Economics Chapter 5: Supply

The Theory of Production Production Function: A figure that shows how total output changes when the amount of a single variable input changes while all other inputs are held constant. Labor is the most common variable that business change. In order to meet changes in market demand, businesses must constantly change production levels. Productivity: Output per unit of input. Example: output per labor hour Efficiency: maximum output of a good from the resources used in production.

The Four Factors of Production What are the 4 Factors of Production? Anything used to produce a good or service Land: a broad measure representing all the basic natural resources that contribute to production Labor: the human factor of production Capital: previously produced goods used to produce other goods Entrepreneurship: the managerial ability and risk taking that contribute so much to a productive economy

The Four Factors of Production Costs: Land = Rent Labor = Wages Capital = Interest Entrepreneurship = Profit

Schedules & Graphs http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p128.swf

Short Run vs. Long Run Short Run: Long Run: A production period so short that only the amount of one variable input can be changed Labor is the most common input to be changed. Long Run: A production period long enough for a firm to adjust the amounts of all inputs. Even capital can be changed in the long run.

Production Total Product: Marginal Product: The total output or production by the firm Marginal Product: The extra output (or change in total product) caused by adding one more unit of input. (MPP: marginal physical product)

Stages of Production Increasing Returns Decreasing Returns Stage where marginal product of each new worker is increasing Decreasing Returns Stage where marginal product of each new worker is diminishing Negative Returns Stage where marginal product of each new worker is negative.

Diminishing Marginal Returns The stage where output increases at a diminishing rate as more units of a variable input are added.

Measures of Cost Fixed Costs Variable Costs costs that an organization incurs regardless of the level of production or services offered. Overhead: total amount of fixed costs Examples: rent, property taxes, salaries paid to executives, interest charges on bonds. Variable Costs Costs that change when production levels change. Examples: labor (wages) , raw materials, electricity, and freight charges.

Measures of Cost Total cost: Marginal Cost: The sum of all fixed and variable costs Takes into account all costs a business faces in order to operate. TC = FC + AC Marginal Cost: The extra cost of producing one more unit of output. MC = Change in TC / Change in Output

Measures of Cost Average Total Cost: Average Fixed Cost: The total cost divided by the quantity produced in a given time period. ATC = Total Cost / Total Output Average Fixed Cost: The total fixed cost divided by the quantity produced in a given time period. AFC = Total Fixed Cost / Total Output Average Variable Cost: The total variable cost divided by the quantity produced in a given time period. AVC = Total Variable Cost / Total Output

Measures of Cost Sunk cost: Break-even Point: A once-and-for-all cost that cannot be recovered by the firm if it were to close. Break-even Point: The production level where total cost equals total revenue TC = TR E-commerce: Electronic business conducted on the Internet.

Cost Explicit Cost Implicit Cost Economic Cost A payment made for the use of a resource Implicit Cost The value of resources used, even when no direct payment is made. Economic Cost The value of all resources used to produce a good or service; opportunity cost.

Revenue Revenue: Total Revenue: Marginal Revenue: The money that a firm earns for the sale of a product. Total Revenue: The total amount of money earned by a firm from the sale of its product or service. Marginal Revenue: The extra revenue earned from the sale of one more unit of output.

Costs vs. Revenue Profit: Marginal Analysis: The difference between total revenue and total cost Profit = TR – TC Marginal Analysis: Decision making that compares the extra costs of doing something to the extra benefits gained. Profit-maximizing Quantity of Output: The level of production where marginal cost is equal to marginal revenue.

Graphing what you know. http://media.wiley.com/Lux/90/9690.nfg004.jpg