1. Splash Screen

2. Section 1: What is Supply? Section 2: The Theory of Production
Chapter Introduction
Section 1: What is Supply?
Section 2: The Theory of Production
Section 3: Cost, Revenue, and Profit Maximization
Visual Summary
Chapter Menu

3. In order to earn some extra money, you are considering opening a lawn or babysitting service. Brainstorm the resources you would need. What specific services would you offer? What prices would you charge? What information do you need to determine answers to these and other questions? Read Chapter 5 to find out about the factors that influence how businesses make production decisions.
Chapter Intro 1

4. 1. Buyers and sellers voluntarily interact in markets, and market prices are set by the interaction of demand and supply.
2. The profit motive acts as an incentive for people to produce and sell goods and services.
Chapter Intro 2

5. Chapter Intro-End

6. Section Preview
In this section, you will learn that the higher the price of a product, the more of it a producer will offer for sale.
Section 1-Preview

7. Content Vocabulary Academic Vocabulary supply Law of Supply
supply schedule
supply curve
market supply curve
quantity supplied
change in quantity supplied
change in supply
subsidy
supply elasticity
Academic Vocabulary
various
interaction
Section 1-Key Terms

8. