Supply Chapter 5 Section 2

Labor Affects Production Marginal Product Change in total output caused by adding one worker Specialization Having each worker focus on one aspect of production

Labor Affects Production Increasing Returns Each new worker adds more total output that the last Diminishing Returns Each new worker makes total output grow at a decreasing rate Negative Returns Output decreases through crowding, disorganization

Production Costs Fixed Costs Variable Costs Total Cost Marginal Cost Expenses that the owners of a business must pay no matter production Variable Costs Costs that vary based on production Total Cost Add affixed & variable costs together Marginal Cost Additional cost of producing one more unit of good/service

Earning the Highest Profit Marginal Revenue-money made from sales of each additional unit sold Same as price Total Revenue-income from selling a product Total Revenue=P (Price) x Q (Quantity purchased at that price)

Earning the Highest Profit EXAMPLE: Production Costs and Revenues Schedule To make most profit, owner decides number workers hired, units made To decide, owner performs marginal analysis — comparison of costs, benefits of adding a worker, making another unit Profit-maximizing output—level of production yielding highest profit — marginal cost and marginal revenue are equal

Reviewing Key Concepts Explain the differences between the terms in each of these pairs: marginal product and profit-maximizing output increasing returns and diminishing returns fixed cost and variable cost

What Factors Affect Supply? Section-3 What Factors Affect Supply? Changes in Quantity Supplied KEY CONCEPTS Change in quantity supplied: — rise or fall in amount offered for sale because of change in price Different points on supply curve show change in quantity supplied

Changes in Quantity Supplied EXAMPLE: Changes Along a Supply Curve Change in quantity supplied does not shift the supply curve — movement to right means increase in price and quantity supplied — movement to left means decrease in price and quantity supplied Market supply curves show larger changes than individual curves

Changes in Supply KEY CONCEPTS Change in supply—producers offer different amounts at every price As production costs rise, supply drops; as costs drop, supply rises Change in supply shifts the supply curve Six factors cause change in supply — input costs, labor productivity, technology, government action, producer expectations, number of producers

Changes in Supply Factor 1: Input Costs Input costs—price of resources needed to produce good or service — if price of resource increases, costs increase — if price of resource decreases, costs decrease

Changes in Supply Factor 2: Labor Productivity Labor productivity—amount of product worker can produce in set time Rise in productivity lowers production costs; supply increases Specialization can allow producer to make more goods at lower cost Better-trained workers produce more in less time; decrease costs

Changes in Supply Factor 3: Technology Technology—use of scientific methods, discoveries in production — results in new products or manufacturing techniques Manufacturers use technology to make goods more efficiently Technology enables workers to be more productive

Changes in Supply Factor 4: Government Action Excise tax—tax on production or sale of specific good or service — often placed on items that government wants to discourage use of — taxes increase producers’ costs; decrease supply Regulation—set of rules, laws designed to control business behavior — examples: banning use of certain resources, worker safety laws

Changes in Supply Factor 5: Producer Expectations Producers have expectations about future price of their product — expectations affect how much they will supply at present Expectations of higher price in future may lead to different actions — Farmer may withhold part of current crop and decrease supply — Manufacturer may buy more equipment to increase future supply

Changes in Supply Factor 6: Number of Producers When one producer has successful new idea, others enter the market — supply of good or service increases Increase in number of producers leads to increased competition — may drive less-efficient producers out of market

Robert Johnson: Supplying African-American Entertainment EXAMPLE: Expanding the Number of Producers Johnson recognized cable TV industry ignored African-American market 1980, launched Black Entertainment Television: music, public affairs Cable operators in U.S., Canada, Caribbean began to buy BET’s shows Started BET.com—number one Internet portal for African Americans In 2001, Johnson sold BET, became first black billionaire

Reviewing Key Concepts Explain the differences between the terms in each of these pairs: change in quantity supplied and change in supply input costs and technology excise tax and regulation

What Is Elasticity of Supply? Section-4 What Is Elasticity of Supply? Elasticity of Supply KEY CONCEPTS Elasticity of supply—measures producer response to price changes Elastic—price change leads to larger change in quantity supplied Inelastic—price change leads to smaller change in quantity supplied Unit elastic—price and quantity supplied change by same percentage

Elasticity of Supply EXAMPLE: Elastic Supply As product gains popularity, shortage develops, price goes up Producers can increase supply if — resources are easy to come by, inexpensive — production uncomplicated, easy to increase

Elasticity of Supply EXAMPLE: Inelastic Supply Producers can increase supply if — availability of resources limited — production capacity cannot be increased — shipping too costly or unavailable

What Affects Elasticity of Supply? KEY CONCEPTS Main factor determining elasticity is ease of changing production — given enough time, elasticity rises for most goods and services Industries that respond quickly to rising or falling prices: — do not need much capital, skilled labor, hard-to-obtain resources Other industries need a lot of time to shift resources

Reviewing Key Concepts Use each of the terms in a sentence that gives an example of how the term relates to supply: elastic inelastic elasticity of supply

Case Study: Robots—Technology Increases Supply Background Robots—machines that can be programmed to perform a variety of tasks—perform numerous functions in industry. Half of all industrial robots are used in the automobile industry. Robots are ideal for lifting heavy objects and doing repetitive tasks humans find boring but can perform more refined tasks as well. What’s the Issue? How does technology increase supply?

Vocabulary Marginal Product Change in total output caused by adding one worker Specialization Having each worker focus on one aspect of production Increasing Returns Each new worker adds more total output that the last Diminishing Returns Each new worker makes total output grow at a decreasing rate Negative Returns Output decreases through crowding, disorganization Fixed Costs Expenses that the owners of a business must pay no matter production Variable Costs Costs that vary based on production Total Cost Add affixed & variable costs together Marginal Cost Additional cost of producing one more unit of good/service Marginal Revenue money made from sales of each additional unit sold Total Revenue P (Price) x Q (Quantity purchased at that price)

Profit Maximizing Output level of production yielding highest profit Vocabulary Profit Maximizing Output level of production yielding highest profit Change in Quantity Supplied rise or fall in amount offered for sale because of change in price Change in Supply supply—producers offer different amounts at every price Input Costs price of resources needed to produce good or service Labor Productivity amount of product worker can produce in set time Technology use of scientific methods, discoveries in production Excise Tax tax on production or sale of specific good or service Regulation set of rules, laws designed to control business behavior Elasticity of Supply measures producer response to price changes