ECON CH 5-3 CHANGES IN SUPPLY

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Just as several factors can affect demand at all price levels, a separate set of factors can affect supply. In this section, you will read about these factors that can affect supply, and the factors that shift an entire supply curve to the left or right.	Input Costs Any change in the cost of an input used to produce a good—such as raw materials, machinery, or labor—will affect supply. A rise in the cost of an input will cause a fall in supply at all price levels because the good has become more expensive to produce. On the other hand, a fall in the cost of an input will cause an increase in supply at all price levels.

Which statement is true?

a.	A rise in the cost of an input will cause a rise in supply while a fall in the cost of an input will cause an increase in supply	c.	A rise in the cost of an input will cause a fall in supply while a fall in the cost of an input will cause an increase in supply
b.	A rise in the cost of an input will cause a fall in supply while a rise in the cost of an input will cause an increase in supply	d.	A fall in the cost of an input will cause a fall in supply while a fall in the cost of an input will cause a decrease in supply

Factors that reduce supply shift the supply curve to the left, while factors that increase supply move the supply curve to the right.

Effect of Rising Costs
Think of the effects of input costs on the
relationship between marginal revenue
(price) and marginal cost. A supplier sets
output at the most profitable level, where
price is equal to marginal cost. Marginal
cost includes the cost of the inputs that go
into production, so a rise in the cost of
labor or raw materials will translate directly
into a higher marginal cost. If the cost of
inputs increases enough, the marginal cost
may become higher than the price, and the
firm may not be as profitable as it could be.

If a firm has no control over the price,
the only solution is to cut production and
lower marginal cost until marginal cost
equals the lower price. Supply falls at each
price, and the supply curve shifts to the left,
as illustrated in Figure 5.12.

Technology
Input costs can drop as well. Advances
in technology, for example, can lower
production costs in many industries.
Sophisticated robots have replaced many
workers on assembly lines and allowed
manufacturers to spend less on salaries.
Computers have simplified tasks and cut
costs in fields as diverse as journalism and
architecture. E-mail that can be sent and
received in an instant can replace slowly
delivered letters and expensive long distance
phone calls.

Technology lowers costs and increases
supply at all price levels. This effect is seen
in a rightward shift in the supply curve in
Figure 5.12.

Things that reduce the supply shift the curve to the

a.	right	c.	horizontal
b.	left	d.	vertical

Imagine that you are a contractor who builds homes in the Chula Vista area. You have no control of the price of homes because the market keeps changing. You find that selling price of new homes has fallen and it now costs you more to build the houses than you can sell them for. The cost of raw materials has risen while the selling price for houses has fallen. What is your only option?

a.	cut the price of the homes	c.	Raise the price of the homes
b.	Produce more homes until the cost of building the homes equals the cost of building them	d.	Produce fewer homes until the cost of building the homes equals the cost of building them.

Factors that increase supply shift the supply curve to the

a.	right	c.	vertical
b.	left	d.	horizontal

Which graph best represents the effects of higher costs?

a.	the one on the left	c.	neither - this is a trick question
b.	the one on the right

Adopting technology can have a dramatic effect on a company. How would a company likely feel the effects of technology .

a.	technology is not likely to effect a company’s production	c.	production costs will most likely decline
b.	production costs will rise dramatically	d.	production costs will most likely increase

Government’s Influence on Supply
The government has the power to affect the
supplies of many goods. By raising or
lowering the cost of producing goods, the
government can encourage or discourage
an entrepreneur or an industry within the
country or abroad.

Subsidies
One method used by governments to affect
supply is to give subsidies to the producers
of a good, particularly food. 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.

Governments have several reasons for
subsidizing producers. European countries
faced food shortages during and after
World War II. Although imported food is
cheaper, European governments protect
farms so that some will be available to
grow food in case imports are ever cut off.
The government of France also subsidizes
small farms because French citizens want
to protect the lifestyle and character of the
French countryside.

Governments in developing countries
often subsidize manufacturers to protect
young, growing industries from strong
foreign competition. In the past, countries
such as Indonesia and Malaysia have subsidized a national car company as a source of pride, even though imported cars were less expensive to build. In Western Europe, banks and national airlines were allowed to suffer huge losses with the assurance that the government would cover their debts. In many countries, governments have stopped providing industrial subsidies in the interest of free trade and fair competition.

In the United States, the federal government
subsidizes producers in many industries.
Farm subsidies are particularly
controversial, however, especially when
farmers are paid to take land out of cultivation
to keep prices high. In these cases,
more efficient farmers are penalized, and
farmers use more herbicides and pesticides
on lands they do cultivate to compensate
for production lost on the acres the government pays them not to plant.

How does the government effect supply produced by companies?

a.	They use their power to change the cost of production	c.	They issue laws that dictate what the demand for products will be
b.	They issues laws that dictate what the supply of products will be	d.	Government action has no effect on supply whatsoever

The government wants to encourage people to use solar power. They will pay part of the cost of having solar power installed in your home. Is this a subsidy?

yes

10.

