SupplySupply

1212thth Economics Economics

SupplySupply

Supply – the amount of goods availableSupply – the amount of goods available Law of Supply – tendency of suppliers to Law of Supply – tendency of suppliers to

offer more of a good at a higher price.offer more of a good at a higher price. Quantity Supplied – the amount a supplier Quantity Supplied – the amount a supplier

is willing and able to supply at a certain is willing and able to supply at a certain price.price.

SupplySupply

As Price increases...Quantity SuppliedAs Price increases...Quantity Supplied

As Price falls...Quantity SuppliedAs Price falls...Quantity Supplied

How is the law of Supply different How is the law of Supply different from the law of Demand?from the law of Demand?

Supply SchedulesSupply Schedules

Supply Schedule – a chart that lists how Supply Schedule – a chart that lists how much of a good a supplier will offer at much of a good a supplier will offer at different prices.different prices.

Variable – a factor that can change.Variable – a factor that can change. Market Supply Schedule – a chart that lists Market Supply Schedule – a chart that lists

how much of a good all suppliers will offer how much of a good all suppliers will offer at different prices.at different prices.

Supply ScheduleSupply Schedule

Price per slice of Price per slice of pizzapizza

Slices supplied per Slices supplied per dayday

$ .50$ .50 100100

$ 1.00$ 1.00 150150

$ 1.50$ 1.50 200200

$ 2.00$ 2.00 250250

$ 2.50$ 2.50 300300

$ 3.00$ 3.00 350350

Market Supply ScheduleMarket Supply Schedule

Price per slice of pizzaPrice per slice of pizza Slices supplied per daySlices supplied per day

$ .50$ .50 1,0001,000

$ 1.00$ 1.00 1,5001,500

$ 1.50$ 1.50 2,0002,000

$ 2.00$ 2.00 2,5002,500

$ 2.50$ 2.50 3,0003,000

$ 3.00$ 3.00 3,5003,500

How does this market supply schedule compare to the individual supply schedule?

Supply CurvesSupply Curves

Supply Curve – a graph of the quantity Supply Curve – a graph of the quantity supplied of a good at different prices.supplied of a good at different prices.

Market Supply Curve – a graph of the Market Supply Curve – a graph of the quantity supplied of a good by all suppliers quantity supplied of a good by all suppliers at different prices.at different prices.

Individual Supply CurveIndividual Supply Curve

0

0.5

1

1.5

2

2.5

3

50 100 150 200 250 300 350 400

Output (slices per day)

Pri

ce Individual SupplyCurve

Market Supply CurveMarket Supply Curve

0

0.5

1

1.5

2

2.5

3

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Output (slices per day)

Pri

ce

Market Supply Curve

How many slices will one pizzeria produce a $2.00 a slice?

Elasticity of SupplyElasticity of Supply

Elasticity of Supply – a measure of the Elasticity of Supply – a measure of the way quantity supplied reacts to a change way quantity supplied reacts to a change in price.in price.

The key to elasticity is time…The key to elasticity is time… In the short term, a firm cannot easily change In the short term, a firm cannot easily change

its output level, so supply is inelastic.its output level, so supply is inelastic. In the long run, firms are more flexible, so In the long run, firms are more flexible, so

supply is more elastic.supply is more elastic.

Elasticity of SupplyElasticity of Supply

Inelastic – describes demand that is not very Inelastic – describes demand that is not very sensitive to a change in price.sensitive to a change in price. Your demand for a good that you will keep buying Your demand for a good that you will keep buying

despite an increase in price.despite an increase in price. Examples: Prescription Drugs, Milk, ElectricityExamples: Prescription Drugs, Milk, Electricity

Elastic – describes demand that is very sensitive Elastic – describes demand that is very sensitive to a change in price.to a change in price. You buy much less of a good after a small price You buy much less of a good after a small price

increase.increase. Examples: Cars, Bread, JeansExamples: Cars, Bread, Jeans

Elasticity of SupplyElasticity of Supply

If supply is inelastic, how will supply If supply is inelastic, how will supply react to a small increase in price?react to a small increase in price?

In groups answer the following In groups answer the following questions…questions…

If the price of oil rises around the world, what will If the price of oil rises around the world, what will happen to oil production in Texas? Explain your happen to oil production in Texas? Explain your answer.answer.

Explain whether you think the supply of the Explain whether you think the supply of the following goods is elastic or inelastic, and why. following goods is elastic or inelastic, and why.

Hotel RoomsHotel RoomsTaxi RidesTaxi RidesPhotographsPhotographs

How do market supply schedules compare to How do market supply schedules compare to individual supply schedules?individual supply schedules?

