1. Chapter 5: Supply

2. Chapter 5: Supply KEY CONCEPT WHY THE CONCEPT MATTERS
Supply is the willingness and ability of producers to offer goods and services for sale.
WHY THE CONCEPT MATTERS
Most people are producers. Doing household chores, working at a job, providing rides to others are ways of producing goods and services. Participating on a team is a way of supplying skills, knowledge, and support to one’s school. Producers incur costs and receive rewards for the work they do.

3. What Is Supply?

4. The Law of Supply KEY CONCEPTS
Supply—willingness and ability of producers to offer goods, services
Anyone who provides goods or services is a producer
Law of supply:
producers willing to sell more of product at higher than at lower price

6. Supply Schedules KEY CONCEPTS Supply schedule shows
amount of product individual willing, able to offer at each price
Market supply schedule shows
amount of product all producers willing, able to offer at each price

7. The Law of Supply EXAMPLE: Price and Supply
Smiths sell tomatoes at farmers’ market
willing to offer 24 pounds at standard price of $1 per pound
willing to offer 50 pounds at $2 per pound
willing to offer 10 pounds at 50 cents per pounds
not willing to supply any tomatoes below 50 cents

9. Supply Curves KEY CONCEPTS
Supply curve shows data from supply schedule in graph form
Market supply curve shows data from market supply schedule

11. Supply Curves EXAMPLE: Market Supply Curve
Market supply curve differs in scope from individual supply curve
both constructed same way
Supply curves for all types of producers follow law of supply
will provide more at higher prices although costs more to produce more
reason: higher prices signal potential for higher profits

12. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
supply and law of supply
supply schedule and supply curve
market supply schedule and market supply curve

13. What Are the Costs of Production?

14. Labor Affects Production
KEY CONCEPTS
Marginal product—change in total output caused by adding one worker
Specialization—having a worker focus on one aspect of production

15. Labor Affects Production
EXAMPLE: Marginal Product Schedule
Marginal product schedule—relation between labor, marginal product
Increasing returns—new workers cause marginal product increase
Diminishing returns—total output grows at decreasing rate
Negative returns—output decreases through crowding, disorganization

17. Production Costs KEY CONCEPTS
Fixed costs—expenses owners incur no matter how much they produce
Variable costs—expenses that vary as level of output changes
Total cost—the sum of fixed and variable costs
Marginal cost—additional cost of making one more unit of the product

18. Production Costs EXAMPLE: Fixed and Variable Costs
Fixed costs: mortgage, insurance, manager salaries, machinery
Variable costs: workers’ wages, electricity, materials, shipping

20. Production Costs EXAMPLE: Production Costs Schedule
Fixed costs remain the same no matter what total product amounts to
Calculating marginal cost:
divide change in total cost by change in total product
Diminishing returns result in increase in marginal cost

21. Earning the Highest Profit
KEY CONCEPTS
Marginal revenue—money made from sale 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)

22. 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

24. 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

25. What Factors Affect Supply?

26. 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

28. 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

32. What Is Elasticity of Supply?

33. 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

35. 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