# Objective: What is the law of supply? What are supply schedules and supply curves? What is elasticity of supply?

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1 Understanding Supply Objective: What is the law of supply? What are supply schedules and supply curves? What is elasticity of supply? *Be sure to leave a couple blank lines under each question and answer the questions at the end of the lesson.

2 CA Standard(s) Covered 12.2 Students analyze the elements of America s market economy in a global setting. 1. Understand the relationship of the concept of incentives to the law of supply and the relationship of the concept of incentives and substitutes to the law of demand.

3 The Law of Supply According to the law of supply, suppliers will offer more of a good at a higher price and less of a good at a lower price. Price As price increases Supply Quantity supplied increases Price As price falls Supply Quantity supplied falls

4 How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. If iphones increase to \$700 each and people keep buying them the same as before, Apple will want to make more iphones to sell so Apple can make more \$\$ Rising prices draw new firms into a market and add to the quantity supplied of a good. Other companies will want to sell smart phones to take some of Apple s customers

5 Supply Schedules A market supply schedule is a chart that 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

6 Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices. Higher price = higher supply (or output) Price (in dollars) Market Supply Curve Supply Output (slices per day)

7 Elasticity of Supply Elasticity of supply is a measure of the way quantity supplied reacts to a change in price. If supply is not very responsive to changes in price, it is considered inelastic. If orange prices rise the orange tree farmer can t immediately produce (supply) more oranges An elastic supply is very sensitive to changes in price. If prices of pizza went up, the local pizzeria could produce (supply) more pizza immediately

8 Current Events Video

9 Section 1 Assessment 1. What is the law of supply? (a) the lower the price, the larger the quantity supplied (b) the higher the price, the larger the quantity supplied (c) the higher the price, the smaller the quantity supplied (d) the lower the price, the more manufacturers will produce the good 2. What happens when the price of a good with an elastic supply goes down? (a) existing producers will expand and some new producers will enter the market (b) some producers will produce less and others will drop out of the market (c) existing firms will continue their usual output but will earn less (d) new firms will enter the market as older ones drop out How much do we know about energy sources? Click Here!

10 Section 1 Assessment 1. What is the law of supply? (a) the lower the price, the larger the quantity supplied (b) the higher the price, the larger the quantity supplied (c) the higher the price, the smaller the quantity supplied (d) the lower the price, the more manufacturers will produce the good 2. What happens when the price of a good with an elastic supply goes down? (a) existing producers will expand and some new producers will enter the market (b) some producers will produce less and others will drop out of the market (c) existing firms will continue their usual output but will earn less (d) new firms will enter the market as older ones drop out How much do we know about energy sources? Click Here!

11 HW Read pages and complete questions 1-3 p. 106.

12 Costs of Production Objective: Chapter 5, Section 1 Review: How do firms decide how much labor to What is the law of supply? hire? What are supply schedules and supply curves? What are production costs? What is elasticity of supply? *Be sure to leave a couple blank lines under each question and answer the questions at the end of the lesson.

13 CA Standard(s) Covered 12.2 Students analyze the elements of America s market economy in a global setting. 8. Explain the role of profit as the incentive to entrepreneurs in a market economy.

14 A Firm s Labor Decisions Business owners have to consider how the number of workers they hire will affect their total production. The marginal product of labor is the change in output from hiring one additional unit of labor, or worker. Lots of workers doesn t exactly mean more stuff being made Marginal Product of Labor Labor (number of workers) Output (beanbags per hour) Marginal product of labor

15 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 (in other words, when additional workers increase total output but at a decreasing rate). Negative marginal returns occur when the marginal product of labor becomes negative. Increasing, Diminishing, and Negative Marginal Returns Marginal Product of labor (beanbags per hour) Increasing marginal returns Diminishing marginal returns Labor (number of workers) Negative marginal returns

16 Production Costs A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs. The total cost equals fixed costs plus variable costs. The marginal cost is the cost of producing one more unit of a good. Businesses set total output to maximize profit by determining the largest gap between total revenue and total cost.

17 Setting Output (chart on p. 111 in text) 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 1 \$36 36 \$0 8 \$36 44 \$8 \$24 24 \$0 24 \$

18 Current Events Video

19 Section 2 Assessment 1. What are diminishing marginal returns of labor? (a) some workers increase output but others have the opposite effect (b) additional workers increase total output but at a decreasing rate (c) only a few workers will have to wait their turn to be productive (d) additional workers will be more productive 2. How does a firm set its total output to maximize profit? (a) set production so that total revenue plus costs is greatest (b) set production at the point where marginal revenue is smallest (c) determine the largest gap between total revenue and total cost (d) determine where marginal revenue and profit are the same

20 Section 2 Assessment 1. What are diminishing marginal returns of labor? (a) some workers increase output but others have the opposite effect (b) additional workers increase total output but at a decreasing rate (c) only a few workers will have to wait their turn to be productive (d) additional workers will be more productive 2. How does a firm set its total output to maximize profit? (a) set production so that total revenue plus costs is greatest (b) set production at the point where marginal revenue is smallest (c) determine the largest gap between total revenue and total cost (d) determine where marginal revenue and profit are the same

21 HW Read pages and complete questions 1-4 p. 114.

22 Changes in Supply Objective: Chapter 5, Section 2 Review: How do firms decide how much labor to hire? What are production costs? How do firms decide how much to produce? How do input costs affect supply? How can the government affect the supply of a good? *Be sure to leave a couple blank lines under each question and answer the questions at the end of the lesson.

23 CA Standard(s) Covered 12.2 Students analyze the elements of America s market economy in a global setting. 1. Understand the relationship of the concept of incentives to the law of supply and the relationship of the concept of incentives and substitutes to the law of demand. 7. Analyze how domestic and international competition in a market economy affects goods and services produced and the quality, quantity, and price of those products.

24 Input Costs and Supply Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply. Example: Increased price of oranges means orange juice becomes more expensive to produce. As input costs increase, the firm s marginal costs also increase, decreasing profitability and supply and goods becomes more expensive to produce. Input costs can also decrease, thus, increasing supply.

25 Government Influences on Supply By raising or lowering the cost of producing goods, the government can increase or decrease supply. Subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. French Farmers, Asian Car makers Story of Broke Taxes The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. -Cigarettes, alcohol & gas Regulation Regulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs. -smog checks, Chinese Toys

26 Current Events Video (Chinese Toys)

27 Current Events Video (Cigarette Tax)

28 Section 3 Assessment 1. What affect does a rise in the cost of raw materials have on the cost of a good? (a) A rise in the cost of raw materials lowers the overall cost of production. (b) The good becomes cheaper to produce. (c) The good becomes more expensive to produce. (d) This does not have any affect on the eventual price of a good. 2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good? (a) It shifts to the left. (b) It shifts to the right. (c) It reverses direction. (d) The supply curve is unaffected. Let s make some ice creams!!! Click Here!

29 Section 3 Assessment 1. What affect does a rise in the cost of raw materials have on the cost of a good? (a) A rise in the cost of raw materials lowers the overall cost of production. (b) The good becomes cheaper to produce. (c) The good becomes more expensive to produce. (d) This does not have any affect on the eventual price of a good. 2. When government actions cause the supply of a good to increase, what happens to the supply curve for that good? (a) It shifts to the left. (b) It shifts to the right. (c) It reverses direction. (d) The supply curve is unaffected. Let s make some ice creams!!! Click Here!

30 HW Read pages and complete questions 1-3 p. 120, and study for Ch. 5 Test!

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