Module-7
S upply :
doing well by doing good
firm behavior and supply
TEACHER’S GUIDE
P. 195Defined
P. 199Content standards
P. 200Materials
P. 200Procedure
P. 206Closure
P. 207Assessment
P. 209Overheads
P. 2282Answer key
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
P. 210N
P. 211N
P. 212N
P. 213N
P. 214N
P. 215N
P. 216N
P. 217N
P. 218N
Visual-1: Supply defined
Visual-2: Supply
Visual-3: Increase in supply
Visual-4: Decrease in supply
Visual-5: Supply of babysitting
Visual-6: Da Donut Shoppe production activities
Visual-7: Da Donut Shoppe
Visual-8: What is Profit?
Visual-9: Doing well by doing good
Lessons 2
Copy and handout to students.
P. 2202 Lesson-I: Supply and price
P. 2222 Lesson-II: Supply shifters
P. 22442 Lesson-III: Skater Boardss
P. 2262 Lesson assessment
Supply
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Module-7
Teacher
firm behavior and supply
DEFINED
H
ow does society decide how much of a commodity should be
produced? In a communist regime, or a command and control
economy, a planning board determines how much of each good will
be produced. In a market-oriented economy, production is determined
through the coordination of consumer and producer decisions in the
market. Consumers purchase the desired goods and services provided
by producers. Producers, or firms, decide how much is going to be
produced and how it is going to be produced.
In general, firms making these decisions are motivated by the desire
to earn profits. Firms will produce a commodity as long as they believe
they can earn revenues that are greater than, or at least equal to, their
costs of production. When the prospects for profits in an industry
increase, firms are likely to produce more or increase output.
To earn profits, firms must produce commodities that consumers
want and are willing to buy. The following example illustrates the
idea. John is a high school student with a gift for commercial art. He
paints, block-prints, and tie dyes T-shirts to earn spending money. John
produces two types of T-shirts. One is a “save-the-environment” shirt
using a block print of the globe surrounded by various animals, insects,
and plant species around it. The other is a shirt with a flaming soccer ball
on an orange background. The design is the logo for a local soccer team,
the Firing Pumpkins. Both shirts take about the same amount of time
and materials to produce. Soccer is very popular in John’s community
and most of John’s customers want the flaming orange T-shirt. John
allocates most of his resources to producing flaming orange shirts. John
is doing good in the sense that he is satisfying consumer wants. At the
same time he is doing well meeting his own goals.
Just like John, who wants to make money from his small scale
commercial enterprise, firms create goods and services they believe can
be sold with the intention of charging prices that exceed or at least cover
their production costs. In general, the owners and managers of firms
want to make profits and so they seek to produce goods and services
that consumers need and want.
Lets take a look at an expanding coffee enterprise Starbucks. Starbucks
was opened in 1971 as a coffee roasting facility. The original Starbucks
sold gourmet coffee beans and the accessories to make “a great cup of
joe.” They did not sell hot coffee to go. The insight of one employee,
Howard Schultz (who became owner), led the company to start producing
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coffee Italian style. Schultz believed that Seattle consumers would like the
atmosphere and culture of the Italian espresso bar. His vision expanded
into the largest, most successful coffee venture, with more than 11,000
stores in 37 countries, 100,000 employees, and revenues in excess of
$7.5 billion annually.
Profit motivated Schultz to provide what he believed consumers
desired. Profit motivates the entrepreneur to provide better goods and
services desired by the consumer and to minimize costs. Indeed, the
introduction of the gourmet coffee café by Starbucks has led many other
entrepreneurs into the same field. Espresso bars are everywhere.
Profit is a reward to producers and firms for producing what consumers
want at a cost less than revenues. Profit is simply the difference between
a firm’s total revenues and its total costs. When a firm produces a single
commodity, its total revenue (TR) is equal to the per unit price of the
commodity (P) multiplied by the quantity (Q) that the firm has sold.
TR = P x Q
[Total Revenue = Price x Quantity].
If you sold 6 CDs to your friend for $5, each what is your total revenue?
$5x6 = $30. Profit is the difference between total revenue and total
cost.
Profit equals total revenue (TR) minus total costs (TC).
