Econ ch05
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Econ ch05

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Econ ch05 Econ ch05 Presentation Transcript

  • Chapter 5 Section Main Menu Understanding Supply • What is the law of supply? • What are supply schedules and supply curves? • What is elasticity of supply? • What factors affect elasticity of supply?
  • Chapter 5 Section Main Menu Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply • According to the law of supply, suppliers will offer more of a good at a higher price.
  • Chapter 5 Section Main Menu Law of Supply • Quantity Supplied – the amount a supplier is willing and able to supply at a certain price • As a price rises, the producer will make more in order to earn additional revenue – New firms will then have an incentive to enter the market to earn profit • Price falls, the business produces less or drops out completely
  • Chapter 5 Section Main Menu Higher Production • Business that is already making a profit, then an increase in price will increase profits – The higher revenues encourage them to produce more (supply raises) • Example – Making profit at market price and cost of production is low – Then price of pizza rises a little, raising profits – Then they will produce more in order to sell more – If price would fall, they would supply less
  • Chapter 5 Section Main Menu Market Entry • Rising prices draw new people into the market – If you see a certain type of restaurant doing very well (their prices rising along w/ profits) you want to join in – So you open that type of restaurant b/c it’s a safe bet • Grunge music in the 1990s – Record labels saw the popularity grow, so many more bands joined the market – Music stores sold more grunge music – Later, the fad ended
  • Chapter 5 Section Main Menu The Supply Schedule • Supply Schedule – shows the relationship b/w price and quantity supplied for a specific good – Table compares 2 variables, or factors, that can change • Price of a slice and the amount supplied • Lists supply for a very specific set of conditions – Only price is taken into account (not labor or price of resources)
  • Chapter 5 Section Main Menu $.50 1,000 Price per slice of pizza Slices supplied per day Market Supply Schedule $1.00 1,500 $1.50 2,000 $2.00 2,500 $2.50 3,000 $3.00 3,500 Supply Schedules
  • Chapter 5 Section Main Menu A Change in Quantity Supplied • Each number of slices supplied at any given price is called the Quantity Supplied – $.50/slice, there are 100 slices supplied • We just move from each row when the prices change • The Supply Schedule never actually changes, only the Quantity Supplied
  • Chapter 5 Section Main Menu Market Supply Schedule • Like the market demand schedule, the Market Supply Schedule shows how much of a good all suppliers will offer at diff. prices – Important b/c it helps us determine the total supply of a good at a certain price • Reflects the law of supply
  • Chapter 5 Section Main Menu Market Supply Curve Price(indollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00 .50 0 0 500 1000 1500 2000 2500 3000 3500 Supply Supply Curves • Supply Curve – graph showing quantity supplied of a good at different prices • X-Axis = Quantity • Y-Axis = Price • Rises left to right • A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.
  • Chapter 5 Section Main Menu Supply and Elasticity • Elasticity of Supply – measure of the way suppliers respond to a change in price – Values of Elasticity of Supply are same as demand
  • Chapter 5 Section Main Menu Elasticity of Supply and Time • Short Term – Orange Grove Example – Price goes up on oranges, grower can plant more trees to increase supply, but it takes years to grow – Small steps to increase output, use better pesticide (# of oranges does not increase much) – This would be inelastic then, supply does not respond much to price change – Same as if price goes down • Still grow and sell same number of oranges
  • Chapter 5 Section Main Menu Elasticity of Supply and Time • Short Term continued – Haircut Example – Haircuts can be easily reduced or increased by the hair dresser – Price rises, hire new workers raise supply • New shops will open or existing ones stay open later • Small price raise and supply increases dramatically – Price falls, supply falls – Highly elastic
  • Chapter 5 Section Main Menu Elasticity of Supply and Time • Long Term – Oranges example – The grower that planted more trees will, over time, have a higher supply • Ends up selling many more oranges at the higher market price – Price falls and stays there for several years • Orange growers will eventually cut back on growth or grow something diff. – Becomes elastic over time
  • Chapter 5 Section Main Menu Costs of Production • How do firms decide how much labor to hire? • What are production costs? • How do firms decide how much to produce?
