3/11 - supply
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3/11 - Supply. AIM : How does the law of supply work? Opener : Poll your classmates on the following question. Then present the responses on a graph. - PowerPoint PPT PresentationTRANSCRIPT
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3/11 - Supply• AIM: How does the law of supply work?
• Opener: Poll your classmates on the following question. Then present the responses on a graph.
– Determine how many classmates would sell you the shoes off their feet at each of the following prices: $10, $20, $40, $60, $80, $100, $150
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Law of Supply
• The law of supply states that the higher the price of a good, the larger the quantity produced.
– Existing companies will start making more– New companies will enter the market to get a
share of the profits
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Sample Supply SchedulePrice per slice of pizza Slices supplied per day
$0.50 100
$1.00 150
$1.50 200
$2.00 250
$2.50 300
$3.00 350
(Remember, this is ceteris paribus – the assumption that everything stays constant except for the price.)
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Elasticity of Supply
• When supply is elastic, a small increase in price has a big effect on supply
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Elasticity over time
• Does supply become more or less elastic over time? Why?
Consider this apple orchard
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Elasticity of Supply
• Analyze the following situations to determine how supply is elastic or inelastic in each case:
– The price of milk increases– The price of a hair cut increases– The price of SAT tutoring increases– The price of tickets to a football game increases.
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Challenge:
• Can you come up with examples of goods whose supply curves are extremely inelastic?
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3/12 – Costs of Production
• AIM: How does a company decide how much labor to hire to produce a certain level of output?
• Opener: Review from yesterday – Can you come up with examples of goods whose supply curves are extremely inelastic?
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3/12 – Costs of Production
• AIM: How does a company decide how much labor to hire to produce a certain level of output?
• Homework: Read about marginal returns (p. 108-110. How did today’s exercise illustrate this concept?
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Mickey Mouse Inc.• Company rules:– Only use the tools allocated to your
team. (No personal tools allowed)– No tracing: all of our portraits are
hand drawn with pride!– Incentives: The most productive
teams will receive extra credit.– Each production shift will last for 3
minutes.– At the end of each shift, the shift
leader should organize all finished faces for counting.
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Mickey Mouse Inc.• Shifts:– Round 1: Individual– Round 2: Teams of 4– Round 3: Teams of 8– Round 4: Teams of 16
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3/13 – Costs of Production• AIM: How does a company
decide how much labor to hire to produce a certain level of output?
• Opener: Reflect on yesterday’s exercise. What happened to our production output as we added more people to a team? What conditions helped production? What conditions hurt production?
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Marginal Product of Labor
• In economic terms, “marginal” means “additional”.
• Marginal Product of Labor = the change in output from hiring one more worker.
• Look at the chart on the right. How do you calculate the marginal product of labor?
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Increasing and Diminishing Marginal Returns
Why do marginal returns initially increase, but then start to decrease, and even become negative?
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Marginal Product of Labor – Band 4Labor (number of workers)
Output Output Per Worker Marginal Product of Labor
1 1 1 --
4 4.6 1.2
8 23 2.9
16 13 0.8
Marginal Product of Labor – Band 6Labor (number of workers)
Output Output per worker Marginal Product of Labor
1 1 1 --
4 8.1 2
9 22 2.4
16 38 2.38
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Production Costs: Fixed vs. Variable
• Fixed Cost: A cost that does not change, no matter how much of a good is produced.
• Variable Cost: Costs that rise or fall depending on the quantity produced.
• Marginal Cost: The cost of producing one additional unit
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Production Costs: Fixed vs. Variable
• What are examples of both fixed and variable costs in your daily life?
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Setting Output• How does a company know how much of a
product to produce?
Is there enough information on this chart to determine how many beanbags to produce?
What additional info might you need?
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Setting Output• How does a company know how much of a
product to produce?
Revenue = money the firm gets from selling its product.
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Setting Output• How does a company know how much of a
product to produce?
Profit = Total revenues minus total costs
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Setting Output• Examine the following table. How much
should the company produce if the market price is $10?
Output (units) Fixed Cost Variable Cost
1 $3 $5
2 $3 $8
3 $3 $12
4 $3 $20
5 $3 $31
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Setting Output• What would happen if the market price dropped
to $7?• What would happen if the market price rose to
$11?
Output (units) Fixed Cost Variable Cost
1 $3 $5
2 $3 $8
3 $3 $12
4 $3 $20
5 $3 $31
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Setting Output• Can you see a shortcut to determine the best
output without doing all the math?
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Setting Output• The optimal output is when price (marginal
revenue) is equal to the marginal cost.