Section 1 Understanding Supply

Transcription

1 Chapter 5 - Supply

2 Section 1 Understanding Supply

3 Supply the amount of goods available

4 Law of Supply Tendency for suppliers to offer more of a good at a higher price. Law of Supply Price As price increases Supply Quantity supplied increases Price As price falls Supply Quantity supplied falls

5 Market Entry - Rising prices draw new firms into a market and add to the quantity supplied of a good. EX: DISCO

6 The Supply Schedule A chart that lists how much of a good a supplier will offer at different prices. Supply Schedule Price per slice of pizza Slices supplied per day $ $ $ $ $ $

7 A Market Supply Schedule lists how much of a good all suppliers will offer at different prices. Market Supply Schedule Price per slice of pizza Slices supplied per day $.50 1,000 $1.00 1,500 $1.50 2,000 $2.00 2,500 $2.50 3,000 $3.00 3,500

8 Price (in dollars) Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices. Market Supply Curve 3.00 Supply Output (slices per day)

9 Elasticity of Supply a measure of the way quantity supplied reacts to a change in price. >1 = Elastic <1 = Inelastic 1 = Unitary

10 Elasticity of Supply and Time In the short run, a firm cannot easily change its output level, so supply is inelastic.

11 In the long run, firms are more flexible, so supply can become more elastic.

12 CH 5 Section1 Review Questions 1. Explain the Law of Supply in your own words. 2. What is the difference between supply and quantity supplied? 3. How does the quantity supplied of a good with a large elasticity of supply react to a change in price? 4. If the price of oil rises around the world, what will happen to oil production in Texas? Explain your answer. 5. Explain whether you think the supply of the following goods is elastic or inelastic and why. (A) hotel rooms (B) taxi rides ( c ) photographs 6. When the price of a good rises, total supply in the market will rise, but some entrepreneurs might actually choose to work less. Why might they make this choice?

13 Section 2 - Costs of Production

14 Labor and Output The marginal product of labor is the change in output from hiring one additional unit of labor, or worker. Marginal Product of Labor Labor (number of workers) Output (beanbags per hour) Marginal product of labor

15 Marginal Product of labor (beanbags per hour) Marginal Returns Increasing marginal returns occur when marginal production levels increase with new investment. Diminishing marginal returns occur when marginal production levels decrease with new investment. Negative marginal returns occur when the marginal product of labor becomes negative. Increasing, Diminishing, and Negative Marginal Returns Increasing marginal returns Diminishing marginal returns Labor (number of workers) Negative marginal returns 8 9

16 Production Costs A fixed cost is a cost that does not change, regardless of how much of a good is produced. Ex: rent and salaries

17 Production Costs Variable costs are costs that rise or fall depending on how much is produced. Ex: costs of raw materials

18 Production Costs The total cost equals fixed costs plus variable costs.

19 Production Costs The marginal cost is the cost of producing one more unit of a good.

20 Setting Output Marginal revenue is the additional income from selling one more unit of a good. It is usually equal to price. To determine the best level of output, firms determine the output level at which marginal revenue is equal to marginal cost. Production Costs Beanbags (per hour) Fixed cost Variable cost Total cost (fixed cost + variable cost) Marginal cost Marginal revenue (market price) Total revenue Profit (total revenue total cost) 0 $ $0 $ $ $0 $ $

21 Section 3 Changes in Supply

22 Input Costs and Supply Any change in the cost will affect supply. As input costs increase, the firm s marginal costs also increase. Input costs can also decrease.

23 Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry. Subsidies Taxes Regulation

24 Other Factors Influencing Supply The Global Economy Future Expectations of Prices Number of suppliers

25 Chapter 5 Review Questions 1. How does the marginal product of labor change as more people are hired? 2. What categories of costs combine to create a firm s total cost? 3. How can the global economy affect the supply of a good in the U.S.? 4. Assume that a $1 per lbs tax will be placed on fish. What will happen to the supply for fish? 5. Explain how the Law of Supply works in your own words