  • Chapter 5 Section Main Menu Marginal Product of Labor • Marginal Product of Labor – the change in output from hiring one additional unit of labor – Shows the change in output at the margin, where the last worker was hired or fired • First worker hired makes 4 T-Shirts/hour • 2nd worker raises total to 10 T-Shirts/hour – Marginal product of labor is 6 • See this in column 3 of the table
  • Chapter 5 Section Main Menu Marginal Product of Labor Labor (number of workers) Output (T- Shirts per hour) Marginal product of labor 0 0 — 1 4 4 2 10 6 3 17 7 4 23 6 5 28 5 6 31 3 7 32 1 8 31 –1 A Firm’s Labor Decisions
  • Chapter 5 Section Main Menu Diminishing Marginal Returns • 4th through the 7th worker – the marginal product of labor is still positive – It is shrinking though • Diminishing Marginal Returns – level of production in which the marginal product of labor decreases as the number of workers increases – Specialization ends when you hire more workers – Increases total output but at a decreasing rate
  • Chapter 5 Section Main Menu Diminishing Marginal Returns • Business w/ D.M.R. of labor produce less and have less output from each unit of labor added • Workers are working w/ a limited amount of capital – Workers now have to wait to use the tools to create w/e product they sell – They do not increase the speed of making the product – Add less to the total output of the factory
  • Chapter 5 Section Main Menu Increasing Marginal Returns • Marginal product of labor increases among the first 3 workers b/c there are more than one task to making a T-Shirt – Adding more workers mean each can specialize in each task – Specialization increases output per worker – 2nd worker adds more output than the 1st – Increasing Marginal Returns – level of production in which the marginal product of labor increases as # of workers increase
  • Chapter 5 Section Main Menu Negative Marginal Returns • Hiring the 8th worker puts the marginal product of labor in the negatives – Too many workers, everyone in the way of each other – Businesses work to avoid this problem
  • Chapter 5 Section Main Menu Increasing, Diminishing, and Negative Marginal Returns Labor (number of workers) MarginalProductoflabor (beanbagsperhour) 8 7 6 5 4 3 2 1 0 –1 –2 –3 4 5 6 7 Diminishing marginal returns 8 9 Negative marginal returns Marginal Returns 1 2 3 Increasing marginal returns
  • Chapter 5 Section Main Menu Fixed Costs • Fixed Cost – cost that does not change, no matter how much of a good is produced – The facility, cost of building the factory (office, store, restaurant etc.) – Rent, repairs, property taxes, salaries
  • Chapter 5 Section Main Menu Variable Costs • Variable Costs – costs that rise or fall depending on quantity produced – Company wants to produce more of a product, buy more materials and hire more workers – Cut costs, then cut back on buying materials and cut workers hours – Cost of labor is a variable cost – Electric and Heating bills – turn off electricity and heat when the factory is not in use
  • Chapter 5 Section Main Menu Total Cost • Total Cost – the fixed cost plus the variable cost – Fixed costs are the building and equipment ($36/hour) – Variable costs are the fabric, thread, most of the workers • These rise with number of T-Shirts made/hour
  • Chapter 5 Section Main Menu Production Costs Total revenue Profit (total revenue – total cost) Marginal revenue (market price) Marginal cost Total cost (fixed cost + variable cost) Variable cost Fixed cost T-Shirts (per hour) $ –36 –20 0 21 40 0 1 2 3 4 $0 24 48 72 96 $24 24 24 24 24 — $8 4 3 5 $36 44 48 51 56 $0 8 12 15 20 $36 36 36 36 36 57 72 84 93 5 6 7 8 120 144 168 192 24 24 24 24 7 9 12 15 63 72 84 99 27 36 48 63 36 36 36 36 98 98 92 79 216 240 264 288 24 24 24 24 19 24 30 37 36 36 36 36 9 10 11 12 82 106 136 173 118 142 172 209 Setting Output
  • Chapter 5 Section Main Menu Marginal Cost • Marginal Cost – the cost of producing one more unit of a good – If we know the total cost at different levels of output, you can figure out marginal cost • Not producing a single T-Shirt, they still pay the fixed cost ($36/hour) • Produce one T-Shirt/hour its total cost rises $36 to $44 ($8 is marginal cost now) • Total Cost - Fixed Cost = Marginal Cost
