CHAPTER 5: SUPPLY

Get Books/Workbooks/Notes Ready

Fill out pg. 41 as Warm-up for Supply

Copy down Chart on pg. 109

CHAPTER 5 SECTION 1

“How do suppliers decide what goods/services to offer?”

Objectives Explain law of demand Interpret supply schedule and graph Examine relationship b.t. elasticity of supply and

time Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch05/Econ_OnlineLectureNotes_ch5_s1.swf

INTRODUCTION

How does the Law of Supply affect qty supplied? As prices rise, producers want to and will offer

more of a good and new suppliers will enter the market in hopes of profit

Law of supply states that as prices rise, so will quantity supplied.

LAW OF SUPPLY: PRICE = ONLY FACTOR

Supply is the amount of goods available As price of good increases, producers offer more As price of good decreases, producers offer less

Includes 2 movements Individual firms changing their level of

production Firms entering or exiting the market

Higher Production If a firm is earning a profit from sale of

good/service…. Then an increase in price alone will, in turn, increase

firm’s profits Search for profits is what drives the choices made by

producers

SUPPLY SCHEDULE

Supply of a good can be measured using supply schedule Shows relationship bt price and qty. supplied of good

Indiv. Supply schedule shows how much of a good a single supplier will be able to offer at various prices

Market supply schedule shows how much of a good ALL firms in a particular market can offer at various prices

Figure 5.1 (112) What does ISS tell you about pizzeria owners

decisions? How does MSS compare to ISS?

SUPPLY GRAPH Supply graph can be represented graphically

ALWAYS rises from left to right b/c higher prices leads to higher output

ELASTICITY OF SUPPLY: READ 114-115

Based on same concept of Elasticity of Demand Measures how firms will respond to changes in the

price of a good Elastic

When elasticity is greater than one, supply is very sensitive to price changes

Inelastic Less than one, supply is not very responsive to price

change

Elasticity in Short run: Supply is inelastic B/c firms have difficulty changing output levels fast

Example: Agriculture (Orange-grove from book)

Elasticity in Long run: Supply is more elastic Like demand, supply becomes more elastic if

supplier has longer time to respond to change

LESSON CLOSING

Quick Review: TPS w/Partner How does a highly elastic business respond to

price falls? “Simple Supply Demand” Video During Video

Work on Pg. 42 in workbook Supply Schedules/Curves wrksht in workbook

Homework ?s for tomorrow Work w/partner Answer Critical Thinking 6-9: pg.115

BELL WORK SECTION 2

2 Min. to finish Critical Thinking from Section 1

FINISH CRITICAL THINKING SECT. 1

6. Example of variable other than price for each of these markets

1. Rock bands concert tour1. Number of dates they

play, seats in arenas

2. Electronic equipment maker

1. Supply of comp. chips for equip., other supplies

3. Bakery1. Seasonal demand

7. Price of gold rises what happens to 2nd hands?

6. Supply will increase (@higher prices) to profit

8. Elastic of Inelastic?8. Lawn care

8. Elastic; entry cost low

9. Making Movies8. Inelastic:

expensive and time consuming

10. Baseball8. Inelastic: costs are

high and players are not manufactured

CHAPTER 5 SECTION 2

“How can a producer maximize profits?” Objectives

How firms decide how much labor to hire in order to produce certain output

Analyze production costs of firms How firms choose to set output Factors that a firm considers before shutting

down a profitable business Key terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch05/Econ_OnlineLectureNotes_ch5_s2.swf

HOW CAN A PRODUCER MAXIMIZE PROFITS?

When thinking about how to maximize profits, producers think about the cost involved in producing one more unit of a good

Costs producers take into consideration are: Operating cost Variable cost Total cost Marginal cost

HOW FIRMS DECIDE: LABOR AND OUTPUT

All businesses must decide how many workers they will hire The addition of new

workers will increase production to a point, then it will decrease Increasing/Decreasing

marginal returns

HOW FIRMS DECIDE: MARGINAL RETURNS

Addition of workers allows for greater specialization. (refer to figure 5.4 pg.117) Specialization increases output Increased output leads to firms increasing

marginal returns Eventually the addition of workers will increase

output but less and less. Diminishing marginal returns means a firm will

produce less/less with each added unit of labor

PRODUCTION COSTS

Divided into 2 categories Fixed Costs (stay same)

Mainly involve the production facility Rent, machine repair, property taxes, salaries