Profit = TR-TC
[Profit = Total Revenue-Total Cost].
If you paid $25 for the CDs you sold to your friend, how much profit
did you earn? $30-$25 = $5
To understand how much of a product will be supplied in a market, it
is useful to assume that firms serving that market are seeking to maximize
their profits. Even most non-profit organizations, such as Red Cross or
Boy Scouts, behave as though they are trying to maximize profits. Any
change that increases firms’ profits at current output levels will encourage
them to increase production. The opposite also holds true. Events that
reduce profits at current output levels will generally lead firms to reduce
production.
Many factors can influence a firm’s profit. Several of these will be
discussed. Importantly, in each case we will change one and only one factor,
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assuming that other factors which could affect profits remain unchanged.
Change in the price of the commodity
Most obviously, profits will increase at current output levels when
the price of the commodity (the good or service produced) goes up but
no other prices or input costs change. An increase in the price of the
commodity will increase total revenue, and with costs remaining the
same profits (TR-TC) will go up. Thus an increase in the commodity’s
price will encourage firms to increase the quantity supplied or
produced.
Quantity is the number of units produced over a specified period of
time. At a given price, a firm may produce 100 units of a commodity
per month or 1200 units per year (which, of course, is the same rate of
production). A commodity’s supply curve shows the quantity supplied
to a market at each price over a fixed period of time. The supply curve
is constructed under the assumption that among all the factors that
can affect profits and firms’ production decisions, the price of the
commodity itself is the only factor that changes.
The supply schedule below shows the quantity of donuts producers
are willing to provide at different prices. Plotting these points on the
graph demonstrates that price and the quantity supplied have a positive
relationship. As the per unit price (on the vertical axis) increases, the
quantity firms are willing to produce (on the horizontal axis) will also
increase. As price rises from $1.50 to $2.00 per donut, firms are willing
to produce 25 more donuts. This is a movement along the supply curve
from a quantity supplied of 50 to a quantity supplied of 75 donuts.
Changing the price of an input
Profits (TR-TC) will change when the price of an input, a resource
used to produce the commodity, changes. At a given level of output, a
fall in the price of an input will decrease the total costs of production.
Typically, other things remaining unchanged, a decrease in input prices
will result in higher levels of output. At a fixed price for the commodity,
a decrease in an input price results in expanded output, causing a shift
in the supply curve (outwards to the right in this case, as more will
be produced at the given price). Input prices are often called supply
shifters, as are other variables that affect production decisions when
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the price of the commodity has not changed.
If the cost of sugar used to produce donuts is reduced, but everything
else remains the same, most firms will be willing to supply more donuts at
a given price. The graph below shows a shift to the right of the supply curve
for donuts. At any given price, say $1.50, firms will now produce more, 70
instead of only 50 donuts. If everything else remains the same but input
costs decline, potential profits will increase and output will also increase.
Similarly, the introduction of new technologies typically lowers
production costs and will increase profits at current output levels.
Therefore, firms will increase quantities supplied at the current price
of the commodity, shifting the supply curve to the right.
Other supply shifters
In addition to input prices and technological advancements, other
events or factors can also cause supply to change or shift for given
commodity prices. These other supply shifters include:
1. Changes in the number of firms producing the product:
a. An increase in the number of firms will increase supply, shifting
the curve to the right.
b. A decrease in the number of firms will decrease supply, shifting
the curve to the left.
2. Natural disasters:
a. A freeze in Florida will decrease the supply of oranges, forcing
the supply curve for oranges to shift to the left.
b. Hurricane Katrina destroyed a large proportion of the U.S. sugar
cane crop, shifting the supply curve of sugar cane to the left.
3. Policy driven changes (such as a tax increase or new regulations on
the production of a commodity):
a. An increase in taxes on a commodity will increase production
costs and decrease potential profit. This will shift the supply
curve to the left and reduce quantities supplied at current prices.
b. A regulation requiring stricter safety standards for construction
may increase the cost of building houses, reduce the
production of new houses at current prices, and shift the supply
curve for new houses to the left.
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firm behavior and supply
CONCEPTS
1.
2.
3.
4.
5.
6.
