1. Chapter 5: Supply

2. 5.1 What is Supply?

3. Supply Schedule Supply
Amount of a product offered for sale at all possible prices in a market
The Law of Supply
States that more product will be offered for sale at higher prices than at lower prices
Supply Schedule
Chart showing the quantities offered for sale at each possible price in the market

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Individual supply curves
Have a positive slope that goes up from left to right; if price goes up, quantity of supply increases
Market supply curve
Shows the quantities offered by all producers in a given market
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5. Change in quantity supplied
Change in the quantity of a product offered for sale in direct response to a change in price
Occurs only when prices change

6. Factors that can cause a change in supply
Cost of resources
Productivity
Technology
Taxes
Subsidies
Government payment to encourage or protect a certain type of economic activity
Government regulations
Number of sellers, and future expectations
Supply elasticity
Measure of the degree to which the quantity supplied responds to a change in price

7. Like demand, supply can be elastic, inelastic, or unit elastic
Production considerations alone determine supply elasticity.
If a firm can adjust to new prices quickly, then supply is likely to be elastic.
If adjustments take much longer, then supply is likely to be inelastic

8. 5.2 Theory of Production

9. Production function
Graph that shows how a change in one production variable affects total output
Shows the changes in output in response to changes in input
Analyzed in terms of short-run or long-run relationships between inputs and outputs
Short-Run
period of production that allows producers to change only the amount of the variable input called labor
Long-Run
Period of production in which producers can adjust the quantities of their resources, including capital

10. Marginal product
Extra output or change in total product caused by adding one more unit of outputs
Changes as more workers are added

11. Stage 1 Increasing Returns
Few workers not all resources are used
Some machines are idle
Each extra worker adds more than the previous
Workers begin to specialize and work as a unit

12. Stage 2 Diminishing Returns
Eventually the plant is at full employment
All resources are maximized
Marginal products are still positive, but decrease steadily
Adding more workers still increases production
But each worker adds less than the previous

13. Stage 3 Negative Returns
Finally there are just too many workers
They get in each other’s way and slow down production
Each worker actually subtracts from total production

14. 5.3 Cost, Revenue and Profit Maximization

15. Fixed costs
Costs an organization incurs even when there is little or no activity
Ex: rent, executive salaries, property taxes
Variable costs
Usually associated with labor, or raw materials, and change with the business’s rate of operation and output

16. Total cost
Sum of fixed and variable costs
Marginal costs
Extra cost incurred to produce one more unit of output

17. Average revenue
The average price of every unit of output
Total revenue
All of the revenue a business receives

18. Marginal Revenue
Extra revenue a business receives from the production and sale of one additional unit out output
The most important measure of revenue

19. Break-even point
Level of production that generates enough revenue to cover total operating costs

20. The internet is one of the fastest-growing areas of business today
E-commerce
Lower overhead
Does not require as much inventory as traditional retail stores
The break-even point of sales is much lower