SUPPLY

Elasticity of Supply Supply Elasticity: a measure of the way in which a quantity supplied responds to a change in price Elastic Small increase in price leads to a larger increase in output—supply Inelastic Mall increase in price causes little change in supply Unit Elastic A change in price causes a proportional change in supply

Determinants of Supply Elasticity How quickly a producer can act when a change in price occurs: Adjust quickly = elastic Complex/advance planning = inelastic Factor of Substitution: Easy = elastic Difficult = inelastic

The Theory of Production

The Law of Variable Proportions Short Run: Output will change as one variable input is altered, but other inputs are kept constant i.e.: salting a meal (amount of input –salt- varies; so does the output – quality of the meal) Final Product is affected How is the output of the final product affected as more units of one variable input or resources are added to a fixed amount of other resources? i.e.: farmer may have all the land, machines, workers, and other items needed to produce a crop, but may have questions about the use of fertilizers ,

The Production Function Concept that describes the relationship between changes in output to different amounts of a single input while others are constant

The Law of Variable Proportions Possible to vary all the inputs at the same time Economist prefer only a single variable be changed at a time b/c more than one = harder to gauge the impact of a single variable

The Production Function Total product is the total output the company produces Total Product Rises As more workers are added, total product rises until a point that adding more workers causes a decline in total product Total product Slows As more workers are added output continues to rise = it does so at a slower rate until ti can grow no further More workers “get in the way”

The Production Function Marginal Product is the extra output or change in total product caused by adding one more unit of variable output i.e.: worker 1’s output is 7; worker 2’s output is 13 together their output is 20 (figure 5.5)

Three Stages of Production Stage I: increasing returns Marginal output increases with each new worker Companies are tempted to hire more workers (moves them to stage II) Stage II: diminishing returns Total production keeps growing but the rate of increase is smaller Each worker is still making a positive contribution to total output (but diminishing) Stage III: negative returns Marginal product becomes negative Decreasing total plant output

Cost, Revenue and Profit Maximization

What kinds of cost do you have to consider? Fixed Cost – the cost that a business incurs even if the plant idle and output is zero. Salaries Rent Property Taxes Variable Cost – cost that does change when the business rate of operation or output changes Electric power Shipping charges

What kinds of cost do you have to consider? Variable Cost – cost that does change when the business rate of operation or output changes Electric power Shipping charges Total Cost – Sum of the fixed and variable costs Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

Applying Cost Principles Self-service Principles Gas station is an example of high fixed cost with low variable cost Ration of variable to fixed cost is low E-Commerce An industry with low fixed cost

Measure of Revenue Total revenue = Marginal Revenue = Number of units sold multiplied by the average price per unit Marginal Revenue = The extra revenue connected with producing and selling an additional unit

Marginal Analysis Marginal Analysis comparing the extra benefits to the extra cost of a particular decision Break-even point is the total output or total product the business needs to sell in order to cover its total cost

Marginal Analysis Businesses want # of workers and level of output that generates max. profits Profit-maximizing: quantity of output is reached when marginal cost and marginal revenue are equal