Supply and supply curve
Quantity supplied
Supply shifters (shifts in supply or change in supply)
Profit
Total revenue
Total cost
OBJECTIVES
1. Understand the Law of Supply.
2. Realize that firms behave as though they are maximizing profits.
3. Know that an increase in price will motivate an increase in quantity
supplied.
4. Understand that an increase in potential profit will likely increase
production.
5. Recognize supply shifters and their effects on the supply curve.
6. Recognize the difference between a change in quantity supplied
and a change in supply.
CONTENT STANDARDS
National Content Standards in Economics
1. (Standard 1) Productive resources are limited. Therefore, people
cannot have all the goods and services they want; as a result, they
must choose some things and give up others.
2. (Standard 2) Effective decision making requires comparing the
additional costs of alternatives with the additional benefits.
3. (Standard 3) Different methods can be used to allocate goods and
services.
4. (Standard 4) People respond predictably to positive and negative
incentives.
5. (Standard 7) Markets exist when buyers and sellers interact.
6. (Standard 8) Prices send signals and provide incentives to buyers
and sellers.
7. (Standard 14) Entrepreneurs are people who take the risks of
organizing productive resources to make goods and services.
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Montana Social Studies Content (Standard 5)
1. (Benchmark 1) Identify and explain basic economic concepts.
2. (Benchmark 2) Use basic economic concepts to explain current
and historical events.
TIME REQUIRED
2-4 class periods
MATERIALS
Overhead projector
Transparency pen
Overheads: Copy to transparency:
N Visual-1: Supply defined
N Visual-2: Supply
N Visual-3: Increase in supply
N Visual-4: Decrease in supply
N Visual-5: Supply of babysitting
N Visual-6: Da Donut Shoppe production activities
N Visual-7: Da Donut Shoppe
N Visual-8: What is Profit?
N Visual-9: Doing well by doing good
Copies of lessons for each student:
2 Lesson-I: Supply and price
2 Lesson-II: Supply shifters
2 Lesson-III: Skater Boardss
2 Lesson assessment
PROCEDURE
1. Discuss with students the idea of supply.
LQuestion: Ask them what goods and services are available to
them.
LQuestion: How does society determine which commodities
should be produced and in what quantities?
Answer: In the old Soviet system, government planners in one
agency decided what should be produced and how much of it.
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A different agency then set the prices for the various products
produced. Images of bread lines show us that the two agencies
did not do a very good job matching the quantity supplied with
the quantity desired. In the U.S., for the most part, we don’t rely
on government agencies to determine the nation’s output. Rather,
entrepreneurs and consumers determine output with the information
provided by price in the market.
2. Display NVisual-1: Supply defined. Talk about the differences
between planned and market economies. Discuss the different
values that students in the classroom hold. Some students wear
T-shirts, others wear polo shirts. One student might like bright,
vibrant colors, another pastels. In a market economy we are
fortunate that producers respond to the different values and desires
of consumers. If a producer in a market economy makes a product
that consumers do not like, few will be sold. Producers must respond
to consumer desires.
3. Have students imagine they run a lawn mowing service.
LQuestion: Ask them if they are likely to spend more or less time
mowing if the pay they receive increases.
Answer: Most students will be willing to work more hours if they
make more money.
Display NVisual-2: Supply. Explain the supply schedule at the top
of the overhead. As the hourly wage goes up, more hours of mowing
are provided. Move to the graph below and carefully explain the
axes. The horizontal (or X) axis shows the quantity produced. In this
example the quantity is the number of hours spent mowing. The
vertical (or Y) axis shows the per unit (or per quantity) price. In the
lawn mowing example, this is the price or wage per hour.
4. Discuss the idea that if nothing but the commodity price changes,
producers are likely to adjust the quantity they produce. A response
to a change in price is called a change in quantity supplied. A
higher price, everything else the same, will encourage producers
and firms to provide (or supply) more because they can increase
their profits.
5. Discuss with students some of the commodities they provide
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to the community and how they determine how much they are
willing to supply. Recall the discussion of the opportunity cost to
babysit in module two. Display NVisual-3: Supply of babysitting.
