1. Supply Producing Goods & Services
Chapter 5

2. What Is Supply? Supply Interchangeable terms:
is the quantity(s) of a product or service that a firm is willing and able to make available for sale at all possible prices.
Interchangeable terms:
Firm
Business
Producer
Supplier

3. How Businesses make $$
The Law of Supply states that the quantity of goods supplied will be greater at a higher price than it will at a lower price.
Profit ($) is motive (goal) for firms (suppliers)

4. Supply Schedule & Curve
Analyze supply by listing quantities and prices in a supply schedule (table) & supply curve (graph).
Upward Slope!

5. A market supply curve shows the quantities offered at various prices by all firms that offered the product for sale in a given market.
Make sure students can explain the difference between a supply curve & a market supply curve

6. Change in Quantity Supplied
is the amount of a product that the firms offer for sale at any given price.
Change in Quantity Supplied
is the change in the amount offered for sale in response to a change in price.
In general, if the price of a product goes up, the producer offers more of the product for sale…Why? = More $$

7. Change in Quantity Supplied pg. 118
The movement along the curve represents how supply changes based on price.
The higher the price, the more will be produced.
The lower the price, the less will be produced.
“Change in Quantity Supplied” & 1 curve line means movement along the curve is reflective of price/price change(s)

8. Elasticity of Supply pg. 124
Responsiveness of producers to changes in the price of their goods or services
Supply is elastic when a small change in price leads to a larger change in output (supply).
Supply is inelastic when a small change in price causes little change in supply.
Supply is unit elastic when a change in price causes a proportional change in supply.

9. Elasticity of Supply Determinants of supply elasticity
are linked to how quickly a producer can act when the change in price occurs.
If a firm can adjust it’s production to new prices quickly, then supply is elastic.
Toys, candy, ice cream, etc.
Doesn’t require a lot of capital or skilled labor.
If production is complex and requires advance planning, aka the firm takes longer to react to a change in price, the supply is inelastic.
Cars, computers, etc.

10. Change in Supply
A change in the cost of an input will impact the cost of producing a good and will result in a shift in supply
Supply changes, but price remains the same
Results in a shift in the supply curve to the Left or Right
Make sure students know what an “input” is. Clarify that we are now discussing shifts in supply that have nothing to do with a change in price (b/c price remains the same).
Shifts are shown graphically by a new curve line to the left (decrease) or right (increase)

11. Changing Supply pg.120
Clarify the table: Price remains the same while the quantity/Supply changes. Clarify that a shift/new curve line to the left is a decrease in supply & a shift to the right is an increase in supply
Anything that is viewed as increasing or decreasing the cost(s) of producing the good or service will change supply.
This will shift the curve to the left or to the right.

12. Change in Supply
Changes in supply can be caused by a number of factors:
Technology (R) – improving productivity
Change in Costs of Resources (L or R) – labor, raw materials, etc.
Increase Productivity (R) – workers decide to work more efficiently thus more products are produced
Use real life examples to explain the changes in supply. Ask students if they can come up with their own examples:
What could cause an increase in productivity? Maybe a manager that is more demanding…?

13. Change in Supply (continued)
Government can affect supply through increasing or decreasing production costs
Taxes (L) - paid by the producer which adds to cost of production…thus reducing supply.
Subsidies (R) - gov’t payment to supplier, which decreases cost of production…Thus increasing supply.
Page 122
Regulations (L) - Rules, Standards, Requirements, Safety measurements, etc.
add to costs which raise prices, thus reducing supply.
Have students open their book and read page 122 on taxes and subsidies. Use Trump’s plan to decrease taxes on businesses in America to explain how this could increase production (shift R).
Make sure they can define what a subsidy is & why it is economically necessary. Book uses milk, corn, & cotton farmers as examples of recipients of subsidies.

14. Change in Supply (Cont.)
Number of Sellers:
More sellers offering or producing the product (R)
Less sellers (L)
More = More
Less = Less

15. Theory of Production
Is the relationship between factors of production and the output of goods and services
Short run – production period so short that only the variable inputs (usually labor) can be changed.
Long run, is a period of production long enough for producers to adjust the quantities of all its resources, including capital.
Ex. A firm that reduces its labor force today may also have to close down some factories later on. These are long run changes b/c the amount of capital used for production changes.

16. Law of Variable Proportions & the Production Function
States that in the short run, output will change as one input is varied (changed), while others are held constant.
The production function describes the relationship between changes in output to different amounts of a single input while all other inputs are held constant.

17. Measuring Production (Output)
Total product is the total amount of a product that is produced by a business in a given time period.
Average Product is the number of units of output produced per unit of input.
We don’t use this!

18. More In = More Out (sometimes)
Marginal Product is the change in output as a result of adding one additional unit of an input
For example: Hire another worker
Thought provoking question:
Why does this NOT always lead to an increase in output?
Because some workers are less efficient

19. Stages of The Production Function
Marginal Product differentiates the different stages of production

20. Stages of The Production Function (pg. 129-130)
In Stage I (increasing returns): marginal output increases with each new worker. Companies are tempted to hire more workers, which moves them to Stage II.
In Stage II (diminishing returns): total production keeps rising but the rate of increase is smaller; each worker is still making a positive contribution to total output, but it is diminishing.
In Stage III (negative returns): marginal product becomes negative, decreasing total output. Workers are less productive b/c they get in each other’s way
Make sure students know the names of the stages of production

21. Measures of Cost
Fixed cost is the cost that a business incurs regardless of output.
Management salaries, rent, taxes, & depreciation on capital goods.
Overhead is the total fixed cost.
Variable cost is a cost that changes when the production level changes. Can change at any time.
Hourly labor, raw materials, freight charges, inventory, & electricity.
Total cost is the sum of the fixed and variable costs
Differentiate between fixed & variable

22. Business Operation E-Commerce:
Electronic business conducted over the internet
Significantly less overhead
They don’t have to rent a store front
They don’t have to have lots of inventory
Advantage of E-commerce

23. Marginal Cost & Analysis
Marginal cost is the extra cost incurred when a business produces one additional unit of a product
Change in variable cost divided by marginal product
Marginal analysis is comparing the extra benefits to the extra costs of a particular decision.

24. Measurement of Revenue
Total revenue is the number of units sold multiplied by the average price per unit.
Marginal revenue is the extra revenue collected with producing and selling an additional unit of output.
Change in Revenue divided by Marginal Product

25. Breaking Even
The break-even point is the point where the companies total revenue covers it’s total cost.
All additional revenue would then be profit.
Businesses want to find the number of workers and the level of output that generates maximum profits. This is called the profit-maximizing quantity of output is reached when MC=MR.
Common sense tells you that max profits occur when cost is less than revenue, but output has to be included…& when we include output we realize that cost < revenue means add more variable inputs (workers) to increase output.