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Title: SUPPLY


1
Chapter 5
  • SUPPLY

2
The Law of Supply
  • According to the law of supply, suppliers will
    offer more of a good at a higher price.
  • This is a direct relationship.

3
How Does the Law of Supply Work?
  • Economists use the term quantity supplied to
    describe how much of a good is offered for sale
    at a specific price.
  • The promise of increased revenues when prices are
    high encourages firms to produce more.
  • Rising prices draw new firms into a market and
    add to the quantity supplied of a good.

4
How do we show supply?
  • Supply schedule- lists each quantity of a product
    that producers are willing to supply at various
    possible market prices.
  • Supply curve- plots the information from a supply
    schedule.
  • quantity varies directly with price.

5
Government Influences on Supply
  • By raising or lowering the cost of producing
    goods, the government can encourage or discourage
    an entrepreneur or industry.

1) Subsidies A subsidy is a government payment
that supports a business or market. Subsidies
cause the supply of a good to increase. 2)
Taxes The government can reduce the supply of
some goods by placing an excise tax on them. An
excise tax is a tax on the production or sale of
a good. 3) Regulation Regulation occurs when the
government steps into a market to affect the
price, quantity, or quality of a good.
Regulation usually raises costs.
6
Other Factors Influencing Supply
  • 4) Technology
  • - Improvement in the production process of a
    good or service will result in an increase that
    products supply
  • 5) Future Expectations of Prices
  • Expectations of higher prices will reduce supply
    now and increase supply later. Expectations of
    lower prices will have the opposite effect.
  • 6) Number of Suppliers
  • If more firms enter a market, the market supply
    of the good will rise. If firms leave the
    market, supply will decrease.
  • 7) Rising Costs
  • - When a firm spends more to get resources, they
    charge more for goods/services

7
Input Costs and Supply
  • Any change in the cost of an input such as the
    raw materials, machinery, or labor used to
    produce a good, will affect supply.
  • As input costs increase, the firms marginal
    costs also increase, decreasing profitability and
    supply.
  • Input costs can also decrease. New technology
    can greatly decrease costs and increase supply.

8
Production Costs
  • A fixed cost is a cost that does not change,
    regardless of how much of a good is produced.
    Examples rent and salaries
  • Variable costs are costs that rise or fall
    depending on how much is produced. Examples
    costs of raw materials, some labor costs.
  • The total cost equals fixed costs plus variable
    costs.
  • The marginal cost is the cost of producing one
    more unit of a good.

9
Setting Output
  • Marginal revenue is the additional income from
    selling one more unit of a good. It is usually
    equal to price.
  • To determine the best level of output, firms
    determine the output level at which marginal
    revenue is equal to marginal cost.

10
4.2 Changes in SupplyImagine that you own a
coffee plantation. A recent strike by coffee bean
pickers has resulted in an increase in your costs
of production reducing your profit. How will this
situation effect the amount of coffee that you
supply at each price?
  • The amount supplied will decrease

11
SUPPLY SHIFTSWhich way would the supply curve
for coffee shift in the following scenarios?
  • 1. This years coffee bean harvest is the largest
    to date.
  • 2. Coffee bean pickers go on strike.
  • 3. Congress approves a tax cut for small
    businesses.
  • 4. Agricultural subsidies for coffee bean
    plantations are decreased.
  • 5. Congress passes a new law regulating how
    brewed coffee must be stored until it is served.
  • 6. A new invention makes it easier and faster to
    harvest coffee beans.
  • 7. Coffee shops increase in popularity, and their
    numbers increase rapidly.
  • 8. The price of herbal teas increases because of
    their popularity with college students.
  • 9. Producers expect the popularity of coffee
    shops to continue to increase.

12
  • 1. This years coffee bean harvest is the largest
    to date. (right)
  • 2. Coffee bean pickers go on strike. (left)
  • 3. Congress approves a tax cut for small
    businesses. (right)
  • 4. Agricultural subsidies for coffee bean
    plantations are decreased. (left)
  • 5. Congress passes a new law regulating how
    brewed coffee must be stored until it is served.
    (left)
  • 6. A new invention makes it easier and faster to
    harvest coffee beans. (right)
  • 7. Coffee shops increase in popularity, and their
    numbers increase rapidly. (right)
  • 8. The price of herbal teas increases because of
    their popularity with college students. (left)
  • 9. Producers expect the popularity of coffee
    shops to continue to increase. (right)
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