Economics Unit 4. Supply

Transcription

1 Economics Unit 4 Supply These documents are being distributed for educational discussion purposes only. They do not reflect any attempt by the North East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect those of the NEISD, its trustees, administrators or teachers.

2 Section 1: Nature of Supply To meet consumer s demand, producers deliver goods and services to the marketplace Producers make things in time to meet the demand for them Ex. Factories make winter coats in the summer and swim suits in the winter so stocks can be in stores at the right time

3 Supply Supply is the quantity of goods and services that producers are willing and able to offer at various possible prices during a given time period Quantity supplied is the amount of a good or service that a producer is willing to sell at each particular price

4 Law of Supply In our free enterprise system, price is the key factor affecting not only the quantity demanded but also the quantity supplied Quantity supplied is directly related to the prices that producers can charge for their goods and services The Law of Supply states that producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices

5 Mixed Signals Signals to producers are the opposite of the signals to consumers Low prices signal consumers to buy more while low prices signal producers to produce less High prices signal consumers to buy less while high prices signal producers to produce more

6 Money, Money, Money Higher prices will encourage producers to produce more Lower prices will encourage producers to produce less Why do they do this? Their actions are based on a profit motive, the desire to make money

7 Profit Motive The amount of money remaining after producers have paid all of their costs is called profit A business makes a profit when revenues are greater than costs of production Costs of production include wages and salaries, rent, interest on loans, electricity, raw materials and anything else it takes to make a product or provide a service Revenue Costs of Production = Profit

8 Signals in the Marketplace High demand for a good or service signals other producers to get in the market to produce similar products/services Low demand for a good or service signals producers to get out of the market and/or cut production Remember, low demand is typically followed by prices going down Profits go down at the same time

9 What follows low demand? Remember, low demand is typically followed by prices going down Profits go down at the same time Low demand, and therefore low profit causes producers to cut production It also signals others who produce a similar product (the competition) to cut production levels too

10 Supply Schedules High Prices! I think I will produce more This supply schedule lists the quantity of a product that producers are willing to supply at various market prices Observe that the higher the price, the more producers are willing to make (profits increase) The supply curve plots on a graph the information from a supply schedule

11 Elasticity of Supply Elasticity of supply is the degree to which price changes affect the quantity supplied A products supply, like demand, can be either elastic or inelastic

12 Elastic Supply Elastic supply exists when a small change in price causes a major change in quantity supplied Products with elastic supply usually can be made. Quickly Inexpensively Using a few, readily available resources

13 Elastic Supply Curves T-shirts, posters & other sports memorabilia are good examples of goods with elastic supply When a team wins, within hours or days stores are flooded with souvenir merchandise Remember: Quick to produce Inexpensive Using readily available resources

14 Inelastic Supply Inelastic supply exists when a change in a goods price has little impact on the quantity supplied A product usually has an inelastic supply if production requires a great deal of Time Money Resources that are not readily available

15 Examples of Inelastic Supply Gold-Rare, expensive to mine, requires lots of time to refine or purify Fine Art Space Shuttles Labor intensive, expensive. Costs for these items tends to be expensive

16 Dreamliner

17 Perfectly Inelastic Supply Curve Example: A builder has only 10 lots in a subdivision No new lots can be created (zoning laws) If demand is high the builder can charge a higher price for each lot If demand is low the builder might lower the price of each lot, however.. No new lots can be created so supply is inelastic

18 Sect. 2: Changes in Supply Like demand curves, supply curves illustrate a products market at a specific period of time (snapshot) Because the snapshot is taken at a specific period in time the only factor affecting quantity supplied is price Notice that only price and quantity supplied is graphed

19 Supply Curves Shift Too Supply curves examine only price & supply at a given time (snapshot) However supply is affected by other nonprice factors over time Over time a new snapshot needs to be taken The new snapshot can show a shift in the entire supply curve (up or down)

20 Shift In The Supply Curve Supply can increase or decrease at every level over time The red curve is the original curve

21 Non-Price Factors Over time non-price factors can affect supply These are called determinants of supply Prices of resources Government tools Technology Prices of related goods Producer expectations A change in one of these can cause a change in the overall supply of a product

22 Price of Resources A resource is anything used in the production of a good or service Examples are: Workers wages/benefits Raw materials Rent/mortgage payments Utilities Much more.

