Transcript what is supply? - Dublin City Schools
CHAPTER 5: SUPPLY
SSEMI2 THE STUDENT WILL EXPLAIN HOW THE LAW OF DEMAND, THE LAW OF SUPPLY, PRICES, AND PROFITS WORK TO DETERMINE PRODUCTION AND DISTRIBUTION IN A MARKET ECONOMY.
A. DEFINE THE LAW OF SUPPLY. B. DESCRIBE THE ROLE OF BUYERS AND SELLERS IN DETERMINING MARKET CLEARING PRICE. C. ILLUSTRATE ON A GRAPH HOW SUPPLY AND DEMAND DETERMINE EQUILIBRIUM PRICE AND QUANTITY. D. EXPLAIN HOW PRICES SERVE AS INCENTIVES IN A MARKET ECONOMY.
SECTION 1: WHAT IS SUPPLY?
AN INTRODUCTION TO SUPPLY—FOR ALMOST ANY GOOD OR SERVICE, THE HIGHER THE PRICE, THE LARGER THE QUANTITY THAT WILL BE OFFERED FOR SALE.
SUPPLY: THE AMOUNT OF A PRODUCT FOR SALE AND DEALS WITH HOW PRICES AFFECT QUANTITIY SUPPLIED (PRICES AND QUANTITIES MOVE IN THE SAME DIRECTION).
SUPPLY IS THE AMOUNT OF A PRODUCT THAT WOULD BE OFFERED FOR SALE AT ALL POSSIBLE PRICES IN THE MARKET.
DEMAND: THE DESIRE, ABILITY, AND WILLINGNESS TO BUY, AND DEALS WITH HOW PRICES AFFECT CONSUMER SPENDING (THEY VARY INVERSELY).
1. WHAT DOES THE LAW OF SUPPLY STATES?
THE LAW OF SUPPLY STATES THAT SUPPLIERS WILL NORMALLY OFFER MORE FOR SALE AT HIGH PRICES AND LESS AT LOWER PRICES.
FOR EXAMPLE, IN WHICH CASE WILL A TOYMAKER OFFER MORE FASHION DOLLS: IF THE COMPANY CAN CHARGE $20 FOR EACH DOLL, OR IF IT CAN CHARGE $10 FOR EACH DOLL.
THE TOYMAKER WILL OFFER MORE FASHION DOLLS FOR $20 BECAUSE SUPPLIERS OFFER GREATER QUANTITIES AT HIGHER PRICES.
2. EXPLAIN HOW EACH OF THE FOLLOWING TOOLS CAN HELP BUSINESS MAKE PRODUCTION DECISIONS.
THE SUPPLY SCHEDULE IS A LISTING OF THE VARIOUS QUANTITIES OF A PARTICULAR PRODUCT SUPPLIED AT ALL POSSIBLE PRICES IN THE MARKET.
AN INDIVIDUAL SUPPLY CURVE ILLUSTRATES HOW THE QUANTITY THAT A PRODUCER WILL MAKE VARIES DEPENDING ON THE PRICE THAT WLL PREVAIL IN THE MARKET. A MARKET SUPPLY CURVE ILLUSTRATES THE QUANTITIES AND PRICES THAT ALL PRODUCERS WILL OFFER IN THE MARKET FOR ANY GIVEN PRODUCT OR SERVICE.
PRICE PER CD
$10 $12
SUPPLY SCHEDULE FOR CDS QUANTITY SUPPLIED (IN MILLIONS)
100 300 $14 $16 $18 $20 500 700 900 1,100 IF YOU WERE TO GRAPH THIS SUPPLY SCHEDULE, THE SUPPLY CURVE WOULD A. BE HORIZONTAL.
B. SLOPE UPWARD FROM LEFT TO RIGHT.
C. BE VERTICAL.
ANS: B D. SLOPE DOWNWARD FROM LEFT TO RIGHT.
ACCORDING TO THIS SUPPLY CURVE, 400 MOVIE VIDEOS WILL BE SUPPLIED AT WHAT PRICE?
A.
B.
$10 $12 C.
D.
