Chapter 5Chapter 5

SupplySupply

Section 1 What Is Supply?Section 1 What Is Supply?

• What are five services or goods that What are five services or goods that you supply to people in life? Please you supply to people in life? Please tell me the benefit others receive tell me the benefit others receive from your good or service and the from your good or service and the cost. How would you willingness to cost. How would you willingness to supply those things be affected if the supply those things be affected if the cost and rewards changed?cost and rewards changed?

• Demand seems to deal more with Demand seems to deal more with consumers, so supply will deal more consumers, so supply will deal more with producers. with producers.

• In this chapter we will discuss why In this chapter we will discuss why producers want to supply goods and producers want to supply goods and services at the highest price possibleservices at the highest price possible

• Supply- the desire and ability to Supply- the desire and ability to produce and sell a productproduce and sell a product

• IN order to supply goods and IN order to supply goods and services, we have to have that services, we have to have that willingness and ability to do sowillingness and ability to do so

Ex.Ex.

• Joe owns a clothing store. If the Joe owns a clothing store. If the prices of his clothes are too low, he prices of his clothes are too low, he can’t pay for his product; he can’t can’t pay for his product; he can’t pay his workers or his building lease. pay his workers or his building lease. Without prices being high enough to Without prices being high enough to pay all the expenses, Joe is not pay all the expenses, Joe is not willing or able to provide his goodswilling or able to provide his goods

Price is a major factor with Price is a major factor with supplysupply

• Law of supply- when prices decrease, Law of supply- when prices decrease, quantity supplied decreases. When quantity supplied decreases. When prices increase, quantity supplied prices increase, quantity supplied increases.increases.

• Why do you think this law is true?Why do you think this law is true?

ExampleExample

• Mr. V owns a used car Mr. V owns a used car dealership. The blue book dealership. The blue book price on 2004 SUV’s has price on 2004 SUV’s has dropped by $1,500.00. Mr. dropped by $1,500.00. Mr. V will put less SUV’S on the V will put less SUV’S on the lot because his chances of lot because his chances of making profit have making profit have decreased. The price of decreased. The price of sedans have stayed the sedans have stayed the same, so Mr. V will put same, so Mr. V will put more sedans on the lotmore sedans on the lot

• Even I higher prices mean higher Even I higher prices mean higher costs to make the product, the costs to make the product, the potential to make more profit is still potential to make more profit is still higher than for cheaper priced higher than for cheaper priced goods.goods.

• Price and Quantity supplied go hand Price and Quantity supplied go hand in handin hand

• Higher Price= more quantity supplied Higher Price= more quantity supplied and more profit. Lower Price= less and more profit. Lower Price= less quantity supplied and less profitquantity supplied and less profit

Why do price and supply have Why do price and supply have a direct relationship?a direct relationship?

• Ans- Because producers will supply Ans- Because producers will supply more of something if they can make more of something if they can make more money by selling at a higher more money by selling at a higher price.price.

• Why do producers and consumers Why do producers and consumers have different attitudes towards price?have different attitudes towards price?

• Ans- producers want to make money Ans- producers want to make money and consumers want to save money.and consumers want to save money.

Supply Schedule and Market Supply Schedule and Market Supply ScheduleSupply Schedule

• Refer to pg 132-133Refer to pg 132-133• Supply Schedules are tables that Supply Schedules are tables that

show how much an individual show how much an individual producer is willing and able to sell at producer is willing and able to sell at each given priceeach given price

• Market Supply Schedules are tables Market Supply Schedules are tables that show how much all producers that show how much all producers are willing and able to sell a good or are willing and able to sell a good or service at a given priceservice at a given price

• Remember, when price goes up Remember, when price goes up quantity supplied goes up and when quantity supplied goes up and when price goes down quantity supplied goes price goes down quantity supplied goes down.down.

• If producers want to research prices for If producers want to research prices for a market schedule, they research what a market schedule, they research what others are selling at or check with others are selling at or check with various gov’t or trade organizationsvarious gov’t or trade organizations

Supply and Market Supply Supply and Market Supply CurvesCurves

• Refer to pages 134-135 in textRefer to pages 134-135 in text• Supply Curves- show data from the Supply Curves- show data from the

supply schedule on how much of a supply schedule on how much of a good or service an individual producer good or service an individual producer is willing and able to offer for sale at is willing and able to offer for sale at each priceeach price

• Market Supply Curves- show data from Market Supply Curves- show data from the market supply schedule where all the market supply schedule where all producers are willing and able to sell a producers are willing and able to sell a good or service at a certain price.good or service at a certain price.

