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Chapter 5

Chapter 5. Supply. In this lesson, students will identify characteristics of the Law of Supply. Students will identify factors that affect supply. Students will be able to identify and/or define the following terms: Law of Supply Supply Curve Elasticity of Supply

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Chapter 5

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  1. Chapter 5 Supply

  2. In this lesson, students will identify characteristics of the Law of Supply. • Students will identify factors that affect supply. • Students will be able to identify and/or define the following terms: • Law of Supply • Supply Curve • Elasticity of Supply • 7 Determinants that Affect Supply

  3. What is supply? • Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices.

  4. Law of Supply • What is the Law of Supply? • There is a DIRECT (or positive) relationship between price and quantity supplied. • As price increases, the quantity producers make increases • As price falls, the quantity producers make falls. • Why? Because, at higher prices profit seeking firms have an incentive to produce more.

  5. Law of Supply • There is a direct relationship between price and quantity supplied. • Quantity supplied rises as price rises, other things constant. • Quantity supplied falls as price falls, other things constant.

  6. The Supply Schedule • The only real difference between a supply schedule and a demand schedule is that prices and quantities now move in the same direction for supply • can also be illustrated graphically as an upward-sloping line

  7. Change in Quantity Supplied • Suppliers have some control over the price • Ultimately the final interaction between supply and demand determines the price. • Again if the price changes then it is a movement along the supply curve.

  8. Change in Supply • Appears as a SHIFT in the Supply curve. • Decrease in Supply – Shift to the Left • Increase in Supply – Shift to the Right

  9. GRAPHING SUPPLY Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 10

  10. GRAPHING SUPPLY Price of Milk Supply Schedule What if there are new and more productive milking machines? Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 11

  11. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 12

  12. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 13

  13. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 14

  14. Change in Supply Price of Milk Supply Schedule Supply S2 $5 4 3 2 1 Increase in Supply Prices didn’t change but there is MORE milk produced Q 10 20 30 40 50 60 70 80 Quantity of Milk 15

  15. Change in Supply Price of Milk Supply Schedule What if the price for dairy cows increases drastically? Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 16

  16. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 17

  17. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 18

  18. Change in Supply Price of Milk Supply Schedule Supply $5 4 3 2 1 Q 10 20 30 40 50 60 70 80 Quantity of Milk 19

  19. Change in Supply Price of Milk Supply Schedule Supply S2 $5 4 3 2 1 Decrease in Supply Prices didn’t change but there is LESS milk produced Q 10 20 30 40 50 60 70 80 Quantity of Milk 20

  20. Cost of Inputs • A change in the cost of inputs can cause a change in supply • If the price of the inputs drops, producers are willing to produce more at each price

  21. Productivity • If workers work more efficiently, productivity should increase • The result is more is produced at every price • supply shifts right • if workers are unmotivated, untrained, or unhappy, productivity could decrease • Supply shifts left

  22. Technology • New technology tends to shift the supply curve to the right • New Technology can affect supply by lowering the cost of production or by increasing productivity

  23. Taxes and Subsidies • Firms view taxes as costs • If the producer’s inventory is taxed or if fees are paid the cost of production goes up. • Taxes shift supply left

  24. Taxes and Subsidies • A subsidy is a government payment to encourage or protect a certain type of economic activity • Subsidies lower the cost of production • Subsidies shift supply right

  25. Expectations • Expectations about the future price can affect the supply curve • If producers think the price of their product will go up, they may withhold some of the supply • If producers may expect lower prices they may try to produce and sell as much as possible right away

  26. Government Regulations • When the government establishes new regulations, the cost of production can be affected • Increased government regulations restrict supply • supply curve to shifts to the left • Relaxed regulations allow producers to lower the cost of production • Shift to the right

  27. Elasticity of Supply • If a small increase in price leads to a large increase in output, supply is elastic. • If the quantity supplied changes very little, supply is inelastic

  28. Determinants of Supply Elasticity • If a firm can adjust to new prices quickly, then supply is likely to be elastic. • If adjustments take longer, then supply is likely to be inelastic.

  29. Theory of production • The relationship between the factors of production and the output of goods and services. • Short run vs Long run • Some things take longer to change and can only be changed in the long run.

  30. Short run vs Long run • Short run – only the variable inputs can be changed • Long run – any input, fixed or variable, can be changed • hiring 300 extra workers is a short-run adjustment • building a new factory, this is a long-run adjustment

  31. Stage 1 - Increasing • With only a couple of workers not all resources are used • Some machines are idle • Each extra worker adds more than the previous

  32. Stage 1 - Increasing • Workers begin to specialize and work as a unit • This stage is characterized by increasing marginal returns

  33. Stage 2 - Decreasing • Eventually the plant is at full employment • All resources are maximized • Adding more workers still increases production • But each work adds less than the previous • This is called decreasing marginal production

  34. Stage 3 - Negative • Finally there are just too many workers • They get in the way and slow down production • Each worker actually subtracts from total production • This is call negative marginal product

  35. Law of Supply • Subsidy • Change in supply • Theory of Production • Short run • Long Run • Total product • Marginal product • Diminishing returns • Fixed cost • Variable cost • Marginal cost • Demand • Law of Demand • Marginal utility • Diminishing marginal utility • Microeconomics • Market demand curve • Income effect • Substitution effect • Change in demand • Change in quantity demanded • Substitutes • Compliments • Elasticity • Elastic • Inelastic

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