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
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
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
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
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