$14 $16
ANS: B
ACCORDING TO THIS SUPPLY CURVE, IF THE PRICE OF MOVIE VIDEOS DECREASES FROM $18 TO $16, THE QUANTITY SUPPLIED WILL A.
B.
RISE FROM 800 TO 1000.
FALL FROM 1000 TO 800.
C.
D.
ANS: B
RISE FROM 600 TO 800.
FALL FROM 800 TO 600.
WHAT DOES THE MOVEMENT SHOWN ON THIS GRAPH REPRESENT?
A.
B.
C.
D.
A CHANGE IN SUPPLY A CHANGE IN QUANTITY SUPPLIED THE LAW OF DIMINISHING RETURNS A SHIFT IN THE MARKET SUPPLY CURVE
ANS: B
ECONOMISTS ANALYZE SUPPLY BY LISTING QUANTITES AND PRICES IN SUPPLY SCHEDULE (TABLE/CURVE). WHEN THE SUPPLY DATA IS GRAPHED, IT FORMS A SUPPLY CURVE WITH AN UPWARD SLOPE. HOW DO YOU EXPLAIN THAT PRICES AND QUANTITIES MOVE IN THE SAME DIRECTION IN A SUPPLY SCHEDULE?
PRODUCERS WILL PRODUCE HIGH QUANTITIES AT THE HIGHEST PRICES AND LOW QUANTITIES AT THE LOWEST PRICES.
CHANGE IN QUANTITY SUPPLIED 3. WHAT DOES A CHANGE IN QUANTITY SUPPLIED RESPOND TO?
A CHANGE IN QUANTITY SUPPLIED IS THE CHANGE IN THE AMOUNT OFFERED FOR SALE IN RESPONSE TO A CHANGE IN PRICE.
PRODUCERS HAVE THE FREEDOM, IF PRICES FALL TOO LOW, TO SLOW OR STOP PRODUCTION OR LEAVE THE MARKET COMPLETELY. IF THE PRICES RISES, THE PRODUCER CAN STEP UP PRODUCTION LEVELS.
CHANGE IN SUPPLY A CHANGE IN SUPPLY IS WHEN SUPPLIERS OFFER DIFFERENT AMOUNTS OF PRODUCTS FOR SALE AT ALL POSSIBLE PRICES IN THE MARKET.
WHEN BOTH OLD AND NEW QUANTITIES SUPPLIED ARE PLOTTED IN THE FORM OF A GRAPH, IT APPEARS AS IF THE SUPPLY CURVE HAS SHIFTED TO THE RIGHT (SHOWING AN INCREASE IN SUPPLY).
4. WHY DOES THE SUPPLY CURVE SHIFT TO THE LEFT?
FOR A DECREASE IN SUPPLY(REASON FOR SHIFTING TO THE LEFT) TO OCCUR, LESS WOULD BE OFFERED FOR SALE AT EACH AND EVERY PRICE, AND THE SUPPLY CURVE WOULD SHIFT TO THE LEFT.
5. NAME THE SEVEN FACTORS THAT DETERMINE WHETHER SUPPLIES INCREASE OR DECREASE.
1. THE COST OF INPUTS (LABOR OR PACKAGING); 2. PRODUCTIVITY LEVELS (EFFICIENT LABOR OF WORKERS; 3. TECHNOLOGY (INTRODUCTION TO NEW MACHINE, CHEMICAL, OR INDUSTRIAL PROCESS); 4. TAXES OR THE LEVEL OF SUBSIDIES (TAXATION COST OR GOVERNMENT PAYMENT TO INDIVIDUALS) 5. EXPECTATIONS (PREDICT THE FUTURE) 6. GOVERNMENT REGULATIONS (MONITOR WORKPLACE OR SENDS MANDATES ON NEW AUTO SAFETY); 7. NUMBER OF SELLERS (WHO WILL BUY—AFFECTS BOTH THE INDIVIDUAL AND MARKET SUPPLY CURVE).
SUBSIDY—A GOVERNMENT PAYMENT TO AN INDIVIDUAL, BUSINESS, OR OTHER GROUP TO ENCOURAGE OR PROTECT A CERTAIN TYPE OF ECONOMIC ACTIVITY.
