1. SUPPLY

2. Elasticity of Supply
Supply Elasticity: a measure of the way in which a quantity supplied responds to a change in price
Elastic
Small increase in price leads to a larger increase in output—supply
Inelastic
Mall increase in price causes little change in supply
Unit Elastic
A change in price causes a proportional change in supply

4. Determinants of Supply Elasticity
How quickly a producer can act when a change in price occurs:
Adjust quickly = elastic
Complex/advance planning = inelastic
Factor of Substitution:
Easy = elastic
Difficult = inelastic

5. The Theory of Production

6. The Law of Variable Proportions
Short Run:
Output will change as one variable input is altered, but other inputs are kept constant
i.e.: salting a meal (amount of input –salt- varies; so does the output – quality of the meal)
Final Product is affected
How is the output of the final product affected as more units of one variable input or resources are added to a fixed amount of other resources?
i.e.: farmer may have all the land, machines, workers, and other items needed to produce a crop, but may have questions about the use of fertilizers ,

7. The Production Function
Concept that describes the relationship between changes in output to different amounts of a single input while others are constant

8. The Law of Variable Proportions
Possible to vary all the inputs at the same time
Economist prefer only a single variable be changed at a time
b/c more than one = harder to gauge the impact of a single variable

9. The Production Function
Total product is the total output the company produces
Total Product Rises
As more workers are added, total product rises until a point that adding more workers causes a decline in total product
Total product Slows
As more workers are added output continues to rise = it does so at a slower rate until ti can grow no further
More workers “get in the way”

10. The Production Function
Marginal Product is the extra output or change in total product caused by adding one more unit of variable output
i.e.: worker 1’s output is 7; worker 2’s output is 13 together their output is 20 (figure 5.5)

13. Three Stages of Production
Stage I: increasing returns
Marginal output increases with each new worker
Companies are tempted to hire more workers (moves them to stage II)
Stage II: diminishing returns
Total production keeps growing but the rate of increase is smaller
Each worker is still making a positive contribution to total output (but diminishing)
Stage III: negative returns
Marginal product becomes negative
Decreasing total plant output

14. Cost, Revenue and Profit Maximization

15. What kinds of cost do you have to consider?
Fixed Cost – the cost that a business incurs even if the plant idle and output is zero.
Salaries
Rent
Property Taxes
Variable Cost – cost that does change when the business rate of operation or output changes
Electric power
Shipping charges

16. What kinds of cost do you have to consider?
Variable Cost – cost that does change when the business rate of operation or output changes
Electric power
Shipping charges
Total Cost – Sum of the fixed and variable costs
Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

18. Applying Cost Principles
Self-service Principles
Gas station is an example of high fixed cost with low variable cost
Ration of variable to fixed cost is low
E-Commerce
An industry with low fixed cost

19. Measure of Revenue Total revenue = Marginal Revenue =
Number of units sold multiplied by the average price per unit
Marginal Revenue =
The extra revenue connected with producing and selling an additional unit

20. Marginal Analysis
Marginal Analysis comparing the extra benefits to the extra cost of a particular decision
Break-even point is the total output or total product the business needs to sell in order to cover its total cost

21. Marginal Analysis Businesses want
# of workers and level of output that generates max. profits
Profit-maximizing: quantity of output is reached when marginal cost and marginal revenue are equal