined N Visual-2: N Visual-3: Increase in supply N Visual-4: Decrease in supply N Visual-5: of babysitting N Visual-6: Da Donut Shoppe production activities N Visual-7: Da Donut Shoppe N Visual-8: What is Profit? N Visual-9: Doing well by doing good Copies of lessons for each student: 2 Lesson-I: and price 2 Lesson-II: shifters 2 Lesson-III: Skater Boardss 2 Lesson assessment PROCEDURE 1. Discuss with students the idea of supply. LQuestion: Ask them what goods and services are available to them. LQuestion: How does society determine which commodities should be produced and in what quantities? Answer: In the old Soviet system, government planners in one agency decided what should be produced and how much of it. 200 Copyright 2008 by MCEE ( Economics: The Study of Choices

9 Teacher A different agency then set the prices for the various products produced. Images of bread lines show us that the two agencies did not do a very good job matching the quantity supplied with the quantity desired. In the U.S., for the most part, we don t rely on government agencies to determine the nation s output. Rather, entrepreneurs and consumers determine output with the information provided by price in the market. 2. Display NVisual-1: defined. Talk about the differences between planned and market economies. Discuss the different values that students in the classroom hold. Some students wear T-shirts, others wear polo shirts. One student might like bright, vibrant colors, another pastels. In a market economy we are fortunate that producers respond to the different values and desires of consumers. If a producer in a market economy makes a product that consumers do not like, few will be sold. Producers must respond to consumer desires. 3. Have students imagine they run a lawn mowing service. LQuestion: Ask them if they are likely to spend more or less time mowing if the pay they receive increases. Answer: Most students will be willing to work more hours if they make more money. Display NVisual-2:. Explain the supply schedule at the top of the overhead. As the hourly wage goes up, more hours of mowing are provided. Move to the graph below and carefully explain the axes. The horizontal (or X) axis shows the quantity produced. In this example the quantity is the number of hours spent mowing. The vertical (or Y) axis shows the per unit (or per quantity) price. In the lawn mowing example, this is the price or wage per hour. 4. Discuss the idea that if nothing but the commodity price changes, producers are likely to adjust the quantity they produce. A response to a change in price is called a change in quantity supplied. A higher price, everything else the same, will encourage producers and firms to provide (or supply) more because they can increase their profits. 5. Discuss with students some of the commodities they provide Copyright 2008 by MCEE ( Economics: The Study of Choices 201

10 Teacher to the community and how they determine how much they are willing to supply. Recall the discussion of the opportunity cost to babysit in module two. Display NVisual-3: of babysitting. Ask students to raise their hand if they are willing to babysit this evening for 1 hour at $2 per hour. Fill in the quantity of hours the class is willing to provide at a wage rate of $2 per hour in the quantity column. This is the number of students willing to babysit for one hour at $2 per hour. Explain the graph axes and the supply schedule. The vertical axis shows different possible prices for each hour of babysitting. It shows the hourly wage rate. The horizontal axis shows the number of hours the class is willing to babysit at a given wage rate. Now increase the wage being offered to the class to $4 per hour, how many students are willing to babysit now? Students that were willing to accept $2 for one hour should also be willing to work for the higher wage. Continue to fill in the column for quantity of babysitting given the different wages, the price, in the supply schedule. The class supply schedule for babysitting shows the quantity of babysitting that will be supplied at different prices. LQuestion: How do teenagers determine how much babysitting they are willing to do? Answer: A teenager will babysit as long as the benefits are greater than the opportunity cost. LQuestion: Did some students baulk at the idea of babysitting at low wages but changed their mind as the wages rose? Why? Answer: The babysitting job has become more enticing because the payment for their time has increased, increasing the profitability of babysitting. 6. Use the graph on NVisual-3: of babysitting to trace the supply curve defined in the supply schedule by the class. The supply curve should be upward sloping. Generally, there is a positive relationship between the price of a commodity and the quantity supplied. Remember, if a student is willing to babysit for 1 hour at $2 per hour, they will also be willing to babysit for 1 hour at a higher hourly wage. Note: The supply curve does not always slope upwards to the right; that is, a higher price for a commodity does not always 202 Copyright 2008 by MCEE ( Economics: The Study of Choices

11 Teacher increase the amount of it that is produced. If students were to tell you how many hours they were willing to babysit at different wages, at first the hours spent babysitting would go up as the wage rose. At some point, if the wage for babysitting were say $1,000 per hour, students would begin to babysit less. At some point, workers begin to prefer more leisure to more pay. As a result, the supply curve for wages may eventually begin to bend backward. 7. Handout 2 Lesson-I: and price. Give students time to work through the lesson. Discuss the idea that as Cindy s potential for earning profits increases, she is willing to provide more lawn care services. This also means that she must give up doing other things, like sleeping in on Saturday morning. The higher profits motivate Cindy to work more. The supply schedules and graphs are displayed in NVisual-2:. This lesson discusses changes in quantity supplied. The supply curve is upward sloping because at higher prices (everything else remaining the same) firms can earn greater profits and will increase the quantity supplied. Any given supply curve shows the quantity firms are willing to supply at different prices. 8. Handout 2 Lesson-II: shifters. Give students time to read through the lesson. This lesson discusses a change or shift in supply. Before students work through the lesson talk about the factors that will cause the supply curve to shift. Display NVisual-4: Increase in supply. Discuss the different factors that will shift or change the supply curve. An increase in supply is a shift to the right, a decrease in supply is a shift to the left. NVisual-5: Decrease in supply, shows a leftward, or a decrease, in supply. When the cost of inputs change, the supply curve will shift. The supply curve will increase (shift right) if input costs decline or technology increases. The supply curve will decrease (shift left) if input costs rise. Other factors that will change (shift) supply are firm expectations, natural or political disruptions, and a change in the number of firms providing the product. 9. Create an imaginary store in your classroom. All members of the class are going to be owners of the firm, Da Donut Shoppe. The shop buys donuts from the local grocery store and sells them out of the Copyright 2008 by MCEE ( Economics: The Study of Choices 203

12 Teacher classroom. Talk about the costs of providing donuts to the school. 10. Display NVisual 6: Total cost. Da Donut Shoppe Production activities. LQuestion: Itemize the production activities that are a cost to the firm (avoid estimating actual costs). Answer: The cost to provide donuts would include the explicit costs, like the price of the donuts and gas purchased to deliver the donuts. Costs would also include the implicit costs; the opportunity cost of the firm owned resources. These would include the opportunity cost of: The individual s time that is delivering the donuts (if wages are paid, this would be an explicit cost), the vehicle being used for delivery (if firm owned), the classroom where the donuts are going to be sold, and the time it takes for store clerks to sell the donuts. The sum of all of the costs would be the total cost of the firm. 11. Now, suppose Katie, a student, can pick up two dozen donuts on her way to school. Each donut will cost $.35. Only two dozen donuts can be purchased at one time. If more donuts are needed, someone else must make a special trip to the store. The necessary time and transport will increase the cost of the next two dozen donuts to $.45 per donut. If even more donuts are needed, Mr. Jack, will have to go and pick them up. The cost of the last two dozen donuts will be $.55. Six dozen is the maximum number of donuts the class can supply. LQuestion: Assuming the class can sell as many donuts as they provide, at a selling price of $.30 per donut, how many donuts will the class store provide? Answer: At $.30 the class will not provide any donuts. The cost to provide the first two dozen donuts ($.35) would be more than the revenue received per donut ($.30). LQuestion: How many will they provide at $.35? Answer: At $.35 the class would provide two dozen donuts. Total revenues ($.35 x 24 donuts) would exactly equal total costs ($.35 x 24 donuts), so profit would equal zero. LQuestion: Will they provide more at $.45? Why? Answer: At $.45 per donut the class would provide four dozen donuts. They earn $.10 profit each on the first 24 sold. 204 Copyright 2008 by MCEE ( Economics: The Study of Choices