• Remember, both supply curves and Remember, both supply curves and market supply curves show the law market supply curves show the law of supply graphically.of supply graphically.

• Refer to page 136 in the text NBA Refer to page 136 in the text NBA international playersinternational players

Section 2 What Are The Costs Section 2 What Are The Costs of Production?of Production?

• What costs might a pro sports team What costs might a pro sports team have to pay to supply their service?have to pay to supply their service?

How Labor Affects How Labor Affects ProductionProduction• Will hiring one more worker improve Will hiring one more worker improve

production?production?• Producers use Marginal Product to Producers use Marginal Product to

determine if the cost of one more determine if the cost of one more worker is less than the benefit of worker is less than the benefit of more being producedmore being produced

• Marginal Product- the change in total Marginal Product- the change in total output brought about by adding one output brought about by adding one more workermore worker

ExampleExample

• Mr. V owns a sweatshop Mr. V owns a sweatshop making hooded sweatshirts. making hooded sweatshirts. He employs 10 workers. He employs 10 workers. Some workers sew, some cut Some workers sew, some cut fabric, and some box the fabric, and some box the product. I am producing 40 product. I am producing 40 hoodies a day. I decide to hoodies a day. I decide to hire one more worker and my hire one more worker and my output rises to 55 hoodies a output rises to 55 hoodies a day. My marginal product day. My marginal product would be 15 hoodies.would be 15 hoodies.

Why would output rise so Why would output rise so much?much?

• Ans- That one worker was able to Ans- That one worker was able to free up a few workers who can free up a few workers who can concentrate more on areas of concentrate more on areas of production they are better at, leading production they are better at, leading to more hoodies made.to more hoodies made.

• This is called specialization, having a This is called specialization, having a worker focus on a particular aspect worker focus on a particular aspect of production.of production.

Marginal Product ScheduleMarginal Product Schedule

• Refer to page 139Refer to page 139

• These schedules show the relationship These schedules show the relationship between labor and marginal productbetween labor and marginal product

• Sometimes more workers lead to more Sometimes more workers lead to more output. Why could to many workers output. Why could to many workers lead to less output and higher costs lead to less output and higher costs outweighing the benefits?outweighing the benefits?

• At some point the more workers we At some point the more workers we have the more marginal product have the more marginal product increases. This is call increasing increases. This is call increasing returns.returns.

• Eventually, if you hire to many people Eventually, if you hire to many people the workplace becomes disorganized, the workplace becomes disorganized, which could lead to diminishing returns, which could lead to diminishing returns, where new hires cause marginal product where new hires cause marginal product to dropto drop

• Any businesses goal is to make profit, Any businesses goal is to make profit, but first they have to pay the costs.but first they have to pay the costs.

• There are fixed costs- costs that There are fixed costs- costs that businesses owners must pay no matter businesses owners must pay no matter what. Ex. Taxes, rent, mortgage, what. Ex. Taxes, rent, mortgage, insurance.insurance.

• Variable Costs- these vary according to Variable Costs- these vary according to the amount of production and output. the amount of production and output. Ex. Workers wages, supplies, increased Ex. Workers wages, supplies, increased utility costs as you make more, shipping utility costs as you make more, shipping costscosts

• As you decrease supply of your product, As you decrease supply of your product, those variable cost decrease as wellthose variable cost decrease as well

• Total Cost- the sum of all fixed and Total Cost- the sum of all fixed and variable costs. Just add those up to variable costs. Just add those up to figure out total costfigure out total cost

• Marginal Cost- the extra cost of Marginal Cost- the extra cost of producing one more unit of your good or producing one more unit of your good or service. service.

• You calculate this by You calculate this by change in total change in total costcost

change in total productchange in total product

Ex. What does it cost to make just one Ex. What does it cost to make just one more hooded sweatshirt? more hooded sweatshirt?

• To figure out how much revenue your To figure out how much revenue your business is making you calculate-business is making you calculate-

• Price X Quantity= Total RevenuePrice X Quantity= Total Revenue• Marginal Revenue is the price you Marginal Revenue is the price you

sell each product at.sell each product at.• Now you want to find out how much Now you want to find out how much

profit you have made. Subtract Total profit you have made. Subtract Total Costs by the Total RevenueCosts by the Total Revenue

Does The Cost Outweigh The Does The Cost Outweigh The Benefit?Benefit?

• Finally, you want to use Cost/Benefit Finally, you want to use Cost/Benefit or Marginal Analysis to see if the cost or Marginal Analysis to see if the cost outweighs the benefit. You do this outweighs the benefit. You do this by looking at number you get from by looking at number you get from subtracting the Total Costs from the subtracting the Total Costs from the Total Revenue.Total Revenue.

