Download Chapter 5 Supply - Little Miami Schools

Chapter 5 Supply
Section 1 – An introduction to Supply
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The amount of a product that would be offered for sale at all possible prices that
could prevail in the market
Law of supply – principle that suppliers will normally offer more for sale at high
prices and less at lower prices
Supply Schedule – A listing of the various quantities of a particular product
supplied at all possible prices in the market
o Figure 5-1 pg 118
Individual Supply Curve – A graph showing the various quantities supplied at
each and every price that might prevail in the market
Market Supply Curve – The supply curve that shows the quantities offered at
various prices by all the firms that offer the product for sale in a given market
o Figure 5.2 pg 119
Changes in Quantity Supplied
 Quantity Supplied – The amount that producers bring to market at any given price
 Change in Quantity Supplied – The change in the amount offered for sale in
response to a change in price
 Change in Supply – Situation where supplies offer different amounts of products
for sale at all possible prices in the market
Discuss Figure 5-3 on page - 120
Changes in Supply
1. Costs of inputs- Supply might increase because of a decrease in the costs of
inputs, such as labor of packaging
a. Input price drops = producers up supply
2. Productivity- work is done more/less efficiently
3. Technology- new technology = shift to right
Tech breaks down = shift to right
4. Taxes- subsides
a. Taxes – viewed as cost = shift to left
b. Lowered- shift to right
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Subsidy- government payment to an individual, business, or other group to
encourage or protect a certain type of economic activity.
5. Expectations- If producers think the prize will go up, they will with hold some
of the supply
6. Government Regulations- Government mandates new features then products
cost more to produce.
o Cost more to produce
o Tighten regulations= shift to left
o Loosen regulations = shift to right
7. Number of sellers- More firms = shift to right
 Less firms = shift to left
Elasticity of Supply Measure of the way in which quantity supplied responds to a change in
price. If a small increase in price leads to a relativity larger
increase in output, supply is elastic. If supply changes very
supply is inelastic.
Determinants of Supply Elasticity
 If a firm can react quickly to higher or lower prices, then supply is likely
to be elastic. If the firm takes longer to react to a change in prices, then
supply is likely to be inelastic.
1. Elastic – The change in price causes a relatively larger change in
quantity supplied
2. Inelastic – A change in price causes a relatively smaller change in
quantity supplied
3. Unit Elastic – A change in price causes a proportional change in the
quantity supplied
o SEE CHART 5.4 PAGE 124
Section 2 – The Theory of Production
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Theory of Production – Deals with the relationship between the factors
of production and the output of goods and services
o Short run – A period of production that allows producers to change
only the amount of the variable input called labor
 Ex – Having 300 extra workers
o Long Run – A period of production long enough for producers to
adjust the quantities of all their resources, including capital
 Building a new factory
Law of Variable Proportions
 In the run, output will change as one input is varied while the others are
held constant
 Adding salt to a meal makes it taste better until at some point it ruins the
meal
The Production Function
 A concept that describes the relationship between changes in output to
different amounts of a single input while other outputs are held constant.
o Raw Materials – Unprocessed natural products used in production
o Total Product – Total output produced by the firm
o Marginal Product – The extra output or change in total product
caused by the addition of one more unit of variable input
Three Stages of Production
1. Increasing Returns – Marginal output increases by a larger amount each time a
new worker is added
2. Diminishing Returns – Output increases at a diminishing rate as more units of a
variable input are added
3. Negative Returns – Marginal product becomes negative and output decreases
Section 3 Cost Revenue & Profit Maximization
Measures of Cost
 Fixed Cost – The cost that a business incurs even if the plant is idle and
input is zero. (Overhead)
o Ex – Salaries, rent, depreciation, etc…
 Variable Cost – Cost that changes when the business rate of operation or
input changes
o Ex – Electric, shipping charges, etc…
 Total Cost – Sum of the fixed & variable costs
 Marginal cost – Extra cost incurred when a business produces one
additional unit of a product
Applying Cost Principles
 Self-Service Gas Station – Large fixed costs with low variable costs = 24/7 =
variable costs are covered by profits of extra sales
 Internet Stores – Low overhead (Fixed Costs)
Measures of Revenue – Used to determine amount of output for greatest profits
1. Total Revenue - # of units sold multiplied by the average price per unit
2. Marginal Revenue – Extra revenue associated with the production and sale
of one additional unit of output
 Determined by dividing the change in total revenue by the
marginal product
 Ex – 5 workers produces 90 units of output and generates $1350 of
total revenue
 By adding a 6th worker output increases by 20 units and
total revenue increases to$1650
 If we divide the change in total revenue $300 by the
marginal product 20, we have the marginal revenue of $15
 DISCUSS FIGURE 5.6 on page 134!!!!!!!!!!
Marginal Analysis – A type of cost benefit decision making that compares the extra
benefits to the extra costs of an action
 Break-even point – The total output or total product that business needs to sell in
order to cover its total costs
 Profit-maximizing quality of output – Reached when marginal cost and marginal
revenue are equal