13 Teacher LQuestion: How many will the class provide at $.50? Answer: At $.50 the class would still provide four dozen donuts. It would cost them more than $.50 per donut to increase the donuts available for sale. LQuestion: How many at $.55? Answer: At $.55 per donut it would be worthwhile for Mr. Jack to pick up the remaining two dozen donuts, hence the class would provide a total of six dozen donuts. LQuestion: What is the profit at $.55 per donut? Answer: Profits would be $7.20. Total Revenue is the price per donut ($.55) times the quantity (72), $ Total costs would be two dozen at $.35 ($8.40) plus two dozen at $.45 ($10.80) plus two dozen at $.55 ($13.20), $ Display NVisual-7: Da Donut Shoppe. Graph the points on the curve and discuss the reasons for an upward sloping supply curve. This example shows a stepped supply curve as shown below that approximates the typical upward sloping supply curve. 13. Display NVisual-8: Profit. Reiterate the importance of profit to firms and entrepreneurs. Profit motivates producers to provide the goods and services desired by consumers. Along with competition, profit motivates producers to lower costs, hence increasing potential profits. Profit is the amount of sales revenue that is greater than the (opportunity) cost of production. Profit = total revenue - total cost. Total revenue = price x quantity. 14. Handout 2 Lesson-III: Skater Boardss. Have students work through the exercise to calculate firm profit. Now talk with students about the products firms produce. LQuestion: How do firms know what to produce? Remind students about the lemonade stand discussion from Module-6. Answer: Firms seek profits by trying to meet the needs and desires of consumers. Most firms are in business to make a profit, to earn revenues that are greater than the costs of production. LQuestion: Many firms also have other goals too. Discuss some Copyright 2008 by MCEE ( Economics: The Study of Choices 205

14 Teacher of these with the class and write them down on the board. Answer: Firm objectives include making a profit, managing risk (for survival), maintaining cash flow, abiding by legal regulations, and embracing ethical responsibilities. Regardless, private firms, even non-profits, must cover their bottom-line (revenues must exceed expenses) to stay in business for the long run. Hence, most firms act to maximize profits. This goal benefits society. Through profit maximization firms are motivated to lower costs and produce what consumers desire. 15. Display NVisual-9: Doing well by doing good. Discuss this idea with students. The firm that produces what society desires at the lowest cost will profit the most. Higher cost firms, or those that produce non-desirable products, will profit less or not at all. This idea was coined the invisible hand by economist and moral philosopher, Adam Smith, in the mid-1700s. CLOSURE Lesson Review 1. LQuestion: What information does the supply curve provide? Answer: The supply curve indicates how much producers (firms) are willing to supply at different commodity prices. 2. LQuestion: Why is the supply curve upward sloping? Answer: The supply curve is generally upward sloping because, everything else held constant, an increase in price will increase profit. Most firms behave to maximize profits. 3. LQuestion: What is the difference between a change in quantity supplied and a shift in supply? Answer: A change in quantity supplied is a movement along the supply curve in response to a change in price, everything else remaining the same. A shift or change in supply is in response to a change in another factor (e.g., a change in input prices, natural or political disturbance, or an increase in the number of firms). An increase in supply will shift the curve to the right. A decrease in supply will shift the curve to the left. 206 Copyright 2008 by MCEE ( Economics: The Study of Choices