• When you reach the point you are When you reach the point you are making maximum profit, you have making maximum profit, you have reached profit maximizing outputreached profit maximizing output

Section 3 What Factors Affect Section 3 What Factors Affect Supply?Supply?

• Price is the biggest factor in quantity Price is the biggest factor in quantity suppliedsupplied

• Change in Quantity Supplied- an Change in Quantity Supplied- an increase or decrease in the amount increase or decrease in the amount of a good or service that producers of a good or service that producers are willing to sell because of a are willing to sell because of a change in pricechange in price

• When we look a supply curves, we When we look a supply curves, we see that at each point we have a see that at each point we have a change in quantity suppliedchange in quantity supplied

• When the supply curve moves to the When the supply curve moves to the right, price goes up and quantity right, price goes up and quantity supplied goes up.supplied goes up.

• When the supply curve moves to the When the supply curve moves to the left price goes down and quantity left price goes down and quantity supplied goes downsupplied goes down

• Change in supply occurs when a Change in supply occurs when a change in the market place prompts change in the market place prompts producers to sell different amounts producers to sell different amounts at different pricesat different prices

6 Factors That Affect Supply6 Factors That Affect Supply

Factor 1- Input Costs Factor 1- Input Costs

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

Ex. Price of steel Ex. Price of steel increases, so Ford will increases, so Ford will make less cars. This make less cars. This causes the supply curve causes the supply curve to shift left. If prices of to shift left. If prices of steel decreases the steel decreases the curve moves to the rightcurve moves to the right

Factor 2- Labor ProductivityFactor 2- Labor Productivity

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

• Well trained and Well trained and educated workers educated workers are specialized and are specialized and can make more for can make more for less than unskilled less than unskilled workersworkers

Factor 3- TechnologyFactor 3- Technology

• Technology is used Technology is used to make goods and to make goods and services more services more efficiently, which efficiently, which leads to increased leads to increased supply.supply.

• Ex. Henry Ford and Ex. Henry Ford and his assembly linehis assembly line

Factor 4- Gov’t ActionFactor 4- Gov’t Action

• This can affect production in both a This can affect production in both a positive and negative way. Taxes can lead positive and negative way. Taxes can lead to increased production costs. This can to increased production costs. This can also decrease your quantity supplied.also decrease your quantity supplied.

• Subsidies Increase Supply- gov’t subsidies Subsidies Increase Supply- gov’t subsidies help pay for operation costs and help pay for operation costs and encourage economic activity.encourage economic activity.

• Ex. Gov’t gives a subsidy to finance a Ex. Gov’t gives a subsidy to finance a factory in Aliquippafactory in Aliquippa

ContinuedContinued

• Gov’t regulation of business and Gov’t regulation of business and safety can also have an affect. safety can also have an affect.

• Gov’t sets rules and laws on trade, Gov’t sets rules and laws on trade, safety, and business. This can also safety, and business. This can also affect supply.affect supply.

• Ex. Worker safety regulations might Ex. Worker safety regulations might decrease supply by increasing decrease supply by increasing production costs.production costs.

Factor 6- Number of Factor 6- Number of ProducersProducers• When one When one

business idea is business idea is profitable, profitable, others run to others run to create the same create the same good or service. good or service.

• This increases This increases overall supply of overall supply of that productthat product

• Ex. Cell Phone Ex. Cell Phone IndustryIndustry

Section 4- What Is Elasticity of Section 4- What Is Elasticity of Supply?Supply?

• Elasticity of Supply- a measure of how Elasticity of Supply- a measure of how responsive producers are to price responsive producers are to price changeschanges

• If a change in price leads to a 10% larger If a change in price leads to a 10% larger change in quantity supplied, supply is change in quantity supplied, supply is then elastic.then elastic.

• If a change in price leads to a small If a change in price leads to a small change in quantity supplied it is inelasticchange in quantity supplied it is inelastic

• Elastic Goods- TV’SElastic Goods- TV’S

• Inelastic Goods- Inelastic Goods- Hybrid CarsHybrid Cars

• Unit Elastic is when Unit Elastic is when price change and price change and quantity supplied quantity supplied move the same move the same exact percentageexact percentage

What Affects Elasticity of What Affects Elasticity of Supply?Supply?

• Overtime elasticity of supply changes Overtime elasticity of supply changes for most products.for most products.

• Ex. HD TV’SEx. HD TV’S

• Producers that can change price and Producers that can change price and output quickly can effect elasticity as output quickly can effect elasticity as well.well.