Download Chapter Five Supply

Chapter Five
 Section One
Supply
What is Supply?
 Section Two The Theory of Production
 Section Three Cost, Revenue, and Profit
Maximization
Section One What is Supply?
 Objectives:
– Understand the difference between the supply
schedule and the supply curve.
– Explain how market supply curves are derived.
– Specify the reasons for a change in supply.
 Supply- the amount of a product that would
be offered for sale at all possible prices that
could prevail in the market.
What is Supply?
(cont’d)
 Law of Supply- the principle that suppliers will
normally offer more for sale at high prices and less
at lower prices.
 An Introduction to Supply:
– The Supply Schedule- a listing of the various quantities
of a particular product supplied at all possible prices in
the market.
– The Supply Curve- a graph showing the various
quantities supplied at each and every price that may
prevail in the market.
• Supply curves ALWAYS slope upward from left to right!
Supply Schedule and Curve
Figure 5.1
What is Supply?
(cont’d)
– Two Types of Supply Curves:
• Individual Supply Curve
• Market Supply Curve- the supply curve that shows the
quantities offered at various prices by all firms that offer the
product for sale in a given market.
 Change in Quantity Supplied
– Quantity Supplied- the amount that producers bring to
market at any given price.
– Change in Quantity Supplied- the change in amount
offered for sale in response to a change in price.
• A Change in Quantity Supplied is shown by the movement of
the dots on the supply curve.
Market Supply Curve
Figure 5.2
What is Supply?
(cont’d)
 Change in Supply- the situation where suppliers
offer different amounts of products for sale at all
possible prices in the market.
– Result is the entire curve shifts either to the left or right.
– Causes for a Change in Supply:
•
•
•
•
Cost of Inputs
Productivity
Technology
Taxes and Subsidies
– Subsidy- a government payment to an individual, business, or
other group to encourage or protect a certain type of economic
activity.
• Expectations
• Government Regulations
• Number of Sellers
Change in Supply
Figure 5.3
What is Supply?
(cont’d)
 Elasticity of Supply
– Supply Elasticity- a measure of the way in
which quantity supplied responds to a change in
price.
• Types of Supply Elasticity:
– Elastic Supply- a change in price causes a relatively
LARGER change in quantity supplied. (ex.)
– Inelastic Supply- a change in price causes a relatively
SMALLER change in quantity supplied. (ex.)
– Unit Elastic Supply- a change in price causes a
PROPORTIONAL change in quantity supplied.
What is Supply?
(cont’d)
– Determinants of Supply Elasticity:
• Products that are costly to produce or limited in
supply, such as oil reserves , are INELASTIC in
supply. ( Require huge amounts of capital or human
investments.)
• Products that are not costly or those not limited in
supply, such as candy bars, are ELASTIC in supply.
(Do not require huge amounts of capital or human
investments.)
Section Two
The Theory of Production
 Objectives:
– Explain the theory of production.
– Describe the three stages of production.
 The Theory of Production- the relationship
between the factors of production and the output
of goods and services.
– Short Run- a period of production that allows producers
to change only the amount of the variable input called
LABOR.
– Long Run- a period of production long enough for
producers to adjust the quantities of all their resources ,
including capital.
The Theory of Production
(cont’d)
 Law of Variable Proportions- states that, in the
short run, output will change as one input is varied
while the others are held constant.
 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.
• Raw Materials- unprocessed natural products used in
production.
– Total Product- is total output produced by the firm.
– Marginal Product- the extra output or change in total
product caused by the addition of one more unit of
variable input.
The Theory of Production
(cont’d)
 The Three Stages of Production- are based
on the way marginal product changes as the
variable input of labor is changed.
– Increasing Returns (Stage One)
– Diminishing Returns (Stage Two)
• Most firms operate in stage two!!
– Negative Returns (Stage Three)
The Law of Variable Proportions
Figure 5.5a
The Law of Variable Proportions
(cont’d)
Figure 5.5b
Section Three
Cost, Revenue, and
Profit Maximization
 Objectives:
– Define four key measures of cost.
– Identify two key measures of revenue.
– Apply incremental analysis to business
decisions.
Cost, Revenue, and Profit Maximization
(cont’d)
 Measures of Cost:
– Fixed Cost (overhead)- the cost a business incurs even
if the plant is idle and output is zero. (examples:
salaries, interest payments, rent, property taxes, and
retirement costs)
– Variable Cost- the cost that changes when the business
rate of operation or output changes. (examples: hourly
wages, utilities,and shipping costs)
– Total Cost- the sum of the variable and fixed costs.
– Marginal Cost- the extra cost incurred when a business
produces one additional unit of a product.
• Factories that produce durable goods have a high fixed cost
and smaller variable costs.
Cost, Revenue, and Profit
Maximization (cont’d)
 Measures of Revenue:
– Total Revenue- the number of units sold multiplied by
the average price per unit.
– Marginal Revenue- the extra revenue associated with
the production and sale of one additional unit of output.
 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 the
business needs to sell in order to cover its total costs.
– Profit-maximizing quantity of output- is when marginal
cost and marginal revenue are equal.
The End of Chapter Five
 Chapter Review Tomorrow!