Ask students to raise their hand if they are willing to babysit this
evening for 1 hour at $2 per hour. Fill in the quantity of hours
the class is willing to provide at a wage rate of $2 per hour in
the quantity column. This is the number of students willing to
babysit for one hour at $2 per hour. Explain the graph axes and
the supply schedule. The vertical axis shows different possible
prices for each hour of babysitting. It shows the hourly wage
rate. The horizontal axis shows the number of hours the class is
willing to babysit at a given wage rate. Now increase the wage
being offered to the class to $4 per hour, how many students are
willing to babysit now? Students that were willing to accept $2
for one hour should also be willing to work for the higher wage.
Continue to fill in the column for quantity of babysitting given
the different wages, the price, in the supply schedule. The class
supply schedule for babysitting shows the quantity of babysitting
that will be supplied at different prices.
LQuestion: How do teenagers determine how much babysitting
they are willing to do?
Answer: A teenager will babysit as long as the benefits are greater
than the opportunity cost.
LQuestion: Did some students baulk at the idea of babysitting at
low wages but changed their mind as the wages rose? Why?
Answer: The babysitting job has become more enticing because
the payment for their time has increased, increasing the profitability
of babysitting.
6. Use the graph on NVisual-3: Supply of babysitting to trace the
supply curve defined in the supply schedule by the class. The
supply curve should be upward sloping. Generally, there is a
positive relationship between the price of a commodity and the
quantity supplied. Remember, if a student is willing to babysit
for 1 hour at $2 per hour, they will also be willing to babysit for
1 hour at a higher hourly wage.
Note: The supply curve does not always slope upwards to
the right; that is, a higher price for a commodity does not always
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increase the amount of it that is produced. If students were to tell
you how many hours they were willing to babysit at different wages,
at first the hours spent babysitting would go up as the wage rose. At
some point, if the wage for babysitting were say $1,000 per hour,
students would begin to babysit less. At some point, workers begin
to prefer more leisure to more pay. As a result, the supply curve for
wages may eventually begin to bend backward.
7. Handout 2 Lesson-I: Supply and price. Give students time to work
through the lesson. Discuss the idea that as Cindy’s potential for
earning profits increases, she is willing to provide more lawn care
services. This also means that she must give up doing other things,
like sleeping in on Saturday morning. The higher profits motivate
Cindy to work more. The supply schedules and graphs are displayed
in NVisual-2: Supply.
This lesson discusses changes in quantity supplied. The supply
curve is upward sloping because at higher prices (everything else
remaining the same) firms can earn greater profits and will increase
the quantity supplied. Any given supply curve shows the quantity
firms are willing to supply at different prices.
8. Handout 2 Lesson-II: Supply shifters. Give students time to read
through the lesson. This lesson discusses a change or shift in
supply. Before students work through the lesson talk about the
factors that will cause the supply curve to shift. Display NVisual-4:
Increase in supply. Discuss the different factors that will shift
or change the supply curve. An increase in supply is a shift to
the right, a decrease in supply is a shift to the left. NVisual-5:
Decrease in supply, shows a leftward, or a decrease, in supply.
When the cost of inputs change, the supply curve will shift. The
supply curve will increase (shift right) if input costs decline or
technology increases. The supply curve will decrease (shift left) if
input costs rise. Other factors that will change (shift) supply are
firm expectations, natural or political disruptions, and a change
in the number of firms providing the product.
9. Create an imaginary store in your classroom. All members of the
class are going to be owners of the firm, Da Donut Shoppe. The shop
buys donuts from the local grocery store and sells them out of the
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classroom. Talk about the costs of providing donuts to the school.
10.Display NVisual–6: Total cost. Da Donut Shoppe Production
activities.
LQuestion: Itemize the production activities that are a cost to the
firm (avoid estimating actual costs).
Answer: The cost to provide donuts would include the explicit
costs, like the price of the donuts and gas purchased to deliver
the donuts. Costs would also include the implicit costs; the
opportunity cost of the firm owned resources. These would include
the opportunity cost of: The individual’s time that is delivering the
donuts (if wages are paid, this would be an explicit cost), the vehicle
being used for delivery (if firm owned), the classroom where the
donuts are going to be sold, and the time it takes for store clerks to
sell the donuts. The sum of all of the costs would be the total cost
of the firm.
