LAW OF SUPPLY
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LAW OF SUPPLY. Quantity OF SUPPLY Goes DOWN. PRICE GOES DOWN. Price Goes Up. Quantity Of Supply Goes Up. UNDERSTANDING SUPPLY. Supply is the amount of goods available. Law of Supply – The higher the price the larger the quantity produced. Example – When do parents buy kids the most?

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Price goes down

LAW OF SUPPLY

Quantity OF SUPPLY Goes DOWN

PRICE GOES DOWN

Price Goes Up

Quantity Of Supply Goes Up


Understanding supply

UNDERSTANDING SUPPLY

  • Supply is the amount of goods available.

  • Law of Supply – The higher the price the larger the quantity produced.

  • Example – When do parents buy kids the most?

    • Suppose that Cabbage Patch dolls sell for $10.00 ea. from January to August but the demand is low therefore producers make a small quantity.

    • For Christmas lots of children want Cabbage patch dolls. Christmas is a hot buying season therefore dolls now sell for $20.00 ea. Producers make more because the profit motive is higher.


Price goes down

  • Quantity Supplied describes how much of a good is offered for sale at a specific price.

    • When the price of goods rise firms produce more in order to earn more profit.

    • The key to profit is that they utilize almost the same labor & output cost.

    • The rise in the price of goods causes new firms to enter into the market.

    • Firms changing their level of output and new firms entering into the market combine to create the Law of Supply.

    • Bottom Line – The more money to be made the higher the supply becomes.


Price goes down

  • If a firm is making a profit an increase in price will automatically bring an increase in profit.

  • A Supply Schedule shows relationship between a price increase of a good and the quantity supplied. (individual firm)

    • Variablesare the factors that can change. See Figure 5.2

    • A supply schedule only deals with price. It shows how the price affects the producer’s output.

  • A Supply Curve – is a graph of the data in a supply schedule.


Price goes down

  • A MarketSupply Schedule lists how much of a good all suppliers will offer at different prices. (all makers of cell phones)

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


Price goes down

SUPPLY SCHEDULE


Price goes down

SUPPLY CURVE

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Quantity of Goods supplied


Price goes down

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Supply Curve

SupplyCurve

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Amount of demand

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Amount Supplied


Understanding elasticity of supply

UNDERSTANDING ELASTICITY OF SUPPLY

  • Unlike consumers, suppliers have to make their products. Their ability to make more products during the time when prices increase determines whether or not a supplier is elastic or inelastic. Time is the main factor to determine whether or not a producer is elastic or inelastic.


Price goes down

  • Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic.

    • A Baker can increase or decrease the amount of cakes baked in a day.

      • His supply is elastic.

    • Marriott hotel wants to take advantage of three straight months of large conventions being held in Macon starting in May.

      • Do they have time to add more rooms to their hotel?

    • If a producer cannot change his supply in a short period of time the supply is inelastic.


Price goes down

  • Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic.

    • Marriott hotel wants to take advantage of three straight months of large conventions being held in Macon starting in September 2011.

      • Do they have time to add more rooms to their hotel?

    • If a producer can change his supply in a period of time to take advantage of the price increase the supply is elastic. Olympics in Atlanta


Price goes down

  • Elasticity of Supply measures the way SUPPLIERS respond to a change in prices.

    • If elasticity is greater than one supply is considered ________

    • If Elasticity is less than one supply is considered ________

    • If Elasticity is equal to one supply is said to be ___________.

The change in quantity supplied

Change in price


Bridge section 1 2

Bridge section 1& 2

  • Quantity supplied only takes into account prices. All other factors remain constant.

    • The producer does not hire any new workers.

    • The producer does not buy any more capital.

    • The cost factor of producing more products are basically constant.

  • In reality producing products there are numerous variables that go along with production.


Costs of production

COSTS OF PRODUCTION

  • Entrepreneurs consider marginal benefits and costs when deciding how much output to produce.

  • Firms earn their highest profit when the cost of making one more unit is the same as the market price of the good.


Costs of production1

COSTS OF PRODUCTION

  • Why do you suppose that some employers increase the work load on its employees instead of hiring help?

  • Labor & Output – how does the number of workers affect production?

    • Marginal Product of Labor – the change in output from hiring one more worker –

      • Why would an employer pay an employee overtime instead of hiring another employee?


Costs of production2

COSTS OF PRODUCTION

  • Labor & Output – how does the number of workers affect production?

    • Marginal Product of Labor – the change in output from hiring one more worker –

    • Recall THINKING AT THE MARGIN!!!

      • Deciding whether to do or add one unit of resource.

      • The marginal product of labor measures the change of output at the margin.

        • How much more will the producer get by hiring one more worker?


Price goes down

  • Increasing Marginal Returns –a level of production in which the marginal product of labor (what is being made) increases as the number of workers increase.

    • More workers equal greater production

    • More workers can specialize thereby creating EFFICIENCY.

  • Diminishing Marginal Returns - a level of production in which the marginal product of labor decreases as the number of workers increase.

    • More workers equals less production.


Production costs

Production Costs

  • Fixed costs – a cost that does not change no matter how much goods are produced.

  • Variable Costs – costs that rise or fall depending on the quantity produced.

  • Total costs – the fixed costs and variables costs added together find the total cost.

  • Marginal cost - is the additional cost to produce one more unit.


Production costs1

Production Costs

  • Marginal revenue – the additional income from selling one more unit; sometimes equal to the price

  • Operating Costs – the cost of operating a facility


Changes in supply

CHANGES IN SUPPLY

  • Changes in the costs of Inputs can raise or lower the supply of a good at all prices.

  • The number of firms in a market and the price and supply of other goods can also have an effect on the supply of a good.


Price goes down

  • Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply.

    • A rise in the cost of an input will cause a fall in supply at all levels because the good has become more expensive to produce.

    • A fall in the cost of input will cause an increase of supply at all levels.

    • Effect of Rising costs –

      • Rising costs affect the relationship between marginal revenue & marginal cost.

      • Marginal costs includes the cost of the inputs that go into production.


Price goes down

  • Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply.

    • Effect of Rising costs –

      • Rising costs affect the relationship between marginal revenue & marginal cost.

      • Marginal costs includes the cost of the inputs that go into production.

      • If the cost of an input increases marginal cost increases so firms decrease the supply in order to MAXIMIZE PROFITS, to get the marginal cost to equal the marginal revenue.


Price goes down

  • Inputs - any change in the cost of an input used to produce a good - such as raw materials, machinery, or labor – will affect supply.

    • Technology – can lower costs of production by simplifying tasks, performing jobs more efficiently, and cutting the costs of salaries.

  • Government’s Influence on Supply – the government can raise or lower supplies by …

    • Raising or lowering the costs of producing goods


Price goes down

  • Government’s Influence on Supply – the government can raise or lower supplies by …

    • Raising or lowering the costs of producing goods through…

      • Regulations – a government intervention in a market that affects price.

      • Subsidies – a government payment that supports a business or market.

      • Taxes – a government can reduce or raise the supply of good by placing or removing an excise tax, a tax on the production or sale of a good.


Price goes down

  • Other Influences on Supply –

    • Future expectations of prices – if prices are expected to increase a firm will decrease the supply. If prices are expected to decrease firms will increase the supply.

    • Number of suppliers – if more suppliers enter the market the quantity of the supply of goods will rise.


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