PRICE FLOOR—MINIMUM ALLOWABLE BY GOVERNMENT FOR PRODUCTS OR EVEN WAGES (WHICH CREATES A SURPLUS).
NOTE: INCREASED GOVERNMENT REGULATIONS CAN CAUSE THE SUPPLY CURVE TO SHIFT TO THE LEFT.
WHICH OF THE FOLLOWING STATEMENTS BEST EXPLAINS WHY THE SUPPLY CURVE FOR LAND IS VERTICAL?
A. LAND HAS PERFECT PRICE ELASTICITY OF SUPPLY.
B. THE SUPPLY OF LAND IS FIXED.
C. LAND-LORDS ARE EXTREMELY STUBBORN ABOUT RECEIPTS OF RENT PAYMENTS.
D. LAND-LORDS ARE PRICE MAKERS.
ANS: B
1. IF THE GOVERNMENT DECIDED TO SUBSIDIZE THE PRODUCTION OF BOBBLE-HEAD DOLLS A) THE COST OF SUBSTITUTES WILL RISE.
B) THE SUPPLY CURVE WILL SHIFT TO THE LEFT.
C) THE PRICE OF BOBBLE-HEAD DOLLS WILL RISE.
D) THE SUPPLY CURVE WILL SHIFT TO THE RIGHT.
ANS: D 2. IN A MARKET ECONOMY, A HIGH PRICE IS A SIGNAL FOR A) PRODUCERS TO SUPPLY LESS AND CONSUMERS TO BUY LESS.
B) PRODUCERS TO SUPPLY LESS AND CONSUMERS TO BUY MORE.
C) PRODUCERS TO SUPPLY MORE AND CONSUMERS TO BUY LESS.
D) PRODUCERS TO SUPPLY MORE AND CONSUMERS TO BUY MORE.
ANS: C
ELASTICITY OF SUPPLY
6. WHAT IS SUPPLY ELASTICITY?
SUPPLY ELASTICITY IS A MEASURE OF THE WAY IN WHICH QUANLITY SUPPLIED RESONDS TO A CHANGE IN PRICE.
SUPPLY IS ELASTIC WHEN A SMALL INCREASE IN PRICE LEADS TO A LARGER INCREASE IN OUTPUT AND SUPPLY.
FOR AN EXAMPLE, THE SUPPLY IS ELASTIC IF YOU WOULD BE DOUBLING THE PRICE OF DRINKS FROM $1 TO $2 CAUSES THE QUANTITY (NUMBER) BROUGHT TO MARKET TO INCREASE POSSIBLE TRIPLE; MEANING AS THE PRICE INCREASE SO DOES THE NUMBER PRODUCE—MORE THAN PROPORTIONAL)
SUPPLY IS INELASTIC WHEN A SMALL INCREASE IN PRICE CAUSES LITTLE CHANGE IN SUPPLY.
7. WHAT CHARACTERIZES AN INELASTIC SUPPLY CURVE?
A RELATIVELY SMALLER CHANGE IN QUANTITY SUPPLIED. FOR AN EXAMPLE, WHEN THE PRICE IS DOUBLED FROM $1 TO $2, THE QUANTITY BROUGHT TO MARKET GOES UP ONLY 50%, FROM TWO UNITS TO THREE UNITS (1/2 OF THE WHICH IS CONSIDERED LESS THAN PROPORTIONAL).
8. WHAT CHANGES DOES A UNIT ELASTIC SUPPLY CURVE SHOW?
SUPPLY IS UNIT ELASTIC WHEN A CHANGE IN PRICE CAUSES A PROPORTIONAL CHANGE IN SUPPLY.
FOR EXAMPLE, IN A UNIT ELASTIC CURVE, IF THE PRICE DOUBLES FROM $1 TO $2 THE QUANTITY BROUGHT TO THE MARKET WOULD ALSO DOUBLE.
DETERMINANTS OF SUPPLY ARE RELATED TO HOW QUICKLY A PRODUCER CAN ACT WHEN THE CHANGE IN PRICE OCCURS. IF ADJUSTING PRODUCTION CAN BE DONE QUICKLY, THE SUPPLY IS ELASTIC. IF PRODUCTION IS COMPLEX AND REQUIRES MUCH ADVANCE PLANNING, THE SUPPLY IS INELASTIC.
