Econ chapter Five

5.1: What is Supply?

The Law of Supply

•Background

–Demand side of market interactions: consumers serve self-interest by purchasing best
products at lowest possible price

–There are factors that change demand at every price

•Demand is one one side of the market equation

•Supply side of the equation explains why producers want to provide products at the highest
possible price.

–Supply: the willingness and ability of producers to offer goods and services for sale

•Producer: anyone who provides goods or services

–E.g: Manufacturers, farmers, retailers, utility companies, airlines, pet sitters

–Two key words: willingness and ability

•Example: Smith family farm

Multiple Choice

Supply

• a table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

• The willingness and ability of producers to offer goods and services for sale

• a table that shows how much of a good or service an individual producer is willing to offer for sale at each price in a market.

• a table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

5.1: What is Supply?

The Law of Supply

•As is true with demand, price is a major factor that influences supply

–Law of Supply: producers are willing to sell more of a good or service at a higher price
than they are at a lower price

•Producers want to earn a profit

–When the price of a good or service rises = willing to sell more of it

–When the price of a good or service falls = want to sell less of it

»Price and quantity supplied have a direct relationship

Multiple Choice

Law of supply

• Shows the data found in the market supply schedule.

• Producers are willing to sell more of a good or service at a higher price than they are at a lower price

• Indirect relationship between the price of a good or service and the quantity of that good or service that consumers are willing and able to buy

• The change in total product that results from higher one more worker.

5.1: What is Supply?

The Law of Supply
•Example: Price and Supply
–The Mullans travel to Middletown Farmer’s Market M/W/F to sell
variety of veggies
•Specialty is tomatoes
–How should the Mullans decide on quantity of tomatoes
to supply?
»Price of tomatoes is $1 per pound
•What quantity of tomatoes will the Smith’s
supply?

•What if the price doubled to $2?

•What if the price falls?

Fill in the Blank

As prices RISE

Fill in the Blank

As prices FALL...

5.1: What is Supply?

Supply Schedules

•A supply scheduleis a table that shows how much of a good or service an
individual producer is willing to offer for sale at each price in a market.
–Shows the law of supply in table form

•A market supply schedule is a table that shows how much of a good or
service all producers in a market are willing and able to offer for sale at
each price.

•Market research (demand & demand schedule) can also be used to create
a market supply schedule
–Use research by government and/or trade organizations to learn the
prices and quantity supplied by all the producers in a given market.

Multiple Choice

Market supply schedule

• A table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

• A graph that shows how much of a good or service an individual producer is willing and and able to offer for sale at each price.

• A table that shows how much of a good or service an individual producer is willing to offer for sale at each price in a market.

• Shows the data found in market supply schedule.

Multiple Choice

Supply schedule

• A table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

• A graph that shows how much of a good or service an individual producer is willing and and able to offer for sale at each price.

• A table that shows how much of a good or service an individual producer is willing to offer for sale at each price in a market.

• Shows the data found in market supply schedule.

5.1: What is Supply?

​TABLES

5.1: What is Supply

Supply Curves

•A supply curve is a graph that shows how much of a good or service an individual producer
is willing and able to offer for sale at each price.

–Follows the law of supply

•Higher prices = higher profits; desire to increase profits drives decision making in
the market

–It displays the data from an individual supply schedule

–Involves transferring data from one format (table) to another (graph)

•A market supply curve shows the data found in the market suppply schedule.

–Shows the quantity that all producers, or the market as a whole, are willing and able to
produce at each price.

–Shows the sum of the information on the individual supply curve of all producers in a
market

•Example: Individual Supply Curve

•Example: Market Supply Curve

5.1: What is Supply

​GRAPHS

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​

Multiple Choice

Supply curve

• A table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

• A graph that shows how much of a good or service an individual producer is willing and able to offer for each price.

• A table that shows how much of a good or service an individual producer is willing to offer for sale at each price in a market.

• Shows the data found in the market supply schedule.

Multiple Choice

A market supply curve

• Shows the data found in the market supply schedule.

• a table that shows how much of a good or service all producers in a market are willing and able to offer for sale at each price.

5.2: What Are the Costs of Production?

Labor Affects Production

•Individual producers have costs involved in supplying goods to the market
–Example: Janine’s small factory that produces custom jeans

•Factory has 3 sewing machines

•3 workers = one day product of 12 pairs of jeans
–Janine wonders if she should hire one more worker (will it affect
production??)
»The change in total product that results from hiring one
more worker - marginal product

–With four workers, production is 19 jeans a day - a marginal
product of ______

–With five workers, output increased from 19 to 29 - a marginal
product of ____: why did it ________??

Fill in the Blank

The change in the total product that results from hiring one more worker

Fill in the Blank

The change in total product that results from hiring one more worker

5.2: What Are the Costs of Production?