Which government activities below can be considered a subsidy? pick 3

a.	the government allows cattle ranchers to graze their cattle on government land	c.	the government pays for low income housing
b.	the government buys large quantities of milk so as to support the price of milk	d.	the government provides pensions for its workers

Taxes
A 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. An excise tax increases production costs by adding an extra cost for each unit sold.

Excise taxes are sometimes used to discourage the sale of goods that the government thinks are harmful to the public good, like cigarettes, alcohol, and high-pollutant gasoline. Excise taxes are built into the prices of these and other goods, so consumers may not realize that they are paying them. Like any increase in cost, an excise tax causes the supply of a good to decrease at all price levels. The supply curve shifts to the left.

Regulation
Subsidies and excise taxes represent ways that government directly affects supply by changing revenue or production costs. Government can also raise or lower supply through indirect means. Government regulation often has the effect of raising costs. Regulation is government intervention in a market that affects the price, quantity, or quality of a good.

For many years, pollution from automobiles harmed the environment. Starting in 1970, the federal government required car manufacturers to install technology to reduce pollution from auto exhaust. For example, new cars had to use lead-free fuel because scientists linked health problems to lead in gasoline. Regulations such as these increased the cost of manufacturing cars and reduced the supply. The supply curve shifted to the left.

11.

What effect do excise taxes have on products?

a.	It reduces supply and makes the supply curve shifts to the right	c.	In increases supply because the cost of products is now higher
b.	It increases demand for products	d.	It reduces supply and makes the supply curve shift to the left

12.

What do we call government intervention in a market that affects the price, quantity, or quality of a good.

a.	score keeping	c.	investment
b.	regulation	d.	privatization

13.

When the government demanded that cars have pollution controls, how did the supply curve shift?

a.	to the right	c.	horizontal
b.	to the left	d.	vertical

Supply in the Global Economy
As you read in earlier chapters, a large and
rising share of goods and services is
produced in one country and imported by
another to be sold to consumers. The
supplies of imported goods are affected by
changes in other countries. Here are some
examples of possible changes in the supply
of products imported by the U.S.

• The U.S. imports carpets from India. An
increase in the wages of Indian workers
would decrease the supply of carpets to
the U.S. market, shifting the supply curve
to the left.
• The U.S. imports telephones from Japan.
A new technology that decreases the cost
of producing telephones would increase
the supply of telephones to the U.S.
market, shifting the supply curve to the
right.
• The U.S. imports oil from Russia. A new
oil discovery in Russia would increase the
supply of oil to the U.S. market and shift
the supply curve to the right.

Import restrictions also affect the supply
curves of restricted goods. The total supply
of a product equals the sum of imports and
domestically produced products. An import
ban on sugar would eliminate foreign sugar
suppliers from the market, shifting the
market supply curve to the left. At any
price, a smaller quantity of sugar would be
supplied. If the government restricted
imports by establishing an import quota,
the supply curve would shift to the left, but
the shift would be smaller than it would be
for an absolute ban on sugar imports.

14.

What is the total supply of a product.

a.	the total produced in side the country plus the total imported	c.	the total produced domestically
b.	the total demand plus the total supply	d.	the total imported from other countries

15.

Canada, the U.S. and Mexico have a treaty called the North American Free Trade Agreement. (NAFTA) It allows for the free exchange of goods across borders. The workers in Mexico make $3 to $4 dollars an hour while American workers make about $15 an hour. How is NAFTA likely to effect the unemployment rate in the United States?

a.	More unemployed	c.	Unemployment about the same
b.	Less unemployed	d.	There is no way to tell

16.

The U.S. and Cuba produce large quantities of sugar. At the present time the U.S. does not import any sugar from Cuba. It is called an embargo on Cuban sugar. The U.S. has just begun to restore relations with Cuba. What will happen to domestic (U.S.) sugar supplies if we start to import sugar from Cuba. First think how the supply of sugar will affect price. Next consider the supply of domestic sugar in response.

a.	domestic supply will increase	c.	domestic supply will stay about the same
b.	domestic supply will decrease	d.	there is no way to tell what domestic supply will be until it happens

Other Influences on Supply
While government can have an important
influence on the supply of goods, there are
also other important factors that influence
supply.

Future Expectations of Prices
If you were a soybean farmer, and you
expected the price of soybeans to double
next month, what would you do with the
crop that you just harvested? Would you
sell it right now, or hold on to it until
soybean prices rise? Most farmers would
store their soybeans until the price rose,
cutting back supply in the short term.

If a seller expects the price of a good to
rise in the future, the seller will store the
goods now in order to sell more in the
future. On the other hand, if the price of
the good is expected to drop in the near
future, sellers will earn more money by
placing goods on the market immediately
before the price falls. Expectations of
higher prices will reduce supply now and
increase supply later, and expectations of
lower prices will have the opposite effect.

In Chicago there is a market, much like the stock exchange, where people buy and sell commodities such as food to make money. The idea is to buy food at a low price, hold on to it, and then sell when the price goes up. Of course if the price of the food falls you could loose money.