ANOTHER FACTOR IS SUBSTITUTION IF SUBSTITUTING FOR A GIVEN PRODUCT IS EASY, THE SUPPLY IS ELASTIC.
IF IT IS DIFFICULT TO SUBSTITUTE, THE SUPPLY IS INELASTIC.
WHAT IS THE DIFFERENCE BETWEEN DEMAND ELASTICITY AND SUPPLY ELASTICITY? BOTH MEASURE THE WAY QUANTITY (WHETHER BOUGHT OR PRODUCED) ADJUSTS TO A CHANGE IN PRICE. REMEMBER THE NUMBER OF SUBSTITUTES AND ABILITY TO DELAY THE PURCHASE ARE IMPORTANT FOR DEMAND ELASTICITY BUT NOT SUPPLY ELASTICITY.
DO YOU THINK THE SUPPLY OF HANDMADE CLOTHING IN THE MARKET IS LARGER OR SMALLER THAN THE SUPPLY OF MACHINE-MADE CLOTHING? EXPLAIN.
THE SUPPLY OF HANDMADE CLOTHING IS SMALLER BECAUSE MACHINERY OR TECHNOLOGY TENDS TO INCREASE THE SUPPLY OF THE PRODUCT.
WHICH FIRM IS MORE LIKELY TO HAVE AN ELASTIC SUPPLY—A CANDY PRODUCER OR A SHALE OIL PRODUCER? EXPLAIN.
A CANDY PRODUCER IS MORE LIKELY TO HAVE AN ELASTIC SUPPLY BECAUSE CANDY CAN BE PRODUCED MORE READILY THAN OIL CAN BE PRODUCED FROM SHALE.
ASSUMING THAT THE GRAPH FOLLOWS THE NORMAL LAWS OF ECONOMICS, THE LINE REPRESENTS A)DEMAND. B) SUPPLY. C) EQUILIBRIUM PRICE. D) PRODUCTION POSSIBILITIES.
ANS: B
1. WHICH RELATIONSHIP IS THE BEST EXAMPLE OF THE LAW OF SUPPLY?
A) THE QUANTITY OF A GOOD SUPPLIED RISES AS THE PRICE RISES.
B) THE QUANTITY OF A GOOD SUPPLIED RISES AS THE PRICE FALLS.
C) THE QUANTITY OF A GOOD SUPPLIED FALLS AS THE PRICE RISES.
D) THE QUANTITY OF A GOOD SUPPLIED IS NOT IMPACTED BY PRICE.
ANS: A
2. WHICH FACTOR MIGHT CAUSE AN INCREASE IN THE SUPPLY OF A PRODUCT?
A) A DECREASE IN PRODUCTIVITY
ANS: C
B) FEWER SELLERS IN THE MARKETPLACE C) THE INTRODUCTION OF NEW TECHNOLOGY D) AN INCREASE IN THE COST OF RAW MATERIALS
NOTE: IF A COMPANY CAN’T SELL ITS PRODUCT AT THE PRICE IT HAS CHOSEN, IT WILL BE FORCED TO LOWER THE PRICE IN ORDER TO SELL ITS SUPPLY. AS THE PRICE GOES DOWN, DEMAND FOR THE PRODUCT WILL GO UP. AT A CERTAIN PRICE THE DEMAND FOR THE PRODUCT WILL EQUAL THE SUPPLY. THE PRODUCER WILL BE ABLE TO SELL THE ENTIRE SUPPLY, AND CONSUMERS WILL BE ABLE TO BUY THE EXACT AMOUNT THEY WANT. THIS POINT IS CALLED THE MARKET CLEARING PRICE OR EQUILIBRIUM PRICE. THE EQUILIBRIUM PRICE WILL BE SHOWN ON AS DEMAND CURVE AND SUPPLY CURVE TOGETHER ON A GRAPH.
3. IF THE SUPPLY OF COMPUTER ENGINEERS INCREASES AT THE SAME TIME THAT THE DEMAND FOR THESE WORKERS DECREASES, WHAT WOULD BE THE MOST LIKELY EFFECT ON WAGES FOR THESE WORKERS?
