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Chapter 5 Supply Section 1 – An introduction to Supply 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 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 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