Homework: Ch 5 Review due next

week

FrontPage: NNIGN

21 Inane Baby Products For Questionable  Parents

SUPPLY: LAWS AND COSTS

Chapter 5, Section 1

Supply

• Supply refers to the willingness and ability of producers to offer goods and services for sale.

The Law of Supply

• States that producers are willing to sell more of a good or service at a higher price than they are at a lower price.– When prices decrease, quantity supplied

decreases. P QS – When prices increase, quantity supplied

increases. P QS

The Law of Supply – really? Yep.• When college students learn computer engineering

jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase.

• -When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits.

• -When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

Supply Schedules

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

• 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.

Smith Family’s Tomato Supply Schedule

Price per Pound ($)

Quantity Supplied (in lbs.)

2.00 50

1.75 40

1.50 34

1.25 30

1.00 24

0.75 20

0.50 10

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 in a market.

• A market supply curve is a graph 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.

Smith Family’s Tomato Supply Curve

0 10 20 30 40 50

Pric

e pe

r po

und

($)

.50

.75

1.00

.25

1.25

1.50

1.75

2.00

Quantity supplied of tomatoes (lbs.)

Practice

Hint: this impacts supply…

Chapter 5, Section 2

COSTS OF PRODUCTION

• Labor is a cost for producers• Question: Will more labor always = more

output?– Short answer – NO– Marginal Cost is the extra cost of producing

one more unit.– Marginal product is the change in total output

brought about by adding one more worker.– A marginal product schedule shows the

relationship between labor and marginal product.

LABOR

Marginal Product ScheduleNumber of Workers Total Product Marginal Product

0 0 0

1 3 3

2 7 4

3 12 5

4 19 7

5 29 10

6 42 13

7 53 11

8 61 8

9 66 5

10 67 1

11 65 -2

Increasing returns occur when hiring new workers

causes marginal product to increase

Diminishing returns occur when hiring new workers

causes marginal product to decrease

• Fixed costs are expenses that the business owner must pay no matter how much or little they produce– Lighting in factory, rent for store, machinery, etc.– These don’t change in the short run

• Variable costs depend on the level of production output.– Wages/salaries and raw materials are a good

example of this– These do change as production level changes

• Total cost is the sum of fixed and variable costs.

COSTS

Fixed costs and variable costs

• Michael, Pam and Ryan leave Dunder Mifflin paper company to strike out on their own…– Selling paper themselves, delivering it

themselves (at 5am), they have managed to undercut the prices of Dunder Mifflin, Staples, all the other competition.

– They visit a financial advisor to find out whether they can hire a delivery guy to take care of some of those 5am deliveries…

– http://economicsoftheoffice.com/all/?jel=D24

Production Cost ScheduleNumber of Workers

Total Product

Fixed Costs ($)

Variable Cost ($)

Total Cost ($)

Marginal Cost ($)

0 0 40 0 40 ---

1 3 40 30 70 10

2 7 40 62 102 8

3 12 40 97 137 7

4 19 40 132 172 5

5 29 40 172 212 4

6 42 40 211 251 3

7 53 40 277 317 6

8 61 40 373 413 12

9 66 40 473 513 20

10 67 40 503 543 30

11 65 40 539 579 ----

Where is highest profit?

Equations for the chart

• Total product = total revenue/marginal rev• Total cost (fixed and variable costs) = profit –

total revenue• Marginal cost = total cost/

total product• Marginal revenue = cost of one unit (price of

item)• Total revenue = product x marginal cost