11.Now, suppose Katie, a student, can pick up two dozen donuts on
her way to school. Each donut will cost $.35. Only two dozen
donuts can be purchased at one time. If more donuts are needed,
someone else must make a special trip to the store. The necessary
time and transport will increase the cost of the next two dozen
donuts to $.45 per donut. If even more donuts are needed, Mr.
Jack, will have to go and pick them up. The cost of the last two
dozen donuts will be $.55. Six dozen is the maximum number
of donuts the class can supply.
LQuestion: Assuming the class can sell as many donuts as they
provide, at a selling price of $.30 per donut, how many donuts
will the class store provide?
Answer: At $.30 the class will not provide any donuts. The cost
to provide the first two dozen donuts ($.35) would be more than
the revenue received per donut ($.30).
LQuestion: How many will they provide at $.35?
Answer: At $.35 the class would provide two dozen donuts.
Total revenues ($.35 x 24 donuts) would exactly equal total costs
($.35 x 24 donuts), so profit would equal zero.
LQuestion: Will they provide more at $.45? Why?
Answer: At $.45 per donut the class would provide four dozen
donuts. They earn $.10 profit each on the first 24 sold.
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LQuestion: How many will the class provide at $.50?
Answer: At $.50 the class would still provide four dozen donuts.
It would cost them more than $.50 per donut to increase the
donuts available for sale.
LQuestion: How many at $.55?
Answer: At $.55 per donut it would be worthwhile for Mr. Jack
to pick up the remaining two dozen donuts, hence the class would
provide a total of six dozen donuts.
LQuestion: What is the profit at $.55 per donut?
Answer: Profits would be $7.20. Total Revenue is the price per
donut ($.55) times the quantity (72), $39.60. Total costs would be
two dozen at $.35 ($8.40) plus two dozen at $.45 ($10.80) plus
two dozen at $.55 ($13.20), $32.40.
12.Display NVisual-7: Da Donut Shoppe. Graph the points on the
curve and discuss the reasons for an upward sloping supply curve.
This example shows a stepped supply curve as shown below that
approximates the typical upward sloping supply curve.
13.Display NVisual-8: Profit. Reiterate the importance of profit to
firms and entrepreneurs. Profit motivates producers to provide the
goods and services desired by consumers. Along with competition,
profit motivates producers to lower costs, hence increasing
potential profits.
Profit is the amount of sales revenue that is greater than the
(opportunity) cost of production.
Profit = total revenue - total cost.
Total revenue = price x quantity.
14.Handout 2 Lesson-III: Skater Boardss. Have students work through
the exercise to calculate firm profit. Now talk with students about
the products firms produce.
LQuestion: How do firms know what to produce? Remind students
about the lemonade stand discussion from Module-6.
Answer: Firms seek profits by trying to meet the needs and
desires of consumers. Most firms are in business to make a profit,
to earn revenues that are greater than the costs of production.
LQuestion: Many firms also have other goals too. Discuss some
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of these with the class and write them down on the board.
Answer: Firm objectives include making a profit, managing risk
(for survival), maintaining cash flow, abiding by legal regulations,
and embracing ethical responsibilities. Regardless, private firms,
even non-profits, must cover their bottom-line (revenues must
exceed expenses) to stay in business for the long run. Hence,
most firms act to maximize profits. This goal benefits society.
Through profit maximization firms are motivated to lower costs
and produce what consumers desire.
15.Display NVisual-9: Doing well by doing good. Discuss this idea
with students. The firm that produces what society desires at the
lowest cost will profit the most. Higher cost firms, or those that
produce non-desirable products, will profit less or not at all. This
idea was coined the ‘invisible hand’ by economist and moral
philosopher, Adam Smith, in the mid-1700s.
CLOSURE
Lesson Review
1. LQuestion: What information does the supply curve provide?
Answer: The supply curve indicates how much producers (firms)
are willing to supply at different commodity prices.
2. LQuestion: Why is the supply curve upward sloping?
Answer: The supply curve is generally upward sloping because,
everything else held constant, an increase in price will increase
profit. Most firms behave to maximize profits.
3. LQuestion: What is the difference between a change in quantity
supplied and a shift in supply?
