Chapter 5

1. Chapter 5 Supply

2. Section 1 What Is Supply? • What are five services or goods that you supply to people in life? Please tell me the benefit others receive from your good or service and the cost. How would you willingness to supply those things be affected if the cost and rewards changed?

3. Demand seems to deal more with consumers, so supply will deal more with producers. • In this chapter we will discuss why producers want to supply goods and services at the highest price possible

4. Supply- the desire and ability to produce and sell a product • IN order to supply goods and services, we have to have that willingness and ability to do so

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

6. Price is a major factor with supply • Law of supply- when prices decrease, quantity supplied decreases. When prices increase, quantity supplied increases. • Why do you think this law is true?

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

8. Even I higher prices mean higher costs to make the product, the potential to make more profit is still higher than for cheaper priced goods. • Price and Quantity supplied go hand in hand • Higher Price= more quantity supplied and more profit. Lower Price= less quantity supplied and less profit

9. Why do price and supply have a direct relationship? • Ans- Because producers will supply more of something if they can make more money by selling at a higher price. • Why do producers and consumers have different attitudes towards price? • Ans- producers want to make money and consumers want to save money.

10. Supply Schedule and Market Supply Schedule • Refer to pg 132-133 • Supply Schedules are tables that show how much an individual producer is willing and able to sell at each given price • Market Supply Schedules are tables that show how much all producers are willing and able to sell a good or service at a given price

11. Remember, when price goes up quantity supplied goes up and when price goes down quantity supplied goes down. • If producers want to research prices for a market schedule, they research what others are selling at or check with various gov’t or trade organizations

12. Supply and Market Supply Curves • Refer to pages 134-135 in text • Supply Curves- show data from the supply schedule on how much of a good or service an individual producer is willing and able to offer for sale at each price • Market Supply Curves- show data from the market supply schedule where all producers are willing and able to sell a good or service at a certain price.

13. Remember, both supply curves and market supply curves show the law of supply graphically. • Refer to page 136 in the text NBA international players

14. Section 2 What Are The Costs of Production? • What costs might a pro sports team have to pay to supply their service?

15. How Labor Affects Production • Will hiring one more worker improve production? • Producers use Marginal Product to determine if the cost of one more worker is less than the benefit of more being produced • Marginal Product- the change in total output brought about by adding one more worker

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

17. Why would output rise so much? • Ans- That one worker was able to free up a few workers who can concentrate more on areas of production they are better at, leading to more hoodies made. • This is called specialization, having a worker focus on a particular aspect of production.

18. Marginal Product Schedule • Refer to page 139 • These schedules show the relationship between labor and marginal product • Sometimes more workers lead to more output. Why could to many workers lead to less output and higher costs outweighing the benefits?

19. At some point the more workers we have the more marginal product increases. This is call increasing returns. • Eventually, if you hire to many people the workplace becomes disorganized, which could lead to diminishing returns, where new hires cause marginal product to drop

20. Any businesses goal is to make profit, but first they have to pay the costs. • There are fixed costs- costs that businesses owners must pay no matter what. Ex. Taxes, rent, mortgage, insurance. • Variable Costs- these vary according to the amount of production and output. Ex. Workers wages, supplies, increased utility costs as you make more, shipping costs • As you decrease supply of your product, those variable cost decrease as well

21. Total Cost- the sum of all fixed and variable costs. Just add those up to figure out total cost • Marginal Cost- the extra cost of producing one more unit of your good or service. • You calculate this by change in total cost change in total product Ex. What does it cost to make just one more hooded sweatshirt?

22. To figure out how much revenue your business is making you calculate- • Price X Quantity= Total Revenue • Marginal Revenue is the price you sell each product at. • Now you want to find out how much profit you have made. Subtract Total Costs by the Total Revenue

23. Does The Cost Outweigh The Benefit? • Finally, you want to use Cost/Benefit or Marginal Analysis to see if the cost outweighs the benefit. You do this by looking at number you get from subtracting the Total Costs from the Total Revenue. • When you reach the point you are making maximum profit, you have reached profit maximizing output

24. Section 3 What Factors Affect Supply? • Price is the biggest factor in quantity supplied • Change in Quantity Supplied- an increase or decrease in the amount of a good or service that producers are willing to sell because of a change in price • When we look a supply curves, we see that at each point we have a change in quantity supplied

25. When the supply curve moves to the right, price goes up and quantity supplied goes up. • When the supply curve moves to the left price goes down and quantity supplied goes down • Change in supply occurs when a change in the market place prompts producers to sell different amounts at different prices

26. 6 Factors That Affect Supply Factor 1- Input Costs The price of resources needed to produce a good or service Ex. Price of steel increases, so Ford will make less cars. This causes the supply curve to shift left. If prices of steel decreases the curve moves to the right

27. Factor 2- Labor Productivity • Amount of goods and services that a person can produce in a given time. • Well trained and educated workers are specialized and can make more for less than unskilled workers

28. Factor 3- Technology • Technology is used to make goods and services more efficiently, which leads to increased supply. • Ex. Henry Ford and his assembly line

29. Factor 4- Gov’t Action • This can affect production in both a positive and negative way. Taxes can lead to increased production costs. This can also decrease your quantity supplied. • Subsidies Increase Supply- gov’t subsidies help pay for operation costs and encourage economic activity. • Ex. Gov’t gives a subsidy to finance a factory in Aliquippa

30. Continued • Gov’t regulation of business and safety can also have an affect. • Gov’t sets rules and laws on trade, safety, and business. This can also affect supply. • Ex. Worker safety regulations might decrease supply by increasing production costs.

31. Factor 6- Number of Producers • When one business idea is profitable, others run to create the same good or service. • This increases overall supply of that product • Ex. Cell Phone Industry

32. Section 4- What Is Elasticity of Supply? • Elasticity of Supply- a measure of how responsive producers are to price changes • If a change in price leads to a 10% larger change in quantity supplied, supply is then elastic. • If a change in price leads to a small change in quantity supplied it is inelastic

33. Elastic Goods- TV’S • Inelastic Goods- Hybrid Cars • Unit Elastic is when price change and quantity supplied move the same exact percentage

34. What Affects Elasticity of Supply? • Overtime elasticity of supply changes for most products. • Ex. HD TV’S • Producers that can change price and output quickly can effect elasticity as well.