Chapter 5 Supply

SUPPLY The amount of a product that would be offered for sale at all possible prices that could prevail in a market Law of Supply- suppliers will offer more for sale at higher prices than at lower prices A supply line is an upward sloping line represented by SS

Supply Supply curve is a graph showing the various quantities supplied at each and every price that might prevail in a market Market supply curve is a curve that shows prices by all firms that offer the product Supply schedule, is a listing of various quantities of a particular product supplied at all possible prices in the market

g Quantity supplied- amount producers bring to a market at any given Change in quantity supplied- change in the amount offered for sale in response to a change in price Change in supply- a situation where suppliers offer different amounts of products for sale at all possible prices in the market

Reasons for Changes in Supply 1. costs of inputs, supply increases because of decreases in the cost of inputs such as labor or packaging -producers are more willing to purchase and produce for cheaper inputs 2. productivity, when workers decide to work more efficiently or if managers motivate productivity goes up -same for the opposite

3. technology, new technology tends to change supply curve 3. technology, new technology tends to change supply curve. Introduction of new machines, industrial processes which can lower the cost of production 4. Taxes and Subsidies, if taxes are raised on businesses their production goes up and vice versus Subsidy- government payment to an individual business to encourage production of a certain activity (example, farmers)

continued 5. Expectations, if a producer anticipates a rise in price in products they may withhold their supplies and if they expect prices to go down they will try and sell 6. Government Regulations, for example, when the government mandates new auto safety features such as air bags cars cost more to produce 7. Number of sellers, the more suppliers the more supply pushes the curve to the right

Fat Pants Again Supply elasticity- measures the way in which quantity supplied responds to a change in price A small change in price leads to relatively large increase in output than the supply is elastic

Determinants of elasticity Can businesses adjust quickly to new prices As long as consumers are willing to pay more money How different is supply different from demand elasticity? 1. number of substitutes has no bearing on supply 2. ability to delay the purchase or a portion of has no bearing

Section 2

Theory of Production The relationship between the factors of production and the output of goods and services It looks at how output changes when input changes It is based on the short run where inputs such as labor change

Law of Variable Proportions In the short run, output will change as one input is varied, while the others are held constant For example: make chili Add a pinch of chili powder Taste better Add more At some point it will not taste good

Production Function When we want to see the effect a change in input has on output Relates the changes in output with changes in input while everything else remains the same Production schedule- create when you want to know what varying amounts of labor will have on your output

Columns- FIX ON YOUR OUTLINE First Column is the varying number of input, for example: workers Second Column is the varying numbers of total production based on the changing number of input Total production- it id the total output produced by that business Third Column is marginal product- it is the extra output produced by adding another input It is a change in total production caused by an addition of an input

Three Stages of Production Stage 1- each new input contributes positively Marginal product increases Producers normally don’t stay here because they want MORE production

Stage 2 Total production keeps growing but by smaller and smaller increments Each worker makes a diminishing but positive contribution to the total output Diminishing returns- as more input is added, for example, labor, total output rises but at smaller and smaller amounts

Stage 3 Negative returns, at this point the producers start to lose money as they add more input Marginal product is negative and total output decreases

Chapter 5 Section 3

Making Production Choices Obviously producer want cheap products Consumers want cheap prices but quality How do we make everyone happy? Pay attention to productivity and cost

Cost is divided 1. fixed cost- cost a business incurs regardless of how busy or not they are This includes salaries paid executives, rent, taxes Also includes depreciation- the gradual wear and tear on capital goods 2. variable costs- a cost that changes when the business rate of operation changes or output changes Example: labor, raw materials

continued 3. total cost- it is the sum of the fixed cost and variable cost Takes in all costs of a business during operation 4. marginal cost- extra cost incurred when a business produces one additional unit

Revenue Businesses measure their revenue to find out profit Total revenue- is number of units sold multiplied by the average price per unit Example: if 42 units are sold at $2 than the total revenue is………. Marginal revenue- extra revenue associated with the production and sale of 1 additional unit of output Determined by dividing the change in total revenue by the marginal product

Let’s figure it out Marginal analysis- decision making that compares the extra benefits to the extra cost of action All businesses are in it to make money!! All business want to reach the break-even point, which is the total output or total product the business needs to sell in order to cover its total costs However, business want to MAKE money so they go beyond Profit-maximizing quantity of output- is reached when marginal cost and marginal revenue are equal