15 Teacher ASSESSMENT Multiple-choice questions 1. LQuestion: What does the supply curve show? a. How producers adjust the quantity of a product they are willing to supply in response to a change in price. b. A negative relationship between price and quantity. c. How much of a commodity producers will provide with a given amount of inputs (resources). d. The benefits consumers gain when firms provide goods and services. 2. LQuestion: A change in quantity supplied is the result of: a. A change in the number of producers providing the commodity. b. A change in the price of the commodity. c. A change in the price of a related good. d. All of the above. 3. LQuestion: A change in supply could be the result of: a. A change in the number of producers providing the commodity. b. A change in the price of the commodity. c. A change in the quantity bought. d. All of the above. 4. LQuestion: How do producers in the United States determine what to produce? a. Government decides what to produce, then firms make the products. b. Firms respond to consumer desires. c. Firms produce items with the highest supply curve. d. People produce what they are best at whether society desires that product or not. 5. LQuestion: Profits are the result of human greed and are bad for society. a. This statement is true. Only greedy people want to take home profit from production of goods that society needs. b. This statement is true. Without profit everyone could buy what they need and there would be less poverty. Copyright 2008 by MCEE ( Economics: The Study of Choices 207

16 Teacher c. This statement is false. Profits drive firms to produce what consumers want at the lowest cost. d. This statement is false. Profits drive firms to produce what consumers want at the highest cost. Answers: 1. a 2. b 3. a 4. b 5. c Discussion/Essay Questions 1. LQuestion: Cade is an excellent musician. He can play all kinds of music but prefers to play really raunchy music that few people like to listen to. On Friday evenings Cade plays with a band at the local café. The band plays popular tunes rather than the raunchy music Cade prefers. Do consumers and/or the band benefit by playing the popular (rather than the raunchy) music? Why? Answer: Consumers and Cade and his band benefit by playing the popular tunes. Producers, the band in this scenario, can do well by doing good. Only by satisfying consumers do producers have the potential to earn profits. 2. LQuestion: Generally the supply curve is upward sloping. Explain why this is true. Answer: The supply curve is upward sloping because producers are profit maximizers; they will supply more of a commodity, everything else remaining the same, if price increases because there is also a potential for increased profits. 3. LQuestion: How does the invisible hand work to motivate producers? Answer: The invisible hand is like the idea of doing well while doing good. Firms will naturally respond to consumer desires in order to benefit themselves in the form of profits. If firms do not respond to what consumers want they will go out of business. 208 Copyright 2008 by MCEE ( Economics: The Study of Choices

17 Module-7 Overhead v i s u a l s

18 Vi s u a l Visual-1: supply Defined does a society decide how much of a commodity should be produced? In a planned economy bread again!!! The board has determined its bread for a year! A planning board determines how much of each good will be produced. In a marketoriented economy what can I get you franky I ll take an apple pie i ll take a can of spam production is determined through consumers and producers Decisions in the market. sluuurp N210

19 Vi s u a l Visual-2: supply N211

20 Vi s u a l Visual-3: INCREASE IN supply DECREASE IN COSTS new TECHNOLOGY more FIRMS N212

21 Vi s u a l Visual-4: DECREASE IN supply INCREASE IN COSTS INCREASE TAXES OR REGULATIONS NATURAL DISRUPTION N213

22 Vi s u a l Visual-5: SUPPLY OF BABYSITTING N214

23 Vi s u a l Visual-6: DA DOnUT SHOPPE Production Activities Explicit Cos t s The explicit costs are the payments that Da Donut Shoppe makes for goods and services. Explicit costs use out-of-pocket funds Implicit Cos t s The implicit costs are the opportunity costs of using the Da Donut Shoppe s own resources N215

24 Vi s u a l Visual-7: DA DONUT SHOPPE N216

25 Vi s u a l Visual-8: What is PROFIT profit is equal to TOTAL REVENUE minus total cost TR = (TOTAL REVENUE) = Price x Quantity TC = (total cost) = Explicit Co s t s + Implicit Co s t N217

26 Vi s u a l Visual-9: DOING WELL BY DOING GOOD The firm that produces what society desires at the lowest cost will profit the most The firm that produces non-desirerable products, or products at a HIGHER COST will profit less N218

