Chapter 5

Report
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/produc
ts/0-13-3698335/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


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


When elasticity is greater than one, supply is very sensitive
to price changes
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
Rock bands concert tour
1.
1.
1.
1.
7.
Supply of comp. chips for
equip., other supplies
Bakery
3.
Seasonal demand
Price of gold rises what
happens to 2nd hands?
6.
Elastic of Inelastic?
Supply will increase
(@higher prices) to profit
Lawn care
8.
8.
Elastic; entry cost low
Making Movies
9.
Number of dates they
play, seats in arenas
Electronic equipment
maker
2.
8.
8.
Inelastic: expensive and
time consuming
Baseball
10.
8.
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/prod
ucts/0-13-3698335/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


Variable Costs (change w/output)


Rent, machine repair, property taxes, salaries
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


Best way to find Marginal cost of production


Or the additional costs of producing one more unit
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 3
BW: Finish up Critical Thinking
CRITICAL THINKING (122)
1.
Other than reducing staff how would you
recommend improving performance?
1.
2.
Would you add same workers to each facility?
Why/why not?
1.
3.
Add workers faster to larger b/c more capacity
Why would a company make more if its
marginal cost is less than marginal revenue?
1.
4.
Raising Prices, upgrading facilities/equipment, and
encourage specialization to increase productivity
Increasing profit
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


Suppliers leaving market will decrease supply


Curve will shift to right
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!!


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