SUPPLY

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Chapter 5

• SUPPLY

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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.

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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.

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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.

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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.

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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.

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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.

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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.
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Other Factors Influencing Supply

• 4) Innovation
• - 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

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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

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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.

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• 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)