27 Module-7 Les s o n w o r k s h e e t s

28 Lesson Lesson I: and Price Firm behavior and supply: Higher price, more production Firms have many objectives. Firms exist to satisfy the desires of owners, to meet concerns about social and ethical needs, to meet consumer demands, and to enhance social well-being, to name just a few. Overwhelmingly, however, the firm s primary objective is to maximize profits. A firm s profits are its total revenues from sales less its total costs of production. Total revenues (TR) are equal to the quantity of products sold (Q) times the per unit price (P). Total costs (TC) are the total expenditures (explicit and implicit) on all inputs used for production. Profit = TR-TC TR = P x Q Any event that leads a firm to believe that their profits will increase will likely result in more of the good being produced. The price of a good is possibly the most important factor determining the profitability. When price increases (and everything else stays the same), profits increase, and the firm will expand production. Example: Cindy has a lawn mowing service. She mows on Saturdays but must be done by 3pm. Cindy also really likes to sleep late on Saturday mornings. LQuestion: What happens when the price changes? If Cindy earns $3 per hour mowing, she will begin at 10am. If Cindy earns $12 per hour mowing, she will begin at 6am. Cindy s supply schedule and supply curve follow. A supply schedule shows the quantity a firm is willing to produce at different prices. The supply curve plots the points of the supply schedule. The previous figure shows that when price increases, Cindy is willing to provide more lawn mowing services. She has increased the quantity supplied. This is a movement along the supply curve. Similarly, If the price goes down, the quantity supplied will go down Copyright 2008 by MCEE ( Economics: The Study of Choices

29 Lesson Lesson I: and Price Co p y r i g h t 2008 b y MCEE (w w w.e c o n e d m o n ta n a.o r g) Ec o n o m i c s: Th e St u d y o f Ch o i c e s 2221

30 Lesson Lesson II: Shifters Firm behavior and supply: Factors that shift the supply curve The quantity firms will supply depends upon a number of factors. Remember, the firms primary objective is to maximize profit. LQuestion: What happens when the costs change? When input prices change, the supply curve will shift. If the price of gasoline used in Cindy s lawn mower goes down, Cindy will be willing to produce more at a given price. The following supply schedule reflects a decrease in gas prices. With lower gas prices, Cindy is now willing to produce 6 hours of lawn mowing for only $3 per hour, her supply curve has shifted to the right. Because expenditures have declined, Cindy s profits per hour worked have increased. She is willing to produce more. In today s world, gas prices may increase. Suppose with an increase in gas prices Cindy s new supply schedule is as follows: On the supply curve shown draw Cindy s new supply curve with the higher gas prices. Cindy s supply curve will now shift to the left Copyright 2008 by MCEE ( Economics: The Study of Choices

31 Lesson Lesson II: Shifters Co p y r i g h t 2008 b y MCEE (w w w.e c o n e d m o n ta n a.o r g) Ec o n o m i c s: Th e St u d y o f Ch o i c e s 2223

32 Lesson Lesson III: Skater Boards Skater Boards produces skateboards. The firm employs 20 workers at a wage of $100 per day. Other costs to produce up to 100 boards are $ LQuestion: If the skateboards sell for $50 a piece and they are able to sell all 100 boards, what is the profit of Skater Boardss? P x Q = TR sum of costs = TC TR-TC = Profit 2. LQuestion: Skater Board employees are members of XTSports Union. The union is concerned about their working conditions. The warehouse where boards are built is shabby. The walls are beginning to crumble, there is no air circulation, and safety is a concern. In addition, wages are low. A new contract is being negotiated that requires wages of $125 per day per employee. Calculate Skater Board s profits under the newly proposed union contract. P x Q = TR sum of costs = TC TR-TC = Profit Copyright 2008 by MCEE ( Economics: The Study of Choices

33 Lesson Lesson III: Skater Boards 3. LQuestion: In addition to the new labor union contract, the market price of skate boards has declined. The price to sell all 100 boards is now $45. What is the profit for Skater Boards? P x Q = TR sum of costs = TC TR-TC = Profit 4. LQuestion: With the new union contract and a sales price of only $45, why might Skater Boards continue to produce skate boards? TR-TC = Profit Co p y r i g h t 2008 b y MCEE (w w w.e c o n e d m o n ta n a.o r g) Ec o n o m i c s: Th e St u d y o f Ch o i c e s 2225