Labor Affects Production

•Each original worker had a sewing machine to operate
–BUT: also had other jobs to do

•Result: workers only spent half their time sewing

•Fourth employee helped with other tasks
–Result: marginal product increased.
»BUT the sewing machines were often still idle

•Result: the fifth worker allowed labor to be divided even
more efficiently which caused marginal product to increase.

•Having each worker focus on a particular aspect of production is called specialization

BUT, does hiring more workers always cause marginal product to increase??

Fill in the Blank

Having each worker focus on a particular aspect of production is called

Fill in the Blank

Having each worker focus on a particular aspect of production is called

5.2: What Are the Costs of Production?

Labor Affects Production

•Marginal Product Schedule
–Shows the relationship between labor and marginal product

•Increasing employees may result in producers experiencing increasingreturns: each
new workers adds more total output than the last
–Adding workers does not always continue to increase returns

•Diminishingreturns: each new worker, past a certain number, causes total
output to grow but at a decreasing rate.
–May experience negative returns
»Causes: work environment, disorganized operation

•Rare for a business to hire so many workers that is has
negative returns.

Multiple Choice

increasing returns

•  each new worker, past a certain number, causes total output to grow but at a decreasing rate.

• each new workers adds more total output than the last

Multiple Choice

Diminishing returns

• each new worker, past a certain number, causes total output to grow but at a decreasing rate.

• each new workers adds more total output than the last

5.2: What Are the Costs of Production?

5.2: What Are the Costs of Production?

Production Costs

•The goal of every business is to earn as
much profit as possible.

–Profit = money from selling products
- costs to make those products

•FixedCosts: expenses that the producer
must incur whether they produce nothing,
a little, or a lot.

•VariableCosts: business costs that vary as
the level of production output changes

•TotalCost: fixed costs + variable costs

•MarginalCost: the additional cost of
producing one more unit of their product

•Example: Fixed and Variable Costs

Multiple Choice

Fixed costs

• Additional costs of producing one more unit of their product

• You always pay

• Is what you have to spend to start

• Fixed+Variable

Multiple Choice

Total costs

• Fixed + Variable

• Is what you have to pay to start

• Additional costs of producing one more unit of their product

• You always pay

Multiple Choice

Marginal costs

• Is what you have to pay to start

• You always pay

• Fixed + Variable

• Additional costs of producing one more unit of their product

Multiple Choice

Variable

• Additional costs of producing one more unit of their product

• Is what you have to pay to start

• you always pay

• Fixed + Variable

5.2: What Are the Costs of Production?

Production Costs

•Example: Production Costs
Schedule

–Marginal cost = change in
total cost / change in total
product.

•Declines at first and
then increases -
why?

–Initial decline is due to
increasing efficiency due
to specialization

•After that, increases
because of
diminishing returns

Marginal cost= change in total cost/change in total product

5.2: What Are the Costs of Production?

Earning the Highest Profit

•Before a business can decide how much to produce in order to earn as much profit as possible, it must
figure out its marginal revenue and total revenue

–Marginal Revenue: is theadded revenue per unit of output, or the money made from each
additional unit sold

•Marginal revenue is the price

–Total Revenue: is the income a business receives from selling a product

•Total Revenue = P x Q (p=price, q=quantity purchased at that price)

•Example: Production Costs and Revenue Schedules

–To make decisions, producers need to perform a marginal analysis: a comparison of the added costs
and benefits of an economic decision

•Janine’s factory

–With nine workers producing 66 pairs of jeans, it has reached the level of production where it
realizes the greatest amount of profit

•Profit-MaximizingOutput: level of output reached when the marginal cost and the marginal
revenue are equal.

–After that point, profits begin to decline

Fill in the Blank

the added revenue per unit of output, or the money made from each additional unit sold= ..... Revenue

Fill in the Blank

the income a business receives from selling a product=.... Revenue

Multiple Choice

Level of output reached when the marginal cost and the marginal revenue are equal.

• Marginal Revenue

• Profit-Maximizing Output

• Fixed Costs

• marginal product

5.2: What Are the Costs of Production?

Total Revenue= price x quantity purchased at that price

5.3: What Factors Affect Supply?

Changes in Quantity Supplied

•Supply schedules and curves are created under the
assumption that all other economic factors but price
remain the same.

–If all other factors remain the same = the only
thing that influences the amount offered for sale is
the price.

•Change in demand is shown by the points along an
existing demand curve while change in demand actually
shifts the curve

–Supply does the same thing!

•Change in quantity supplied: an increase or decrease in
the amount producers offer for sale because of a change
in price

Fill in the Blank

an increase or decrease in the amount producers offer for sale because of a change in price

5.3: What Factors Affect Supply?