  • Chapter 5 Section Main Menu Production Costs Total revenue Profit (total revenue – total cost) Marginal revenue (market price) Marginal cost Total cost (fixed cost + variable cost) Variable cost Fixed cost T-Shirts (per hour) $ –36 –20 0 21 40 0 1 2 3 4 $0 24 48 72 96 $24 24 24 24 24 — $8 4 3 5 $36 44 48 51 56 $0 8 12 15 20 $36 36 36 36 36 57 72 84 93 5 6 7 8 120 144 168 192 24 24 24 24 7 9 12 15 63 72 84 99 27 36 48 63 36 36 36 36 98 98 92 79 216 240 264 288 24 24 24 24 19 24 30 37 36 36 36 36 9 10 11 12 82 106 136 173 118 142 172 209 Setting Output
  • Chapter 5 Section Main Menu Marginal Cost • First 3 T-Shirts, marginal cost falls as output increases – 2nd T-Shirt = $4, 3rd T-Shirt = $3 – Increasing marginal returns b/c of specialization • 4th T-Shirt, marginal cost starts to rise – Reflects diminishing returns to labor – Benefits of specialization are no longer there – Diminishing returns set in once workers start to share machines
  • Chapter 5 Section Main Menu Production Costs Total revenue Profit (total revenue – total cost) Marginal revenue (market price) Marginal cost Total cost (fixed cost + variable cost) Variable cost Fixed cost T-Shirts (per hour) $ –36 –20 0 21 40 0 1 2 3 4 $0 24 48 72 96 $24 24 24 24 24 — $8 4 3 5 $36 44 48 51 56 $0 8 12 15 20 $36 36 36 36 36 57 72 84 93 5 6 7 8 120 144 168 192 24 24 24 24 7 9 12 15 63 72 84 99 27 36 48 63 36 36 36 36 98 98 92 79 216 240 264 288 24 24 24 24 19 24 30 37 36 36 36 36 9 10 11 12 82 106 136 173 118 142 172 209 Setting Output
  • Chapter 5 Section Main Menu Production Costs Total revenue Profit (total revenue – total cost) Marginal revenue (market price) Marginal cost Total cost (fixed cost + variable cost) Variable cost Fixed cost T-Shirts (per hour) $ –36 –20 0 21 40 0 1 2 3 4 $0 24 48 72 96 $24 24 24 24 24 — $8 4 3 5 $36 44 48 51 56 $0 8 12 15 20 $36 36 36 36 36 57 72 84 93 5 6 7 8 120 144 168 192 24 24 24 24 7 9 12 15 63 72 84 99 27 36 48 63 36 36 36 36 98 98 92 79 216 240 264 288 24 24 24 24 19 24 30 37 36 36 36 36 9 10 11 12 82 106 136 173 118 142 172 209 Setting Output • Total Revenue – Total Cost = Profits • B/w 9 and 10 T-Shirts/hour we see is the highest profit, $98
  • Chapter 5 Section Main Menu Marginal Revenue and Marginal Cost • Marginal Revenue – the additional income from selling one more unit of a good, sometimes equal to price • If firm has no control over price, marginal revenue = marginal cost • Each T-Shirt sold at $24 increases the total revenue by $24, so marginal revenue is $24 • At 10 T-Shirts sold, price = marginal cost, so that is the quantity for maximum profit
  • Chapter 5 Section Main Menu Production Costs Total revenue Profit (total revenue – total cost) Marginal revenue (market price) Marginal cost Total cost (fixed cost + variable cost) Variable cost Fixed cost T-Shirts (per hour) $ –36 –20 0 21 40 0 1 2 3 4 $0 24 48 72 96 $24 24 24 24 24 — $8 4 3 5 $36 44 48 51 56 $0 8 12 15 20 $36 36 36 36 36 57 72 84 93 5 6 7 8 120 144 168 192 24 24 24 24 7 9 12 15 63 72 84 99 27 36 48 63 36 36 36 36 98 98 92 79 216 240 264 288 24 24 24 24 19 24 30 37 36 36 36 36 9 10 11 12 82 106 136 173 118 142 172 209 Setting Output • See why output of 10 T-Shirts is best situation by looking at different levels of output (4, 5, 6, so on…)
  • Chapter 5 Section Main Menu Responding to Price Changes • Price raises to $37 for a T-Shirt – Firm increases production to 12 T-Shirts – The new price now = marginal cost – New levels of profit are available – Shows law of supply in action (price rises, supply rises)
  • Chapter 5 Section Main Menu The Shutdown Decision • Operating Cost – the cost of operating a facility • Price of a T-Shirt drops to $7, which means they would produce 5 T-shirts (marginal cost = marginal revenue) – Total revenue would be $35 and the variable costs are $27 – Total revenue is higher, keep factory open
  • Chapter 5 Section Main Menu The Shutdown Decision • Close the factory, still paying $36/hour in fixed costs • Stay open, producing 5 T-shirts/hour with total costs at $63/hour (36 in fixed + 27 in variable) – Losing only $28/hour b/c of the total revenue of $35 • Losing money in both examples, but losing less if they stay open and produce 5 T-shirts
  • Chapter 5 Section Main Menu Changes in Supply • How do input costs affect supply? • How can the government affect the supply of a good? • What other factors can influence supply?