23 Changes of Resource Costs When resource costs go down, businesses can produce more with the same costs Producing more with the same costs increases a businesses profit This encourages businesses to expand supply even more Opposite is true if resource costs go up

24 Government Tools A tax is a required payment of money to the government to help fund government services Businesses must pay taxes on materials they use, the property they own, and the profits they make Taxes increase production costs just like rent or raw materials do Taxes make production less profitible

25 Another Government Tool Payments to private businesses by the government are called subsidies Ex: The government might want to encourage farmers to grow more wheat so food supplies will remain at a certain level Farmers grow more wheat (to get the subsidy) instead of another unsubsidized crop

26 Another Government Tool To protect the public the government passes many kinds of regulations, or rules about how companies conduct business Ex. Strict pollution control, discrimination Following regulations can increase costs of production Loose regulations tend to increase supply Strict regulations tend to decrease supply

27 Technology Using technology can make production more efficient and less expensive Think Fords assembly line Lower production costs created by using technology encourages producers to supply more Technology is not FREE Initial costs can be high (research and development) but eventually savings occur

28 Competition Competition tends to increase supply Lack of competition tends to decrease supply Popularity of some items (video games) makes other businesses produce similar products so they can make a profit too Supply increases Each producer competes for a share of the market Sometimes too much is produced resulting in an oversupply and some producers leave the market

29 Prices of Related Goods The supply of one good can be connected to the supply for its related good If the price of wheat drops because subsidies cause an oversupply in the market a farmer growing wheat might switch to corn which suddenly becomes more profitable

30 Producer Expectations Producers make production decisions based on their expectation that sales prices of their products will rise or fall If they expect prices will rise they will increase production to make more profit If they expect prices will fall they will decrease production to limit their losses

31 Sect. 3: Making Production Decisions The amount of goods/services that companies are willing to produce is affected by The laws of demand and supply The elasticity of demand and supply Shifts in the demand and supply curves

32 Productivity Productivity is the amount of goods and services produced per unit of input Productivity tells business owners how efficiently their resources are being used in production Business owners examine the inputs to production to see if they can get more production by remixing inputs Ex. More automation less manual labor

33 All of the product a company makes during a given period of time is called its total product (total output) Marginal product is the change in output generated by adding one more unit of input Total Product

34 Law of Diminishing Returns The Law of Diminishing Returns states that when one input is added to a fixed supply of other resources, productivity increases up to a point At some point marginal return begins to diminish Eventually, it will result in a negative marginal product

35 Good managers would look at more than one input to maximize production Examining Diminishing Returns At some point production goes down as new inputs are introduced Observe what happens with the introduction of the 12 th worker Also notice that this schedule examines only one input, labor

36 3 Stages of Productions Increasing Marginal Returns: Production increases with the addition of each additional unit of input Diminishing Marginal Returns: Production continues to increase, but at a lower rate than previous additional inputs added Negative Marginal Returns: Production begins to decrease as each additional input in added

37 Two Categories of Costs of Production Fixed Costs (also called Overhead) Those costs that do not change no matter how many goods are made Rent, interest on loans, insurance premiums, property taxes, salaries, depreciation on equipment (depreciation is the lowering of the value of an asset due to time and use) Even if the company produces nothing, these costs continue Variable Costs Those costs that increase as production increases Wages, raw materials, utilities These costs are zero until production begins and increase as production increases Fixed Costs + Variable Costs = Total Costs

38 How much can 1 more cost? Marginal Costs the additional costs of producing one more unit of output Being able to calculate marginal costs allows businesses to determine the profitability of increasing or decreasing production levels

39 References Economics: Texas Edition: McGraw Hill Education Holt Economics; Texas Edition: 2003, Holt, Rinehart and Winston