Changes in Supply

•Change in supply occurs when something prompts producers to offer
different amounts for sale at every price.
–When production costs increase, supply decreases; when production
costs decrease, supply increases

•Factor 1: Input Costs
–Input costs are the price of the resources needed to produce a good
or service.

•Factor 2: Labor Productivity
–Labor productivityis the amount of goods and services that a person
can produce in a given time.

•Increasing productivity decreases the costs of production and
therefore increases supply.

•Better trained/higher-skilled workers can usually produce more
goods in less time; lowers costs

Multiple Choice

The price of the resources needed to produce a good or service.

• Labor productivity

• Input costs

• Change in supply

Multiple Choice

the amount of goods and services that a person can produce in a given time.

• Labor productivity

• Input costs

• Change in supply

Multiple Choice

occurs when something prompts producers to offer different amounts for sale at every price.

• Change in supply

• Labor productivity

• Change in supply

5.3: What Factors Affect Supply?

Decrease = Right Increase = Left

5.3: What Factors Affect Supply?

Changes in Supply

•Factor 3: Technology

–One way businesses improve productivity and increase supply is through technology

•Technology involves the application of scientific methods as discoveries to the
production process, resulting in new products or manufacturing techniques.

–Influenced by profit motive - technology uses to make goods more efficiently

–Greater efficiency = more productivity = increase in supply

»E.G Automation

•Factor 4: Government Action

–Govt. action can also affect the costs of production (positively and negatively)

•Excise tax: a tax on the production or sale of a specific good or service

–Often placed on items such as alcohol and tobacco - things whose consumption
the government is in interested in discouraging

»The taxes are the producers cost and decrease the supply of these items\

•Government regulation, the act of controlling business behavior through a set of
rules/laws, can also affect supply

–E.g banning a material, worker safety rules

Multiple Choice

Excise tax

• occurs when something prompts producers to offer different amounts for sale at every price.

• a tax on the production or sale of a specific good or service

• involves the application of scientific methods as discoveries to the production process, resulting in new products or manufacturing techniques.

• the amount of goods and services that a person can produce in a given time.

Fill in the Blank

the act of controlling business behavior through a set of rules/laws, can also affect supply

Multiple Choice

involves the application of scientific methods as discoveries to the production process, resulting in new products or manufacturing techniques.

• regulation

• Technology

• Excise tax:

• Input costs

5.3: What Factors Affect Supply?

Changes in Supply

•Factor 5: Producer Expectations

–If producers expect the price of their product to rise or fall in the future, it may affect how
much of that product they are willing and able to supply in the present.

•Different producers may react to future price changes differently.

•Factor 6: Number of Producers

–When one company develops a successful new idea, other producers soon enter the market
and increase the supply of a good or service.

•Supply curve shifts to the right.

–An increase in producers means increased competition, which may eventually drive
less-efficient producers out of the market reducing supply.

•Supply curve shifts to the left.

•Robert Johnson: Supplying African American Entertainment

–P.152

factors affect supply:

Input costs, labor productivity technology, Gov. action, # of producers expectation of producers

5.4: What is Elasticity of Supply?

Elasticity of Supply

•Law of supply: as price increases so will the supply of a good or service
–Example: Toyota Motor Corporation’s Prius hybrid (2000)

•Elasticity of demand measures how responsive consumers are to price changes
–Elasticity of supply is a measure of how responsive producers are to price
changes

•If a change in price leads to a larger change in quantity supplied = elastic

•If a change in price leads to a smaller change in quantity supplied =
inelastic

•If the price and quantity supplied change by exactly the same percentage
= unit elastic

•Example: Elastic Supply

•Example Inelastic Supply

Multiple Choice

Elasticity of supply

• involves the application of scientific methods as discoveries to the production process, resulting in new products or manufacturing techniques.

• Don’t require a lot of capital

• a measure of how responsive producers are to price changes

5.4: What is Elasticity of Supply?

Fill in the Blank

If a change in price leads to a larger change in quantity supplied

Fill in the Blank

If the price and quantity supplied change by exactly the same percentage

Fill in the Blank

If a change in price leads to a smaller change in quantity supplied

5.4: What is Elasticity of Supply?

What Affects Elasticity of Supply

•There are factors that affect the elasticity of supply (just like demand)

–Far fewer than for demand though

•The ease of changing production to respond to price change is the main factor in
determining elasticity of supply

–With enough time, the elasticity of supply increases for most goods and services

–Supply with be more elastic over a year vs. in a day, week, month

•Industries that are able to respond quickly to changes in price by increasing or decreasing
production:

–Don’t require a lot of capital

–Don’t require skilled labor

–Don’t require difficult-to-obtain resources

•For some industries, it takes a long time to shift resources to respond to price
changes

–E.G Automakers, oil refineries