Answer: A change in quantity supplied is a movement along
the supply curve in response to a change in price, everything else
remaining the same. A shift or change in supply is in response to
a change in another factor (e.g., a change in input prices, natural
or political disturbance, or an increase in the number of firms).
An increase in supply will shift the curve to the right. A decrease
in supply will shift the curve to the left.
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ASSESSMENT
Multiple-choice questions
___________________________________________________________
1. LQuestion: What does the supply curve show?
a. How producers adjust the quantity of a product they are willing
to supply in response to a change in price.
b. A negative relationship between price and quantity.
c. How much of a commodity producers will provide with a given
amount of inputs (resources).
d. The benefits consumers gain when firms provide goods and
services.
2. LQuestion: A change in quantity supplied is the result of:
a. A change in the number of producers providing the commodity.
b. A change in the price of the commodity.
c. A change in the price of a related good.
d. All of the above.
3. LQuestion: A change in supply could be the result of:
a. A change in the number of producers providing the commodity.
b. A change in the price of the commodity.
c. A change in the quantity bought.
d. All of the above.
4. LQuestion: How do producers in the United States determine what
to produce?
a. Government decides what to produce, then firms make the
products.
b. Firms respond to consumer desires.
c. Firms produce items with the highest supply curve.
d. People produce what they are best at whether society desires
that product or not.
5. LQuestion: Profits are the result of human greed and are bad for society.
a. This statement is true. Only greedy people want to take home
profit from production of goods that society needs.
b. This statement is true. Without profit everyone could buy what
they need and there would be less poverty.
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c. This statement is false. Profits drive firms to produce what
consumers want at the lowest cost.
d. This statement is false. Profits drive firms to produce what
consumers want at the highest cost.
Answers:
1. a
2. b
3. a
4. b
5. c
Discussion/Essay Questions
1. LQuestion: Cade is an excellent musician. He can play all kinds of
music but prefers to play really raunchy music that few people like
to listen to. On Friday evenings Cade plays with a band at the local
café. The band plays popular tunes rather than the raunchy music
Cade prefers. Do consumers and/or the band benefit by playing the
popular (rather than the raunchy) music? Why?
Answer: Consumers and Cade and his band benefit by playing
the popular tunes. Producers, the band in this scenario, can do well
by doing good. Only by satisfying consumers do producers have
the potential to earn profits.
2. LQuestion: Generally the supply curve is upward sloping. Explain
why this is true.
Answer: The supply curve is upward sloping because producers
are profit maximizers; they will supply more of a commodity,
everything else remaining the same, if price increases because there
is also a potential for increased profits.
3. LQuestion: How does the invisible hand work to motivate
producers?
Answer: The invisible hand is like the idea of doing well while
doing good. Firms will naturally respond to consumer desires in
order to benefit themselves in the form of profits. If firms do not
respond to what consumers want they will go out of business.
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Visual
firm behavior and supply
Visual-1: sUPPLY Defined
does a society decide how much of a
commodity should be produced?
bread
In a planned
economy
again !!!
The board
has
determined
its bread for a
year!
A planning board
determines how
much of each
good will be
produced.
what
can
I get you
franky
In a marketoriented economy
production is
determined through
consumers and
producers Decisions
in the market.
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I’ll take
an
apple pie
i’ll take
a can of
spam
sluu
urp
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Visual
Doing well by doing good
firm behavior and supply
Visual-2: sUPPLY
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Visual
firm behavior and supply
Visual-3: INCREASE IN sUPPLY
☞
DECREASE IN COSTS
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nEW TECHNOLOGY
mORE FIRMS
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firm behavior and supply
Visual-4: DECREASE IN sUPPLY
☞
INCREASE
IN COSTS
INCREASE TAXES OR
REGULATIONS
NATURAL DISRUPTION
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Visual-5: SUPPLY OF BABYSITTING
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firm behavior and supply
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Visual
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firm behavior and supply
Visual-6: DA DOnUT SHOPPE Production Activities
E xplicit The explicit costs are the payments that Da Donut Shoppe
C osts makes for goods and services. Explicit costs use out-of-pocket funds.
1.
2.
3.
4.
I mplicit The implicit costs are the opportunity costs of using the
C osts Da Donut Shoppe’s own resources.
1.
