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    7.3 7.3 Presentation Transcript

    • The Law of Supply and the Supply Curve Chapter 7 Section 3
    • Learning Goals• Identify the law of supply.• Identify the 4 determinants of supply
    • Introduction• As you’ve learned, consumers demand products and services at the lowest possible prices• In contrasts, suppliers –like Amazon.com and Hewlett-Packard – exists to make a profit, hopefully a big profit!• In this section we will discuss the law of supply and how it is geared toward making profits
    • The Law of Supply• To understand how prices are determined, you have to understand both demand and supply – the willingness and ability of producers to provide goods at different prices• The law of supply states:• As the price rises for a good, the quantity supplied generally rises• As the price falls, the quantity supplied also falls
    • The Law of Supply• Unlike demand, there is a direct relationship between price and quantity supplied (which is the amount of a good or service that a producer is willing and able to supply at a specific price)• A direct relationship means that when the price rises the quantity supplied will also rise and when the price falls the quantity supplied will also falls
    • The Law of Supply Thus, a larger quantity will generally be supplied at higher prices than at lower prices A smaller quantity will generally be supplied at lower prices than at higher prices
    • The Incentive of Greater Profits• The profit incentive is one of the factors that motivates people in a market economy• In the case of supply, the higher the price of a good, the greater the incentive is for a producer to produce more• The higher price not only returns a higher profit, but it also must cover additional costs of producing more
    • The Incentive of Greater Profits• Suppose you were a owner of a company that sells and produces skateboards• As a skateboard manufacturer, you would have to consider all of your costs of production, including the price of materials such as: decks, trucks, wheels, risers, bolts, and bearings• Also don’t forget the cost of rent payments for the building in which the skateboards are produced• You also have employees for which you have to pay wages as well as taxes and insurance
    • The Incentive of Greater Profits• Imagine that the price you charge for skate boards covers all these costs and gives you a small profit• Under what circumstance would you be willing to produce more skateboards?• To take on the expense of expanding production, you would have to be able to charge a higher price for your skateboards• At a higher price per skateboard, you would be willing to supply more than you would at the current lower price• This is the basis of the law of supply
    • The Supply Curve• The supply curve shows the quantities supplied at each possible price• It slope upward from left to right• You can see the relationship between price and quantity supplied is direct – or moving in the same direction• Each point on a supply curve signifies that a producer will supply a certain quantity at each particular price
    • Quantity Supplied vs. Supply• A change in quantity supplied is caused by a change in price• A shift of the entire supply curve is known as a change in supply• The price does not cause this movement• We will discuss what actually causes the supply curve to shift to the left and right
    • The Determinants of Supply• The four major factors that determines the shifting of the supply curve are• Price of Inputs• The number of firms in the industry• Taxes• Technology
    • Price of Inputs• If the price of inputs (materials, wages) drops, a producer can supply more at a lower production cost• This causes the supply curve to shift to the right• For example:• When the price of memory chips fell during the 1980’s and 1990’s, More computers were supplied at any given price than before
    • Number of Firms in the Industry As more firms enter the industry, greater quantities are supplied at every price, and the supply curve shifts to the right
    • Taxes• If the government imposes more taxes, businesses will not be willing to supply as much as before because the cost of production will rise• Which way will the supply curve shift?• The supply curve will shift to the left indicating a decrease in supply
    • Technology• The use of science to develop new products and new methods of producing and distributing goods and services is called technology• Any improvement in technology will increase supply• Why do you think that is?• New technology usually reduces the cost of production
    • The Law of Diminishing Returns• Lets assume you own a CD production company and you want to expand production• You have 10 machines and employ 10 workers• You hire an eleventh worker and your production increases by 1,000 per week• You hire a twelfth worker and your CD production increases by only 900 per week• There is not enough machines to go around, and perhaps workers are getting in each other’s way
    • The Law of Diminishing Returns• This example illustrates the law of diminishing returns• According to this law, adding units of one factor of production (such as labor) increases total output, but after a certain point the extra output for each additional unit hired will begin to decrease
    • Review1. What does the law of supply state?2. Why would a higher price for a product cause a producer to produce more?3. What does the supply curve show?4. What are the 4 factors that determine the change in supply?5. What is the law of Diminishing returns?