  • Chapter 5 Section Main Menu Input Costs and Effect of Rising Costs • Businesses want their price = marginal cost – Marginal cost includes materials that make the product – Cost of materials go up, marginal cost does • Price and Marginal Cost are no longer the same, business not profitable – The supply curve would shift to the left • Graph on board.
  • Chapter 5 Section Main Menu Technology • New technology can lower production costs – Robots in car manufacturers, speed up work and cut down on salaries paid – Email increasing speed of information being passed throughout the market • Lowering production costs increase profit and supply curve shifts to the right • Graph on board.
  • Chapter 5 Section Main Menu Subsidies • Subsidy – govt. payment that supports a business market – Govt. pays a business a set subsidy for each unit of a good produced – WWII – European countries subsidized farms b/c of food shortages • Protected farms in case food imports were cut off • France – protect small farmers and the French countryside
  • Chapter 5 Section Main Menu Subsidies • Developing countries subsidize businesses to protect growing industries from foreign competition – Indonesia and Malaysia subsidized national car companies – Western Europe let their airlines and banks suffer huge losses by assuring them they would cover debts • Subsidies have slowed to allow for fair competition and free trade
  • Chapter 5 Section Main Menu Subsidies • A controversial subsidy in U.S. are farm subsidies – Pay farmers to take land out of production in order to keep prices high – This hurts efficient farmers – They start to use more pesticides and herbicides to try and produce more on the land they are allowed to plant
  • Chapter 5 Section Main Menu Taxes • Excise Tax – tax on the production or sale of a good – Increases production cost by adding extra cost for each unit sold – Decreases supply (supply curve shifts to the left) – Mainly put on products like cigarettes, alcohol, and high-pollutant gasoline – Consumers don’t realize they are paying them
  • Chapter 5 Section Main Menu Regulation • Regulation – govt. intervention in a market that affects the production of a good – Usually raises the price of a good • 1970s – Govt put regulations on car emissions – Cars cost more to make then, supply went down
  • Chapter 5 Section Main Menu Supply in the Global Economy • Imports into the U.S. – 1. U.S. gets carpets from India • Wages increase among workers • Decreases supply to the U.S. – 2. Phones from Japan • New technology decreases cost of making them • Supply imported goes up – 3. Oil from Russia • New discovery of oil would increase our supply • Lower prices
  • Chapter 5 Section Main Menu Future Expectations of Prices • Soybean farmer knows that the price of soybeans will double in a month – Stores soybeans just harvested and cuts back on supply in short term – Increase supply in long term • Price expected to drop in a month – Sell now and increase supply in short term – Cut supply in long term
  • Chapter 5 Section Main Menu Future Expectations of Prices • Inflation is a condition of rising prices • Businesses hold on to products that can be stored for long periods of time – Hold on to their goods until the price gets high enough, then sell – Short term – supply falls drastically
  • Chapter 5 Section Main Menu Future Expectations of Prices • Civil War – South faced terrible inflation – Prices on goods like flour, butter, and salt rose each month • Shopkeepers would hoard products and wait to sell later at a higher price • Caused great shortages – Prices to high for most and riots broke out
  • Chapter 5 Section Main Menu Number of Suppliers • More producers enter a certain market, supply of that good will rise – Shifting curve to the right • Suppliers leave the market and stop producing that product – Supply decreases and curve shifts to the left