Costs of ProductionCosts of Production

Chapter 5 Section 2Chapter 5 Section 2

Costs of ProductionCosts of Production

Marginal Product of laborMarginal Product of labor – the change in – the change in output from hiring one additional unit of laboroutput from hiring one additional unit of labor

Increasing marginal returnsIncreasing marginal returns – a level of – a level of production in which the marginal product of labor production in which the marginal product of labor increases as the number of workers increasesincreases as the number of workers increases

Diminishing marginal returnDiminishing marginal return – a level of – a level of production in which the marginal product of labor production in which the marginal product of labor decreases as the number of workers increasesdecreases as the number of workers increases

Marginal Product of LaborMarginal Product of LaborLabor (number of Labor (number of

Workers)Workers)Output Output

(beanbags per (beanbags per hour)hour)

Marginal Marginal product of product of

laborlabor

00 00 ------------

11 44 44

22 1010 66

33 1717 77

44 2323 66

55 2828 55

66 3131 33

77 3232 11

88 3131 -1-1

Increasing, Diminishing, and Increasing, Diminishing, and Negative Marginal ReturnsNegative Marginal Returns

-3-2-101234567

Marginal product of

labor (beanbags per hour)

1 2 3 4 5 6 7 8 9

Labor (# of workers)

Marginal Returns

AssignmentAssignment

In Blue Workbooks…In Blue Workbooks… Complete page 31 on your own paper.Complete page 31 on your own paper. This will be checked for accuracy!This will be checked for accuracy!

Production CostsProduction Costs

Fixed Cost – a cost that does not change, no Fixed Cost – a cost that does not change, no matter how much of a good is produced.matter how much of a good is produced. Ex. Rent, property taxes, machinery repairsEx. Rent, property taxes, machinery repairs

Variable Cost – a cost that rises or falls Variable Cost – a cost that rises or falls depending on how much is produced.depending on how much is produced. Ex. Cost of hiring additional workersEx. Cost of hiring additional workers

Total Cost – fixed costs plus variable costs.Total Cost – fixed costs plus variable costs. Marginal Cost – the cost of producing one more Marginal Cost – the cost of producing one more

unit of a good.unit of a good.

SupplySupply

Marginal RevenueMarginal Revenue – the additional – the additional income from selling one more unit of a income from selling one more unit of a good; sometimes equal to price For good; sometimes equal to price For example, if the 5 beanbag in $7 and the example, if the 5 beanbag in $7 and the market price is $24 so the marginal market price is $24 so the marginal revenue is $24. The $17 price difference revenue is $24. The $17 price difference represents pure profit for the company. represents pure profit for the company.

Operating costOperating cost – the cost of operating a – the cost of operating a facility such as a store or factory.facility such as a store or factory.

AssignmentAssignment

Complete the Section 2 Assessment.Complete the Section 2 Assessment.

Changes in SupplyChanges in Supply

Chapter 5 Section 3Chapter 5 Section 3

Changes in SupplyChanges in Supply

Any change in the cost of an input will Any change in the cost of an input will affect the supply.affect the supply. Input – something used to produce a goodInput – something used to produce a good

Government’s Influence on SupplyGovernment’s Influence on Supply

By rising or lowering the cost of producing By rising or lowering the cost of producing goods, the government can encourage or goods, the government can encourage or discourage a business.discourage a business.

Subsidy – a government payment that supports Subsidy – a government payment that supports a business or market.a business or market.

Ex. Farmers, small business ownersEx. Farmers, small business owners Excise Tax – a tax on the production or sale of a Excise Tax – a tax on the production or sale of a

goodgood Regulation – government intervention in a Regulation – government intervention in a

market that affects the production of a goodmarket that affects the production of a good

Other Influences on SupplyOther Influences on Supply

Future expectations of pricesFuture expectations of prices Expectations of higher prices will reduce Expectations of higher prices will reduce

supply now and increase supply later.supply now and increase supply later. Expectations of lower prices will have the Expectations of lower prices will have the

opposite effect.opposite effect. Inflation – is a condition of rising prices.Inflation – is a condition of rising prices.

During periods of inflation, the value of cash During periods of inflation, the value of cash in a person’s pocket decreases from day to in a person’s pocket decreases from day to day as prices rise.day as prices rise.

Number of SuppliersNumber of Suppliers

Finally the number of suppliers in a market Finally the number of suppliers in a market can affect the supply.can affect the supply. If more suppliers enter a market to produce a If more suppliers enter a market to produce a

certain good, the market supply of the good certain good, the market supply of the good will rise, and the supply curve will shift to the will rise, and the supply curve will shift to the right.right.

If suppliers of a good leave the market the If suppliers of a good leave the market the effect will be opposite.effect will be opposite.

AssignmentAssignment

Look on page 117 in your book.Look on page 117 in your book. Modeling Figure 5.12, draw a supply curve Modeling Figure 5.12, draw a supply curve

for an Increase in supply and a Decrease for an Increase in supply and a Decrease in supply.in supply.

Work on group projects.Work on group projects.