A) WAGES WOULD STAY THE SAME AS JOB OPPORTUNITIES INCREASE.
B) WAGES WOULD INCREASE AS THE NUMBER OF WORKERS INCREASES.
C) WAGES WOULD DECLINE AS THE COMPETITION FOR JOBS INCREASES.
D) WAGES WOULD INCREASE AS COMPETITION FOR THESE WORKERS INCREASES.
ANS: C
4. IN ECONOMICS, "EQUILIBRIUM PRICE" IS A SITUATION IN WHICH A) A PARTIAL TEMPORARY REDUCTION IN PRICES OCCURS.
B) THERE IS NEITHER SHORTAGE NOR SURPLUS OF GOODS.
C) THE QUANTITY DEMANDED IS GREATER THAN THE QUANTITY SUPPLIED.
D) THE QUANTITY SUPPLIED IS GREATER THAN THE QUANTITY DEMANDED.
ANS: B
5. IF A PRODUCT IS SOLD AT THE PRICE INDICATED AND SUPPLIED IN THE QUANTITY INDICATED BY THE INTERSECTION OF THE SUPPLY AND DEMAND CURVES IN THE GRAPH, THERE SHOULD BE A) AN INCREASE IN PRICE.
B) NO SHORTAGE AND NO SURPLUS.
ANS: B
C) A SHORTAGE UNTIL THE PRICE IS RAISED. D) A CHANGE IN THE EXPECTED FUTURE PRICE.
6. IN THE GRAPH, THE EQUILIBRIUM PRICE IS APPROXIMATELY A) $1.00 C) $5.00
ANS: B
B) $3.00 D) $6.00
SECTION 2: THE THEORY OF PRODUCTION **A CHANGE IN THE VARIABLE INPUT CALLED LABOR RESULTS IN A CHANGE IN PRODUCTION** LAW OF VARIABLE PROPORTIONS 1. WHAT DOES THE LAW OF VARIABLE PROPORTIONS STATE?
IN THE SHORT RUN, OUTPUT WILL CHANGE AS ONE VARIABLE INPUT IS ALTERED, WHILE OTHER INPUTS ARE KEPT CONSTANT.
THE LAW OF VARIABLE PROPORTIONS LOOKS AT HOW THE FINAL PRODUCT IS AFFECTED AS MORE UNITS OF ONE VARIABLE INPUT OR RESOURCE ARE ADDED TO A FIXED AMOUNT OF OTHER RESOURCES.
ECONOMISTS PREFER THAT ONLY A SINGLE VARIABLE BE CHANGED AT ANY ONE TIME SO THE IMPACT OF THIS VARIABLE ON TOTAL OUTPUT CAN BE MEASURED.
2. WHAT HAPPENS WHEN MORE THAN ONE FACTOR OF PRODUCTION IS VARIED? IT BECOMES HARDER TO GAUGE THE IMPACT OF A SINGLE VARIABLE ON TOTAL OUTPUT.
II. THE PRODUCTION FUNCTION THE CONCEPT ILLUSTRATES THE LAW OF VARIABLE PROPORTIONS WITHIN A PRODUCTION SCHEDULE OR GRAPH.
3. WHAT IS A PRODUCTION FUNCTION?
IT DESCRIBES THE RELATIONSHIP BETWEEN CHANGES IN OUTPUT TO DIFFERENT AMOUNTS OF A SINGLE INPUT WHILE OTHERS ARE HELD CONSTANT.
4. WHAT ARE RAW MATERIALS? UNPROCESSED NATURAL PRODUCTS USED IN PRODUCTION. TOTAL PRODUCT IS THE TOTAL OUTPUT THE COMPANY PRODUCES: A PRODUCTION SCHEDULED SHOWS THAT, AS MORE WORKERS ARE ADDED, THE TOTAL PRODUCTION RISES UNTIL A POINT THAT ADDING MORE WORKERS CAUSES A DECLINE IN TOTAL PRODUCT.
5. WHAT HAPPENS TO RESOURCES IF THERE ARE TOO FEW WORKERS?
THE RESOURCES MAY STAND IDLE (NOT WORKING) BECAUSE THE PLANT IS BARELY OPERATING.
6. WHAT HAPPENS TO OUTPUT IF THERE ARE TOO MANY WORKERS? THE WORKERS GET IN THE WAY OF OTHERSD AND TOTAL OUTPUT FALLS.
7. WHAT IS MARGINAL PRODUCT?
THE EXTRA OUTPUT OR CHANGE IN TOTAL PRODUCT CAUSED BY ADDING ONE MORE UNIT OF VARIABLE INPUT.
THREE STAGES OF PRODUCTION 8. AT WHAT POINT ARE CHANGES IN MARGINAL PRODUCT OF SPECIAL INTEREST? WHEN IT COMES TO DETERMINING THE OPTIMAL NUMBER OF VARIABLE UNITS TO BE USED IN PRODUCTION, (CHANGES IN MARGINAL PRODUCT ARE OF SPECIAL INTEREST).
9. WHAT ARE THE STAGES OF PRODUCTION BASED ON?
THEY ARE BASED ON THE WAY MARGINAL PRODUCTS CHANGES AS THE VARIABLE INPUT OF LABOR IS CHANGED.
Stages of Production
STAGE I: INCREASING RETURNS 10. WHAT IS THE CRITERION FOR DETERMINING HOW LONG TOTAL OUTPUT WILL RISE?
AS LONG AS EACH NEW WORKER HIRED CONTRIBUTES MORE TO TOTAL OUTPUT THAN THE WORKER BEFORE (MARGINAL OUTPUT INCREASES WITH EACH NEW WORKER).
NOTE: COMPANIES ARE TEMPTED TO HIRE MORE WORKERS, WHICH MOVES THEM TO STAGE II. 11. WHEN SHOULD COMPANIES STOP HIRING? WHEN THE MARGINAL PRODUCT OF THE NEXT WORKER HIRED BEGINS TO DIMINISH.
STAGE II: DIMINISHING RETURNS TOTAL PRODUCTION KEEPS GROWING BUT THE RATE OF INCREASE IS SMALLER; EACH WORKER IS STILL MAKING A POSITIVE CONTRIBUTION TO TOTAL OUTPUT, BUT IT IS DIMINISHING. 12. WHAT HAPPENS TO THE RATE OF INCREASE IN TOTAL PRODUCTION DURING THIS STAGE?
IT IS STARTING TO SLOW.
13. WHAT IS THE PRINCIPLE OF DIMINISHING RETURNS?
THE STAGE AT WHICH OUTPUT INCREASES AT A DIMINISHING RATE AS MORE UNITS OF VARIABLE INPUT ARE ADDED.
STAGE III: NEGATIVE RETURNS 14. WHAT HAPPENS TO MARGINAL PRODUCT DURING THIS STAGE?
MARGINAL PRODUCT BECOMES NEGATIVE.
15. WHAT HAPPENS TO TOTAL PLANT OUTPUT DURING THIS STAGE?
THE TOTAL PLANT OUTPUT DECREASES.
16. WHAT EFFECT DOES THIS STAGE HAVE ON HIRING?
MOST COMPANIES DO NOT HIRE WORKERS WHOSE ADDITION WOULD CAUSE TOTAL PRODUCTION TO DECREASE.
SECTION 2: COST, REVENUE, AND PROFIT MAXIMIZATION
MEASURES OF COST
FIXED COSTS ARE THOSE THAT A BUSINESS HAS EVEN IF IT HAS NO OUTPUT. THESE INCLUDE MANAGEMENT SALARIES, RENT, TAXES, AND DEPRECIATION ON CAPITAL GOODS.
TOTAL FIXED COST, OR OVERHEAD, REMAINS THE SAME. VARIABLE COSTS ARE THOSE THAT CHANGE WHEN THE RATE OF OPERATION OR PRODUCTION CHANGES, INCLUDING HOURLY LABOR, RAW MATERIALS, FREIGHT CHARGES, AND ELECTRICITY.
TOTAL COST IS THE SUM OF ALL FIXED COSTS AND ALL VARIABLE COSTS.
MARGINAL COST IS THE EXTRA (VARIABLE) COST INCURRED WHEN A BUSINESS PRODUCES ONE ADDITIONAL UNIT OF PRODUCT.
NOTE: ALL COST ARE VARIABLE IN THE LONG RUN.
APPLYING COST PRINCIPLES A SELF-SERVICE GAS STATION IS AN EXAMPLE OF HIGH FIXED COSTS WITH LOW VARIABLE COST. THE RATIO OF VARIABLE TO FIXED COST IS LOW. WHERE AS, A FULL SERVICE GAS STATION MAY HAVE HIGER VARIABLE COSTS THAN ONE THAT SELLS ONLY GAS, BECAUSE IT EMPLOYS A VARIETY OF EMPLOYEES. E-COMMERCE (ELECTRONIC BUSINESS OR EXCHANGE CONDUCTED OVER THE INTERNET) IS AN EXAMPLE OF AN INDUSTRY WITH LOW FIXED COSTS.
MEASURES OF REVENUE TOTAL REVENUE IS THE NUMBER OF UNITS SOLD MULTIPLIED BY THE AVERAGE PRICE PER UNIT.
**UNIT SOLD X AVERAGE PER UNIT** MARGINAL REVENUE IS THE EXTRA REVENUE CONNECTED WITH PRODUCING AND SELLING AN ADDITIONAL UNIT OF OUTPUT.
MARGINAL ANALYSIS MARGINAL ANALYSIS IS COMPARING THE EXTRA BENEFITS TO THE EXTRA COSTS OF A PARTICULAR DECISION.
***COST-BENEFIT DECISION MAKING*** THE BREAK-EVEN POINT IS THE TOTAL OUTPUT OR TOTAL PRODUCT THE BUSINESS NEEDS TO SELL IN ORDER TO COVER ITS TOTAL COSTS.
BUSINESSES WANT TO FIND THE NUMBER OF WORKERS AND THE LEVEL OF OUTPUT THAT GENERATES MAXIMUM PROFITS. THE PROFIT-MAXIMIZING QUANTITY OF OUTPUT IS REACHED WHEN MARGINAL COST AND MARGINAL REVENUE ARE EQUAL.
WHICH SOCIETY’S ECONOMIC GOALS ARE ASSOCIATED WITH PROFIT MAXIMIZATION?
ECONOMIC FREEDOM AND ECONOMIC EFFICIENCY
SECTION 3: CHANGES IN SUPPLY
• Explain factors that create changes in supply.
– Input costs—the cost of an input used to produce a good such as raw materials, machinery, or labor will affect supply. A rise in cost will cause a fall in supply at all price level because of the expense.
•
Technology lowers costs and increases supply at all price
levels.
– Government’s influence on Supply—the government can discourage or encourage an entrepreneur or an industry within the country or abroad.
•
Subsidies (a government payment) encourages and supports the entrepreneur.
•
Taxes (an entrepreneur payment) discourages and reduces the supply of some goods by placing and excise tax.
•
Regulation (government intervention) affects the price, quantity, or quality of a good.
SECTION 3: CHANGES IN SUPPLY
• Explain factors that create changes in supply.
– Supply in a Global Economy—the supply of one good produced in one country and imported by another to be sold to consumers.
•
Import restrictions such a tariffs and quotas could cause the supply curve to shift to the left.
– Other influences on Supply—the government can discourage or encourage an entrepreneur or an industry within the country or abroad.
•
Future expectations of prices affects output decisions by the entrepreneur, such as inflation, climate conditions (drought, storm, etc).
•
Number of suppliers affects the price, quantity, or quality of a good.
2. What is a subsidy, and how do subsidies affect the supply curve?
A subsidy is a government payment that supports a business or
market. The government often pays a producer a set subsidy for each unit of a good produced. In the United States, the federal government subsidizes producers in many industries. Subsidies increases the supply
of goods and services and would shift the supply curve to the right.
3. What is an excise tax, and how do excise taxes affect the supply curve?
An excise tax is a tax on the production or sale of a good. It is actually a type of tax that is levied on manufacture, purchase, sale, or consumption of a specific product. Excise taxes are often used on controversial items, they usually effect low income people. Excise tax
causes the supply of goods and services to shift to the left.
4. What effect do regulations have on the supply curve? Why?
Regulations are government intervention in a market that affects the production of a good.
Government could raise or lower the supply through indirect means.
Why producers look at productivity when making supply decisions:
to determine how efficiently their resources are being used in production, to maximize efficiency, and to increase profits
How varying levels of input affects the levels of output:
Adding levels of input increases productivity up to a point and then eventually results in decreased productivity and in negative marginal product.
How changes in production costs affect producers’ supply decisions:
by determining the prices at which producers supply quantities of goods or services by determining production goals
1. Assume cars and gasoline are complements. When the price of gasoline goes up, which of the following will happen to the market for cars?
a. The equilibrium price of cars will increase.
Ans. B
b. The equilibrium quantity of cars will decrease.
c. The supply curve for cars will shift to the left.
d. The supply curve for cars will shift to the right.
2. Suppliers produce two goods, cheese and butter. Assume that there is no cost to switch resources from cheese production to butter production and vice versa. Suppose the demand for butter increases. What do we expect to happen to the equilibrium in the market for cheese?
a. The price will go up and the quantity will drop.
b. The price will go up and the quantity will rise.
Ans. A
c. The price will go down and the quantity will drop.
d. The price will go down and the quantity will rise.
3. If the government announces today that a tax increase of 50 cents per pack of cigarettes is to take place in two weeks, what would you expect to happen today to the current market for cigarettes?
a. The demand for cigarettes would increase.
b. The demand for cigarettes would decrease.
c. The price of cigarettes would increase.
d. Both a) and c) are correct.
Ans. D
4. If bread is an inferior good, then what will happen in the market for bread as the consumer income increases?
a. The quantity will increase.
b. The quantity will decrease.
c. The price will fall.
d. Both b) and c) are correct.
Ans. D
5. If OPEC decided to cut oil production for the coming year, what would be the MOST LIKELY effect?
A. prices would not change B. the price for substitute products would decline C. oil prices would probably rise D. oil prices would probably decline
Ans. C
6. Which determinant MIGHT increase supply in the market?
A. an increase in the price of complementary goods B. an increase in the number of sellers of a product C. an increase in the number of consumers in the market D. an increase in the price of inputs to make the product
Ans. B
7. A price set below the current market price is a characteristic of a A. price floor.
B. price ceiling.
C. regular price.
D. equilibrium price.
Ans. B
8. If the government decided to subsidize the production of bobble-head dolls A. the supply curve will shift to the left. B. the supply curve will shift to the right.
Ans. B
C. the demand for bobble-heads will decrease. D. the demand for bobble-heads will equal the supply. 9. A modest price increase for a monthly cell phone package has had little or no effect on demand. This MOST LIKELY indicates that demand for the product is A. complementary.
C. elastic.
B. inelastic.
D. variable
Ans. B
10. An increase in the market demand for gasoline in the present, all else equal, could be caused by
Ans. A
A. a rise in peoples’ income.
B. a reduction in the price of the gasoline.
C. an expected price decrease in the near future. D. a reduction in the cost of drilling and refining petroleum 11. A price set below the current market price is a characteristic of a A. price floor.
C. regular price.
B. price ceiling.
D. equilibrium price.
Ans. B
12. Which situation is the MOST LIKELY result of a price ceiling being set below the equilibrium price?
A. decreased demand B. a surplus in the market
Ans. C
C. a shortage in the market D. a higher equilibrium price
13.
Which example BEST demonstrates the effect of artificial price controls on supply and demand?
A. Both rent controls and minimum wage laws result in shortages. B. Both rent controls and minimum wage laws result in surpluses. C. Rent controls result in surpluses and minimum wage laws result in shortages.
D. Rent controls result in shortages and minimum wage laws result in surpluses.
Ans. D
14. Looking at the graph, if there is an increase in income for the households in this market, what is the MOST LIKELY result?
A. The equilibrium price will fall.
B. The demand curve will shift to the left.
C. The demand curve will shift to the right.
Ans. C
D. The supply curve will become a vertical line.