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Economics Chapter 5 - Supply
 
The Law of Supply looks at things from the suppliers (producers) side of things.  Remember when we look at the Law of Demand, that is looking at things from consumers' prespective.  Supply and Demand come together in the next chapter.
 
Main Ideas (Prentice Hall, Principles in Action)

1 - The law of supply states that producers will offer more of a good if prices rise, and less of a

      good if prices fall.

2 - To maximize profits, businesses consider the marginal benefits of adding workers or
     purchasing capital.
3 - Changes in the costs of inputs, and government actions, can raise or lower the supply of a
      good at all prices.
 
 
 

 

 

 

 

 

UNDERSTANDING SUPPLY

Section 1

 

As the price of a good rises, firms will produce more to make more revenue. New firms will have an incentive to enter the market. The tendency of suppliers to offer more of a good at a higher price is called law of supply. The "law of supply"  states that the higher the price, the larger the quantity producers are willing to supply .    If the price of a good falls, less of a good will br produced.  Some firms will produce less, and others might drop out of the market.  A market supply curve illustrates the quantity supplied by all producers in a market at different  prices.

 

 A supply curve shows a direct relationship between price and quantity demanded. That is because higher prices lead to higher output.

 

Elasticity of supply is a concept that  predicts how suppliers react to price  changes.  The faster a supplier can react increase or decrease production after a shift in price, the greater elacticity of supply.  Industries that cannot easily alter  production have inelastic supply. Orange growers, for example, cannot increase production quickly when prices rise. They  need to purchase more land and plant more trees in order to increase output. A  service industry like a barbershop has elastic supply. If the price of a haircut rises,  barber shops and salons can hire new workers quickly. New barber shops will start, and existing businesses will stay open later. (Prentice Hall, Principles in Action)

 

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Section 2

Costs of Production

 

Economists divide a producer’s costs into fixed costs and variable costs. A fixed cost is a cost that does not change, no matter how much is produced. Examples of fixed costs include rent and machinery repairs. A variable cost is a cost that rises or falls depending on the quantity produced. These include the costs of raw materials and some labor.

 

1 Saab 9 5 Number 001 Of 999 Rolls Off Assembly Line

 

Identify some fixed costs and variable costs in the picture.

 

Fixed and variable costs are added together to find total cost. Businesses can increase output by hiring more workers or purchasing more capital. The change in output from adding one more worker is the marginal

product of labor. At the beginning, adding each worker will result in increasing marginal returns. Workers will be able to specialize and gain skills. At some point, adding each worker will result in diminishing marginal returns. Workers may need to wait to use a tool or machine. As more workers are added, there will eventually be negative marginal returns. Marginal costis the cost of producing one more unit of a good. Marginal revenue is the revenue gained from producing one more unit of a good—usually, the price of a unit. When marginal cost is less than marginal revenue, a producer has an incentive to increase output, since it will earn a profit on the next unit produced. When marginal cost is more than marginal revenue, a producer has an incentive to decrease output, since it will lose money on the next unit produced. That is why profits are maximized when marginal cost equals marginal revenue.

(Prentice Hall, Principles in Action)

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Section 3

 

Any change in the cost of inputs, like raw materials, machinery, or labor, will affect supply. A cost increase causes a fall in supply at all prices because the good has become more expensive to produce. Supply that falls at all prices can be shown as a shift to the left of a supply curve. A fall in the cost of an input will cause an increase in supply at all price levels. An increase in supply is shown by a shift to the right of the supply curve. The government has the power to affect the supply of many goods. A subsidy is a government payment to support a

business or market. Since the subsidy lowers producers’ costs, its effect is usually to increase supply. The government can also 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, making it more expensive to produce

 

Regulation, or steps the government takes to control production, may also affect supply. Another influence on supply is producers’ expectations. If sellers expect the price of a good to rise in the future, they will store goods now and sell more in the future. But if the price of the good is expected to drop, sellers will put more goods on the market immediately. In periods of inflation, or rising prices, producers often try to hold on to goods, reducing supply.

(Prentice Hall, Principles in Action)