34 Lesson Lesson ASSESSMENT Multiple-choice questions 1. LQuestion: The supply curve shows: a. How producers adjust the quantity of a product they are willing to supply in response to a change in price. b. A negative relationship between price and quantity. c. How much of a commodity producers will provide with a given amount of inputs (resources). d. The benefits consumers gain when firms provide goods and services. 2. LQuestion: A change in quantity supplied is the result of: a. A change in the number of producers providing the commodity. b. A change in the price of the commodity. c. A change in the price of a related good. d. All of the above. 3. LQuestion: A change in supply could be the result of: a. A change in the number of producers providing the commodity. b. A change in the price of the commodity. c. A change in the quantity bought. d. All of the above. 4. LQuestion: How do producers in the United States determine what to produce? a. Government decides what to produce, then firms make the products. b. Firms respond to consumer desires. c. Firms produce items with the highest supply curve. d. People produce what they are best at whether society desires that product or not. 5. LQuestion: Profits are the result of human greed and are bad for society. a. This statement is true. Only greedy people want to take home profit from production of goods that society needs. b. This statement is true. Without profit everyone could buy what they need and there would be less poverty. c. This statement is false. Profits drive firms to produce what consumers want at the lowest cost. d. This statement is false. Profits drive firms to produce what consumers want at the highest cost Copyright 2008 by MCEE ( Economics: The Study of Choices

35 Lesson Lesson ASSESSMENT Discussion/essay questions 1. LQuestion: Cade is an excellent musician. He can play all kinds of music but prefers to play really raunchy music that few people like to listen to. On Friday evenings Cade plays with a band at the local café. The band plays popular tunes rather than the raunchy music Cade prefers. Do consumers and/or the band benefit by playing the popular (rather than the raunchy) music? Why? 2. LQuestion: Generally the supply curve is upward sloping. Explain why this is true. 3. LQuestion: How does the invisible hand work to motivate producers? Co p y r i g h t 2008 b y MCEE (w w w.e c o n e d m o n ta n a.o r g) Ec o n o m i c s: Th e St u d y o f Ch o i c e s 2227

36 Answer Lesson III: Answer Key Skater Boards Skater Boards produces skateboards. The firm employs 20 workers at a wage of $100 per day. Other costs to produce up to 100 boards are $ LQuestion: If the skateboards sell for $50 a piece and they are able to sell all 100 boards, what is the profit of Skater Boards? Answer: P x Q = TR sum of costs = TC TR-TC = Profit $50 x 100 = $5,000 wages = $100 x 20 workers $5,000-$4,000 = $1,000 + $2,000 other costs = $4, LQuestion: Skater Boards employees are members of XTSports Union. The union is concerned about their working conditions. The warehouse where boards are built is shabby. The walls are beginning to crumble, there is no air circulation, and safety is a concern. In addition, wages are low. A new contract is being negotiated that requires wages of $125 per day per employee. Calculate Skater Board s profits under the newly proposed union contract. Answer: P x Q = TR sum of costs = TC TR-TC = Profit $50 x 100 = $5,000 wages = $125 x 20 workers $5,000-$4,500 = $500 + $2,000 other costs = $4, LQuestion: In addition to the new labor union contract, the market price of skate boards has declined. The price to sell all 1000 boards is now $45. What is the profit for Skater Boards? Answer: P x Q = TR sum of costs = TC TR-TC = Profit $45 x 100 = $4,500 wages = $125 x 20 workers $4,500-$4,500 = $0 + $2,000 other costs = $4, LQuestion: With the new union contract and a sales price of only $45, why might Skater Boards continue to produce skate boards? Answer: (TR-TC = 0) Skater Boards is making zero economic profit. This is greater than or qual to what the firm could make by producing a different commodity with the resources. Remember, total costs include the opportunity cost of the resources Copyright 2008 by MCEE ( Economics: The Study of Choices