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Economics Chapter 5

Notes Chapter 5 Section 1 – What is Supply?

The Law of Supply

  • Key Concepts
    • Supply:  the willingness and ability to produce and sell a product.
      • Anyone who provides goods or services is a producer.
        • Examples: manufacturers, farmers, retailers, utility companies, airlines, etc.
    • The two key words in the definition of supply are willingness and ability.
      • For example:
        • A family owns a small farm where they grow fruits and vegetables.
        • They sell their produce at a local farmers’ market.
        • If the prices at the market are too low, the family may not be willing to take on the expense of growing and transporting their produce.
        • Also, if the weather is bad and the crops are ruined, they will not be able to supply anything for the market.
    • Just like with demand, PRICE is a major factor that influences supply.
    • Law of Supply:  states that when prices decrease, quantity supplied decreases, and when prices increase, quantity supplied increases.
      • Producers want to earn profit, so when the price of a good or service rises they are willing to supply more of it.
      • When the price falls, they want to supply less of it.
      • Price and quantity supplied have a DIRECT RELATIONSHIP.

 

 

 

 


 

    As prices falls…                 …quantity supplied falls               As prices rise…         …quantity supplied rises

  • What kind of relationship does demand have?
    • INVERSE RELATIONSHIP
      • As price goes up quantity demanded goes down.
      • As price goes down quantity demanded goes up.

 

  • Example Price and Supply
    • Let’s go back to our farming example
      • The farmers have a specialty product they are known for producing – Tomatoes
        • They know the standard price for tomatoes is $1/pound.
        • They decide they are willing and able to sell 24 pounds of Tomatoes.
        • How much would they make?
          • $24
      • What if the standard price of tomatoes went up to $2/pound? – SHOW ARROWS
        • The farmer may decide that prices is good and may be willing to offer 50 pounds of tomatoes instead.
      • What if the standard price of tomatoes fell to $0.50/pound? – SHOW ARROWS
        • The farmer may decide to supply only 10 pounds of tomatoes.
  • Why do price and supply have a direct relationship?
    • Producers will supply more of something if they can make more money by selling it at a higher price.
  • Why do producers and consumers have different attitudes towards price?
    • Producers want to make money by charging higher prices while consumers want to save money by paying lower prices.

Supply Schedules

  • Supply Schedule:  lists how much of a good or service an individual producer is willing and able to off for sale at each price.
    • Example:  Farmer’s Tomato Supply Schedule:

 

Price per pound ($)

Quantity Supplied (in pounds)

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  • How many pounds of tomatoes are farmers willing to produce at $1.75?
    • 40
  • This shows that quantity supplied depends on price.
  • Market Supply Schedule: lists how much of a good or service all producers in a market are willing and able to offer for sale at each price.
    • Instead of looking at just one farm and their willingness and ability to supply tomatoes a market supply schedule would look at something like the entire farmers’ market.
    • It shows he quantity supplied by ALL of the producers who are willing and able to sell tomatoes.

 

Price per pound ($)

Quantity Supplied (in pounds)

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  • Notice that this market supply schedule is similar to our individual demand schedule, BUT the quantities supplied are much larger.
  • What is the quantity supplied at $1.25?
    • 200 tomatoes
  • How does the quantity supplied of tomatoes change when the price rises from $0.75/pound to $1.75/pound?
    • It increases from 100 to 300
  • Try this – Practice creating a supply schedule
    • In your notebook solve the following problem:
      • Imagine you own a health food store that sells several kinds of granola bars.  Create a supply schedule showing how many bars you would be willing to sell each month at the prices of $1, $2, $3, $4, and $5.  Use the table to help you.

 

Price ($)

Quantity Supplied

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Price ($)

Quantity Supplied

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  • Supply schedules should reflect the law of supply by showing higher quantities supplied at higher prices and lower quantities supplied at lower prices.

Supply Curves

  • Supply curve:  shows the data from a supply schedule in graph form.
    • How is a supply curve related to a supply schedule?
      • A supply curve is the representation on a line graph of the information from the supply schedule.

 

Price per pound ($)

Quantity Supplied (in pounds)

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Individual Supply Curve - Tomatoes

 

 

Price per pound ($)

$2.00

 

 

 

 

 

 

$1.75

 

 

 

 

 

 

$1.50

 

 

 

 

 

 

$1.25

 

 

 

 

 

 

$1.00

 

 

 

 

 

 

$0.75

 

 

 

 

 

 

$0.50

 

 

 

 

 

 

 

0

10

20

30

40

50

Quantity Supplied (in pounds)

 

  • What does the supply curve look like?
    • It slopes upright / Increases.
  • What do the points on the supply curve represent?
    • The quantity supplied at each price.

 

  • Market supply curve:  shows the data from a market supply schedule in graph form.