2.
3.
4.
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Visual
Visual-7: DA DONUT SHOPPE
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firm behavior and supply
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Visual
firm behavior and supply
Visual-8: What is PROFIT
profit is equal to TOTAL REVENUE
minus total cost
TR = (TOTAL REVENUE) = Price
x
Quantity
TC = (total cost) = Explicit Costs + Implicit Cost
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Visual-9: DOING WELL BY DOING GOOD
The firm that produces what society desires at the lowest
cost will profit the most
The firm that produces non-desirerable products, or
products at a HIGHER COST will profit less
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Module-7
L e sso n
w ork s h e e t s
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Lesson
firm behavior and supply
Lesson–I: Supply and Price
Firm behavior and supply: Higher price, more production
F
irms have many objectives. Firms exist to satisfy the desires of owners, to meet concerns
about social and ethical needs, to meet consumer demands, and to enhance social
well-being, to name just a few. Overwhelmingly, however, the firm’s primary objective is
to maximize profits.
A firm’s profits are its total revenues from sales less its total costs of production. Total
revenues (TR) are equal to the quantity of products sold (Q) times the per unit price (P).
Total costs (TC) are the total expenditures (explicit and implicit) on all inputs used for
production.
Profit = TR-TC
TR = P x Q
Any event that leads a firm to believe that their profits will increase will likely result in
more of the good being produced. The price of a good is possibly the most important factor
determining the profitability. When price increases (and everything else stays the same),
profits increase, and the firm will expand production.
Example: Cindy has a lawn mowing service. She mows on Saturdays but must be done
by 3pm. Cindy also really likes to sleep late on Saturday mornings.
LQuestion: What happens when the price changes?
If Cindy earns $3 per hour mowing, she will begin at 10am. If Cindy earns $12 per hour
mowing, she will begin at 6am. Cindy’s supply schedule and supply curve follow. A supply
schedule shows the quantity a firm is willing to produce at different prices. The supply
curve plots the points of the supply schedule. The previous figure shows that when price
increases, Cindy is willing to provide more lawn mowing services. She has increased the
quantity supplied. This is a movement along the supply curve. Similarly, If the price goes
down, the quantity supplied will go down.
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Lesson
firm behavior and supply
Lesson–I: Supply and Price
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firm behavior and supply
Lesson–II: Supply Shifters
Firm behavior and supply: Factors that shift the supply curve
T
he quantity firms will supply depends upon a number of factors. Remember, the firms’
primary objective is to maximize profit.
LQuestion: What happens when the costs change?
When input prices change, the supply curve will shift. If the price of gasoline used in Cindy’s
lawn mower goes down, Cindy will be willing to produce more at a given price. The following
supply schedule reflects a decrease in gas prices.
With lower gas prices, Cindy is now willing to produce 6 hours of lawn mowing for only
$3 per hour, her supply curve has shifted to the right. Because expenditures have declined,
Cindy’s profits per hour worked have increased. She is willing to produce more.
In today’s world, gas prices may increase. Suppose with an increase in gas prices Cindy’s
new supply schedule is as follows:
On the supply curve shown draw Cindy’s new supply curve with the higher gas prices.
Cindy’s supply curve will now shift to the left.
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Lesson
firm behavior and supply
Lesson–II: Supply Shifters
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firm behavior and supply
Lesson–III: Skater Boards
S
kater Boards produces skateboards. The firm employs 20 workers at a wage of $100 per day.
Other costs to produce up to 100 boards are $2000.
1. LQuestion: If the skateboards sell for $50 a piece and they are able to sell all 100 boards, what
is the profit of Skater Boardss?
P x Q = TR
sum of costs = TC
TR-TC = Profit
2. LQuestion: Skater Board employees are members of XTSports Union. The union is concerned
about their working conditions. The warehouse where boards are built is shabby. The walls are
beginning to crumble, there is no air circulation, and safety is a concern. In addition, wages
are low. A new contract is being negotiated that requires wages of $125 per day per employee.
Calculate Skater Board’s profits under the newly proposed union contract.