The Chicago Commodities Exchange

Inflation
Inflation is a condition of rising prices.
During periods of inflation, the value of
cash in a person’s pocket decreases from
day to day as prices rise. Not too long ago,
one dollar could buy a movie ticket or a
small meal, but inflation over many years
has reduced the value of the dollar.
However, a good will continue to hold its
value, provided that it can be stored for a
long period of time. When faced with inflation,
suppliers prefer to hold on to goods
that will maintain their value rather than
sell them for cash that loses its value
rapidly. As a result, inflation can affect
supply by encouraging suppliers to hold on
to goods as long as possible. In the short
term, supply can fall dramatically.

During the Civil War, the South faced
terrible inflation. The prices of most goods
rose very quickly. There were shortages of
food, and shopkeepers knew that prices
on basic food items like flour, butter, and
salt would rise each month. A few decided
to hoard their food and wait for higher
prices. They succeeded too well; the supply
of food fell so much that prices rose out
of the reach of many families. Riots broke
out in Virginia and elsewhere when hungry
people decided they weren’t going to wait
for the food to be released from the warehouses, and the shopkeepers lost their
goods and their profits.

Number of Suppliers
One additional factor to consider when
looking at changes in supply is the number
of suppliers in the market. If more suppliers
enter a market to produce a certain good,
the market supply of the good will rise,
and the supply curve will shift to the right.
On the other hand, if suppliers stop
producing the good and leave the market,
the supply will decline. There is a positive
relationship between the number of
suppliers in a market and the market
supply of the good.

17.

You are a farmer who grows corn. You believe that in 6 months the price of corn will rise dramatically. What would you do to maximize your profits?

a.	Sell now	c.	Do not sell at all
b.	Hold on to your corn and sell in 6 months	d.	Sell now and charge more for your corn.

18.

Ethanol is made from corn. Cows eat corn. The government requires all gasoline to contain a certain amount of ethanol. THINK!! How will this effect the future price of meat?

a.	The price of beef will rise	c.	The price of beef is not effected because the government does not require cows to eat corn
b.	The price of beef will fall	d.	The price of beef will remain the same

19.

Inflation is a measure of

a.	how many goods and services are controlled by government price supports	c.	how many goods and services a dollar will buy
b.	how many people have full time jobs in the economy	d.	how many goods and services are available for purchase

20.

In 1950 I quit school and went to work full time. I made 75 cents an hour. Gasoline cost 25 cents a gallon so I could buy about 3 gallons of gas for an hours work. Today gasoline costs about $3.50 a gallon but a starting wage is about $10. an hour. What effect has inflation had on the price of a gallon of gasoline?

a.	Has had no effect at all. Gasoline costs about the same today as it did in 1950	c.	Inflation has made the price of gasoline go higher
b.	The price of gasoline has risen dramatically	d.	Inflation has made the price of gasoline go lower

21.

Victor Santana owns a small Mexicans restaurant in a small town. Everyone loves Victor’s Mexican food and he makes a good living with his restaurant. Sensing the demand for Mexican food, Taco Bell opens a restaurant in the small town. Then two other people open Mexican restaurants in the same town. What can we expect the market supply of taco’s to be in this small town?

a.	the supply of taco’s will go down	c.	`there should be no change in the supply of taco’s
b.	the supply of taco’s will rise	d.	because of the competition everyone will eat more taco’s

Where Do Firms Produce?
So far we have ignored the issue of where
firms locate their production facilities. For
many firms, the key factor is the cost of
transportation—the cost of transporting
inputs to a production facility and the cost
of transporting the finished product to
consumers. A firm will locate close to
input suppliers when inputs, such as raw
materials, are expensive to transport. A
firm will locate close to its consumers when
output is more costly to transport.

For an example of a firm that locates
close to its input suppliers, consider a firm
that cooks tomatoes into tomato sauce.
Suppose that a firm uses seven tons of
tomatoes to produce one ton of sauce. The
firm locates its plant close to the tomato
fields—and far from its consumers—
because it is much cheaper to ship one ton
of sauce to consumers than to ship seven
tons of tomatoes to the plant. Tomato
sauce producers cluster in places like
California’s Central Valley where weather
and soil conditions are favorable for the
growing of tomatoes.

For an example of a firm that locates close
to its consumers, consider a firm that bottles
soft drinks. The firm combines concentrated
syrup with local water, so the firm? ’s
output (canned drinks) weighs more than its
transportable input (syrup). As a result, the
firm locates close to its consumers—and far
from its syrup supplier—because the firm
saves more on transporting soft drinks than
it pays to transport its syrup. In general, if a
firm’s output is bulky or perishable, the firm
will locate close to its consumers.

Other firms locate close to inputs that
cannot be transported at all. Some firms
are pulled toward concentrations of
specialized workers such as artists, engineers, and programmers. Other firms are pulled toward locations with low energy costs. Many firms locate in cities because of the rich variety of workers and business services available in urban areas.

22.

Which statement below is true

a.	Companies will try to locate their factories in places that minimize transportation costs	c.	Transportation costs are the same all of the country so it does not matter
b.	Companies have little concern over transportation costs	d.	Transportation costs do not matter because they are tax deductible

a.	subsidy	c.	regulation
b.	excise tax

23.

a tax on the production or sale of a good

24.

a government payment that supports a business or market

25.

government intervention in a market that affects the production of a good