 

Price per pound ($)

Quantity Supplied (in pounds)

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Tomato market Supply Curve

Price per pound ($)

$2.00

 

 

 

 

 

 

 

 

$1.75

 

 

 

 

 

 

 

 

$1.50

 

 

 

 

 

 

 

 

$1.25

 

 

 

 

 

 

 

 

$1.00

 

 

 

 

 

 

 

 

$0.75

 

 

 

 

 

 

 

 

$0.50

 

 

 

 

 

 

 

 

 

0

50

100

150

200

250

300

350

Quantity Supplied (in pounds)

 

Exit Ticket:  Using the supply schedule you created for granola bars, create an individual demand schedule.

 

Price ($)

Quantity Supplied

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Price ($)

$5

 

 

 

 

 

 

$4

 

 

 

 

 

 

$3

 

 

 

 

 

 

$2

 

 

 

 

 

 

$1

 

 

 

 

 

 

 

0

10

20

30

40

50

Quantity Supplied

 

Notes Chapter 5 Section 2:  What are the Costs of Production?

Labor Affects Production – Let’s look at why this is.

  • Story
    • Let’s say you own a company that makes custom blue jeans.
    • You have 3 sewing machines and 3 workers.
      • They are able to produces 12 pairs of jeans each day.
    • What would hiring one more person do to production? – probably raise it.
    • You still have 3 sewing machines, but now you have 4 workers.
      • They are able to produce 19 pairs of jeans each day.
    • What is the difference in output (how much is produced) with a 4th worker?
      • 7 pairs
      • (19 pairs – 12 pairs)
        • This difference is called the marginal product
          • Marginal Product:  The change in total output brought about by adding one more worker.
    • Let’s continue with our jean example.
      • Because adding a 4th worker proved to be successful, you decide to add a 5th worker to see what happens to output.
        • This turns out to be a great idea because the output has jumped from 19 to 29 – a marginal product of 10
    • How is the output increasing so much?  Remember you only have the 3 sewing machines, so not everyone can sew at the same time? (Hint:  What do your workers need to do before they can start sewing?)
      • Originally you had 3 workers and 3 sewing machines.
      • These 3 workers had to cut cloth, sew the jeans, package the jeans, and keep the shop clean.
      • The 4th employee helped with the other tasks (cutting, packaging, cleaning).
      • The 5th employee allowed labor to be divided even more efficiently which caused the increase in marginal product.
      • Having each worker focus on a particular facet of production is called specialization.
  • Specialization:  having a worker focus on a particular aspect of production.
  • Does hiring more works always cause marginal product to increase?
    • Not necessarily.
    • What are some problems a business may face if it has too few or too many workers?
      • Too few:
        • Resources are not used to full capacity
        • The company cannot produce as much as it wants
      • Too many:
        • Workers get in each other’s way
        • Not enough work to keep all workers busy.

 

A Jean Marginal Product Schedule

Number of Workers

Total Product

Marginal Product

0

0

0

1

3

3

2

7

4

3

12

5

4

19

7

5

29

10

6

42

13

7

53

11

8

61

8

9

66

5

10

67

1

11

65

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What is this table telling us?

  • Total product continues to increase, but at some point the marginal product begins to decrease.

At what number of workers is total product the highest?

  • 10 (67 total pairs of jeans)

This is your business, how many workers would you ultimately hire based on this table?  Why?

  • Six workers would be the ideal number of workers to hire based on this table because you are creating a large number of total products, and your marginal product is also at its highest.
    • This is probably because there are six tasks involved in creating the jeans: 3 people to sew, 1 person to cut, 1 person to package, 1 person to clean.
      • Each person has a specialized task.
  • However, this table does NOT account for profit level which ultimately would show you how many workers to hire.
  • Increasing Returns:  Occur when hiring new workers cause marginal product to increase.
  • Diminishing Returns:  Occur when hiring new workers causes marginal product to decrease.

Production Costs

  • Remember that producers want to make a profit.  Profit is the money the business gets for selling their products once the money it costs to make the products has been subtracted.
  • Common business costs include:
    • Fixed costs
    • Variable costs
    • Total costs
    • Marginal costs
  • Fixed Costs:  Costs that business owners have no matter how much they produced.
    • These occur whether a business produces nothing, a little, or a lot.
    • In our jeans example, fixed costs include the mortgage on the factory, insurance, management salaries, the cost of machinery, and utilities.
      • These costs are the same whether we are producing no jeans, 3 pairs, or 42 pairs of jeans per day.
  • Variable Costs:  Costs that depend on the level of production output.
    • These are dependent on how much or little a company produces.
    • In our jeans example, variable costs include wages, fabric, thread, zippers, buttons, and shipping costs.
      • The more jeans the factory produces, the more out variable costs will increase.
        • We will may need to hire new workers raising the cost of wages.
        • We may producing more pairs of jeans so we need more supplies to make those jeans.
    • How do changes in variable costs relate to the slope of the demand curve?
      • Since variables costs increase as quantity supplied increases, a producer will only supply more product if he or she can charge a higher prices to cover the costs.
  • Total Cost: The sum of fixed and variable costs (Fixed costs + Variable costs = total cost)
    • Example:  Complete the Jeans production chart.

 

Fixed Costs

Variable Costs

Total Cost

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  • Marginal Costs:  The extra cost of producing one more unit.
  • How do we calculate Marginal Costs?
    • Marginal Costs = Change in total cost ÷ Change in total product

 

Number of workers

Total Product

Fixed Costs

Variable Costs

Total Cost

Marginal Cost

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Earning the Highest Profit

  • Marginal Revenue:  The money made from the sale of each additional unit of output
  • Total Revenue:  the company’s income from selling its products. 
    • Formula –
      • Total Revenue = Price x Quantity purchased at that price
  • Profit-maximizing output:  The level of production at which a business realizes the greatest amount of profit.

Chapter 5 Section 3 What Factors Affect Supply?

  • Changes in Quantity Supplied
    • Key Concepts
      • Change in quantity supplied:  A rise or fall in the amount producers offer for sale because of a change in price.
        • For example:  A change in the price of bicycles causes a change in the quantity supplied.
    • Changes along the Supply Curve
      • Each new point on the supply curve shows a change in quantity supplied.
        • A change in quantity supplied does not change the supply curve itself.
      • If you move right along a supply curve there is an increase in both price and quantity supplied.
      • If you move left along a supply curve there is a decrease in both price an quantity supplied.
  • Changes in Supply
    • Key Concepts
      • Change in supply:  Occurs when a change in the marketplace prompts producers to sell different amounts at every price.
        • This will shift the demand curve.
        • When production costs increase, supply decreases, and the supply curve shifts to the left.
        • When production costs decrease, supply increases, and the supply curve shifts to the right.
      • There are 6 factors which shift the entire demand curve:
        • Input Costs
        • Labor Productivity
        • Technology
        • Government Action
        • Producer Expectations
        • Number of Producers
      • Input Costs:  The price of the resources used to make products.
        • Affects supply directly
        • Example:  Willy Wonka makes a chocolate bar that contains peanuts.  If the price of peanuts increase, then costs increase.
          • He cannot afford to produce as many nutrition bars, and her supply curve will shift to the left.
      • Labor Productivity:  The amount of goods and services that a person can produce in a given time.
        • Increasing productivity decreases the costs of production.
          •  This increases supply.
          • Better-trained and more-skilled workers can usually produce more goods in less time, and therefore lower costs.
          • Example:  A business that provides word-processing services can produce more documents if its employees type quickly and have experience with word processing software.
      • Technology:  Applying scientific methods and innovations to production.
        • Helps businesses to improve their productivity and increase supply.
        • Technology helps make goods more efficiently.
        • Example:  Increased automation, including the use of robots, has led to increased supplies of automobiles.
      • Government Action
        • Government action can affect the costs of production both positively and negatively.
        • Excise tax:  A tax on the making or selling of certain goods or services.
          • Often placed on items like alcohol and tobacco – things the government is trying to discourage people from using.
          • These taxes increase a producers’ costs and decrease the supply.
        • Subsidy:  A government payment that partially covers the cost of an economic activity.
          • Its purpose is to encourage or protect that activity.
          • Example:  Subsidies helped to double the supply of ethanol, a gasoline substitute made from corn.
        • Regulation:  a set of rules or laws designed to control business behavior.
          • These can also affect supply.
          • Example:  Banning a certain pesticide might decrease the supply of the crops that depend on the pesticide.
      • Producer Expectations:  The amount of product producers are willing and able to supply may be influenced by whether they believe prices will go up or down.
        • If producers expect the price of their product to rise or fall in the future, it may affect how much of that product they are willing and able to supply.
        • Example:  If a farmer expects the price of corn to be higher in the future, he or she may store some of the current crop, thereby decreasing supply.
      • Number of Producers:  A successful new product or service always brings out competitors who initially raise overall supply.
        • An increase in the number of producers means increased competition.
        • This will eventually drive less-efficient producers out of the market, decreasing supply.
        • Competition has a major impact on supply as producers enter and leave the market all of the time.

 

Chapter 5 Section 3 – What is Elasticity of Supply?

  • Elasticity of supply
    • Key concepts
      • Elasticity of supply:  a measure of how responsive producers are to price changes in the marketplace.
    • Elastic Supply:  If a change in price leads to a relatively LARGE change in quantity supplied supply is elastic.
      • Example:  If a 10% increase in price causes greater then a 10% change in quantity supplied, supply is elastic.
    • Inelastic Supply:  If a change in pries leads to a relatively smaller change in quantity supplied supply is inelastic.
  • What Affects Elasticity of Supply?
    • The ease of changing production to respond to price change is the main factor in determining elasticity of supply.
    • Example:  Industries that are able to respond quickly to changes by  increasing or decreasing production are those that don’t require a lot of capital, skilled labor, or hard to find resources.
      • The quantity supplied of a dog-walking service can increase rapidly with the addition of more people to walk dogs.
    • Example:  Industries that take a great deal of time to shift the resources of production to respond to price changes.
      • Automakers rely on large capital outlays or difficult to find resources.
        • It might take such suppliers a considerable amount of time to respond to price changes.
    • Given enough time, the elasticity of supply increases for most goods and services.

 

 

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