Download Econ Chapter 05

Chapter Introduction
Section 1: What is Supply?
Section 2: The Theory of
Production
Section 3: Cost, Revenue,
and Profit
Maximization
Visual Summary
In order to earn some extra
money, you are considering
opening a lawn or babysitting
service. Brainstorm the
resources you would need.
What specific services would
you offer? What prices would
you charge? What information
do you need to determine
answers to these and other
questions? Read Chapter 5 to
find out about the factors that
influence how businesses
make production decisions.
1. Buyers and sellers
voluntarily interact in
markets, and market
prices are set by the
interaction of demand
and supply.
2. The profit motive acts as
an incentive for people to
produce and sell goods
and services.
Section Preview
In this section, you will learn that the higher the
price of a product, the more of it a producer will
offer for sale.
Content Vocabulary
• supply
• Law of
Supply
• supply
schedule
• supply curve
• market supply • change in
curve
supply
• quantity
supplied
• change in
quantity
supplied
Academic Vocabulary
• various
• interaction
• subsidy
• supply elasticity
What is Supply?
• Supply is an amount of product offered for
sale at prevailing market prices.
• Law of Supply: Producers will offer more
product at higher prices and less at lower
prices
An Introduction to Supply
Supply can be illustrated
by a supply schedule or a
supply curve.
An Introduction to Supply (cont.)
• Suppliers must determine how much to
offer for sale at various prices, taking into
account the factors of production.
• Like demand, supply can be shown in the
form of a table—a supply schedule.
• When information is plotted on a graph, it
forms the supply curve.
Supply of Compact Discs
An Introduction to Supply (cont.)
• Normal supply curves have a positive
slope—prices go up; quantity supply
goes up.
• Economists are more interested in
the market supply curve than for a
single firm.
Individual and Market Supply Curves
An Introduction to Supply (cont.)
• The quantity supplied is the amount
producers bring to market at any
given price.
• A change in price leads to a change in
quantity supplied.
• Although the producer has the freedom to
adjust production up or down, the
interaction of supply and demand usually
determines the final price of a product.
Change in Supply
Several factors can contribute
to a change in supply.
Change in Supply (cont.)
• A change in supply occurs for several
reasons.
– Cost of resources
– Productivity
– Technology
– Taxes
A Change in Supply
Change in Supply (cont.)
– Subsidy
– Expectations
– Government regulations
– Number of sellers
Elasticity of Supply
The response to a change in
price varies for different
products.
Elasticity of Supply (cont.)
• Supply, like demand, has elasticity.
• Supply elasticity measures how the
quantity supplied responds to a change
in price.
Elasticity of Supply
Elasticity of Supply (cont.)
• Supply elasticity has three forms:
– Elastic
– Inelastic
– Unit elastic
Elasticity of Supply
Elasticity of Supply (cont.)
• Supply elasticity is based solely on
production considerations.
• A firm’s ability to adjust to new prices
quickly is likely to be elastic.
• A firm that takes longer to react to a
change in prices is likely to be inelastic.
Elasticity of Supply
Section Preview
In this section, you will learn how a change in the
variable input called “labor” results in changes in
output.
Content Vocabulary
• production
function
• short run
• long run
• total product
• marginal
product
• stages of
production
Academic Vocabulary
• hypothetical
• contributes
• diminishing
returns
The Production Function
The production function
shows how output changes
when a variable input such as
labor changes.
The Production Function (cont.)
• Production can be illustrated with a
production function.
• Economists focus on the short run when
they analyze production.
• No changes occur in land, equipment, or
technology. Changes in total product are
caused by a change in the
number of workers.
Short-Run Production
The Production Function (cont.)
• Long run changes involve other factors of
production, including capital.
• Marginal product—the extra output or
change in total product caused by adding
one more unit of variable input
Stages of Production
The stages of production help
companies determine the
most profitable number of
workers to hire.
Stages of Production (cont.)
• In deciding how many workers to hire, firm
must review the three stages of
production.
– Increasing returns, Stage I
– Diminishing returns, Stage II
– Negative returns, Stage III
Profiles in Economics:
Kenneth I. Chenault
Section Preview
In this section, you will learn how businesses
analyze their costs and revenues, which helps
them maximize their profits.