Variable Costs (change w/output) Price of Raw materials, other labor,

electricity/heating bills Total Cost

Sum of fixed and variable costs

MARGINAL COST OF PRODUCTION

Knowing total costs of several levels of output helps a firm determine the marginal costs of production at each level Or the additional costs of producing one more

unit Best way to find Marginal cost of production

Find where marginal cost is equal to marginal revenue (or additional income from selling 1 more)

Understand Chart on pg. 120: Answer 2 ?s

SETTING OUTPUT: DETERMINING PROFIT

Primary goal is to maximize profit Wants to make most profit with least amount

of total production costs Average cost = TC / Quantity produced Figure 5.6 on pg. 121

Answer 2 ?s

SHUTDOWN DECISION

What happens when a factory starts to lose money? Sometimes, even though a factory is producing

at its most profitable level, the market prices are so low that the factory’s TR is still less than its TC

Leads owners to 2 choices Continue to produce and lose money

When? : If the TR from the goods is greater than cost of keeping factory open Would work if benefit of operation is greater than VC

Shut down factory Still has to pay all of FC but nothing coming in Lose an amount equal to FC

PRODUCTION COSTS

LESSON CLOSING

Answer Critical Thinking (122) 7-9 For tomorrow

Work on Workbook pages 43, 62 Watch Pearson Videos for Ch. 5

How the Economy Works Visual Glossary

CHAPTER 5 SECTION 3BW: Finish up Critical Thinking

CRITICAL THINKING (122)

1. Other than reducing staff how would you recommend improving performance?

1. Raising Prices, upgrading facilities/equipment, and encourage specialization to increase productivity

2. Would you add same workers to each facility? Why/why not?

1. Add workers faster to larger b/c more capacity

3. Why would a company make more if its marginal cost is less than marginal revenue?

1. Increasing profit

4. Why would they simply not make more/more?1. Marginal return will diminish sometime, reducing

profits

CHAPTER 5 SECTION 3

“Why does the supply curve shift?” Objectives

Explain how some factors create changes in supply

Three ways the govt. can influence supply Analyze other factors affecting supply How firms choose a location for production

Key Terms Subsidy: Govt. payment that supports a business

or market Excise Tax: tax on production or sale of good Regulations: Govt. intervention in a market that

affects the production of a good

INTRODUCTION

Why does the supply curve shift? Several factors cause the supply curve to shift

Shifts in prices Rising Costs Technology Changes in Global economy Future expectations of prices Number of suppliers

INPUT COSTS

Any changes in the cost of an input to make a good will affect supply Rise in cost of raw materials would result in

decrease in supply b/c good has become more expensive to produce

Rising costs make a firm have to cut production and lower its marginal cost

It is possible for input costs to drop Industries w/advancements in technology Examples

Automation Computer E-Mail

GOVERNMENTS INFLUENCE ON SUPPLY

Govt. also has power to affect supplies of many goods Subsidies

Gives subsidies to producers of a good Generally lower costs, which allow firm to produce more Reasons

Provide people during a shortage Protect young industries from foreign competition

Taxes Excise taxes increase production costs by adding an extra cost

to each unit sold. Used to discourage a good deemed harmful

Cigarettes/alcohol

Regulation Indirectly, often raises costs

EX: Govt. regulation on auto pollution; regulations led to increase in cost of making cars

OTHER INFLUENCING FACTORS

Changes in global economy Many goods imported, changes in other

countries can affect supply of those goods Increase in wages in one country or the increased

supply of a good in another will cause supply curve to shift

Restrictions on imports also affect supply

SHIFT IN SUPPLY CURVE

Factors that reduce supply shift to left

Factors that increase supply shift to right

Which represents effect of higher costs? Decrease in supply

Which represents advances in technology? Increase in supply

CHECKPOINT: OTHER INFLUENCES

What happens to supply if the price of a good is expected to rise in future? Seller would/should store good to sell more in the

future If price is expected to fall?

Place goods on market now, before price falls

LAST INFLUENCE: NUMBER OF SUPPLIERS

More suppliers in a market, the higher supply Curve will shift to right

Suppliers leaving market will decrease supply Curve shifts to left

Where do firms Produce Key factor in location of a firm is transportation

Inputs (materials) are costly to transport, firm will locate there (mills, mining areas, etc)

Outputs (final goods) are more costly to transport, firms locate there: (bulky/perishable goods) bottling comp.’s

LESSON CLOSING

Case Study Video Work on Workbook Due Tuesday!! Study Day on Monday!!