P x Q = TR
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sum of costs = TC
TR-TC = Profit
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Supply
Doing well by doing good
Module-7
Lesson
firm behavior and supply
Lesson–III: Skater Boards
3. LQuestion: In addition to the new labor union contract, the market price of skate boards has
declined. The price to sell all 100 boards is now $45. What is the profit for Skater Boards?
P x Q = TR
sum of costs = TC
TR-TC = Profit
4. LQuestion: With the new union contract and a sales price of only $45, why might Skater Boards
continue to produce skate boards?
TR-TC = Profit
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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Lesson ASSESSMENT
Multiple-choice questions
1. LQuestion: The supply curve shows:
a. How producers adjust the quantity of a product they are willing to supply in response to a
change in price.
b. A negative relationship between price and quantity.
c. How much of a commodity producers will provide with a given amount of inputs
(resources).
d. The benefits consumers gain when firms provide goods and services.
2. LQuestion: A change in quantity supplied is the result of:
a. A change in the number of producers providing the commodity.
b. A change in the price of the commodity.
c. A change in the price of a related good.
d. All of the above.
3. LQuestion: A change in supply could be the result of:
a. A change in the number of producers providing the commodity.
b. A change in the price of the commodity.
c. A change in the quantity bought.
d. All of the above.
4. LQuestion: How do producers in the United States determine what to produce?
a. Government decides what to produce, then firms make the products.
b. Firms respond to consumer desires.
c. Firms produce items with the highest supply curve.
d. People produce what they are best at whether society desires that product or not.
5. LQuestion: Profits are the result of human greed and are bad for society.
a. This statement is true. Only greedy people want to take home profit from production of
goods that society needs.
b. This statement is true. Without profit everyone could buy what they need and there would
be less poverty.
c. This statement is false. Profits drive firms to produce what consumers want at the lowest
cost.
d. This statement is false. Profits drive firms to produce what consumers want at the highest
cost.
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firm behavior and supply
Lesson ASSESSMENT
Discussion/essay questions
1. LQuestion: Cade is an excellent musician. He can play all kinds of music but prefers to play
really raunchy music that few people like to listen to. On Friday evenings Cade plays with a
band at the local café. The band plays popular tunes rather than the raunchy music Cade prefers.
Do consumers and/or the band benefit by playing the popular (rather than the raunchy) music?
Why?
2. LQuestion: Generally the supply curve is upward sloping. Explain why this is true.
3. LQuestion: How does the invisible hand work to motivate producers?
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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Answer
firm behavior and supply
Lesson–III: Answer Key
Skater Boards
Skater Boards produces skateboards. The firm employs 20 workers at a wage of $100 per day.
Other costs to produce up to 100 boards are $2000.
1. LQuestion: If the skateboards sell for $50 a piece and they are able to sell all 100 boards, what
is the profit of Skater Boards?
Answer:
P x Q = TR
$50 x 100 = $5,000
sum of costs = TC
wages = $100 x 20 workers TR-TC = Profit
$5,000-$4,000 = $1,000
+ $2,000 other costs = $4,000
2. LQuestion: Skater Boards employees are members of XTSports Union. The union is concerned
about their working conditions. The warehouse where boards are built is shabby. The walls are
beginning to crumble, there is no air circulation, and safety is a concern. In addition, wages
are low. A new contract is being negotiated that requires wages of $125 per day per employee.
Calculate Skater Board’s profits under the newly proposed union contract.
Answer:
P x Q = TR
$50 x 100 = $5,000
$500
sum of costs = TC
wages = $125 x 20 workers TR-TC = Profit
$5,000-$4,500 =
+ $2,000 other costs = $4,500
3. LQuestion: In addition to the new labor union contract, the market price of skate boards has
declined. The price to sell all 1000 boards is now $45. What is the profit for Skater Boards?
Answer:
P x Q = TR
$45 x 100 = $4,500
sum of costs = TC
TR-TC = Profit
wages = $125 x 20 workers $4,500-$4,500 = $0
+ $2,000 other costs = $4,500
4. LQuestion: With the new union contract and a sales price of only $45, why might Skater Boards
continue to produce skate boards?
Answer:
(TR-TC = 0) Skater Boards is making zero economic profit. This is greater than or qual to what
the firm could make by producing a different commodity with the resources. Remember, total
costs include the opportunity cost of the resources.
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