Content Vocabulary
• fixed costs
• e-commerce
• overhead
• break-even
point
• variable costs
• total cost
• marginal cost
• total revenue
• marginal
revenue
Academic Vocabulary
• conducted
• generates
• marginal
analysis
• profitmaximizing
quantity of
output
Measures of Cost
Businesses analyze fixed,
variable, total, and marginal
costs to make production
decisions.
Measures of Cost (cont.)
• There are several ways businesses
measure costs.
– Fixed costs
• Total fixed costs, sometimes called
overhead, remain the same.
– Variable costs
Measures of Cost (cont.)
– Total cost
– Marginal cost
Production, Costs, and Revenues
Applying Cost Principles
Fixed and variable costs
affect the way a business
operates.
Applying Cost Principles (cont.)
• People engage in e-commerce conducted
on the Internet because
– Overhead costs are low.
– There is a low need for inventory.
Applying Cost Principles (cont.)
• After businesses measure their costs, they
determine the break-even point.
• Businesses wanting to do better than
break even apply principles of marginal
analysis to their costs and revenues.
Marginal Analysis and Profit
Maximization
Businesses compare marginal
revenue with marginal cost to
find the level of production
that maximizes profits.
Marginal Analysis and Profit
Maximization (cont.)
• Two key measures of revenue are used to
find the amount of output that will produce
the greatest profits:
– Total revenue
– Marginal revenue
The Global Economy & YOU
Air & Ground Shipping Market
Marginal Analysis and Profit
Maximization (cont.)
• Like businesses, we use marginal
analysis in our own decision making.
• When marginal cost is less than marginal
revenue, hire more variable inputs (labor)
to expand output.
Marginal Analysis and Profit
Maximization (cont.)
• Profit-maximizing quantity of output is
reached when marginal cost and marginal
revenue are equal.
Law of Supply When the price of a product goes
up, quantity supplied goes up. When the price goes
down, quantity supplied goes down.
Production Function
The production function
helps us find the optimal
number of variable units
(labor) to be used in
production. As workers
are added in Stage I,
production increases at
an increasing rate. In
Stage II, production
increases at a decreasing rate because of
diminishing returns. In Stage III, production
decreases because more workers cannot make a
positive contribution.
Cost and Revenue While businesses have several
types of costs, they can find the profit-maximizing
quantity of output by comparing marginal cost to
their marginal revenue.
Kenneth I. Chenault
(1952– )
• first African American to be
CEO of a top-100 company
• responsible for continuing
American Express’s
155-year-old tradition of
“reinvention” during global
change
supply
amount of a product offered for sale
at all possible prices
Law of Supply
principle that more will be offered
for sale at higher prices than at
lower prices
supply schedule
a table showing how much a
producer will supply at all
possible prices
supply curve
a graph that shows the different
amounts of a product supplied over a
range of possible prices
market supply curve
a graph that shows the various
amounts offered by all firms over a
range of possible prices
quantity supplied
amount offered for sale at a
given price
change in quantity supplied
change in amount offered for sale
when the price changes
change in supply
situation where different amounts are
offered for sale at all possible prices
in the market; shift of the supply curve
subsidy
government payment to encourage or
protect a certain economic activity
supply elasticity
a measure of how the quantity
supplied responds to a change
in price
various
different
interaction
action of one on the actions of
another
production function
a graph showing how a change in the
amount of a single variable input
changes total output
short run
production period so short that only
the variable inputs (usually labor) can
be changed
long run
production period long enough to
change the amounts of all inputs
total product
total output or production by a firm
marginal product
extra output due to the addition of one
more unit of input
stages of production
phases of production that consist of
increasing, decreasing, and negative
marginal returns
diminishing returns
stage where output increases at a
decreasing rate as more units of
variable input are added
hypothetical
assumed but not proven
contributes
gives time, money, or effort
fixed costs
costs that remain the same
regardless of level of production or
services offered
overhead
broad category of fixed costs that
includes rent, taxes, and executive
salaries
variable cost
production costs that change when
production levels change
total cost
the sum of fixed costs and
variable costs
marginal cost
extra cost of producing one additional
unit of production
e-commerce
electronic business conducted over
the Internet
break-even point
production level where total cost
equals total revenue
total revenue
total amount earned by a firm from
the sale of its products
marginal revenue
extra revenue from the sale of one
additional unit of output
marginal analysis
decision making that compares the
extra costs of doing something to the
extra benefits gained
profit-maximizing quantity of
output
level of production where marginal
cost is equal to marginal revenue
conducted
handled by way of
generates
produces or brings into being
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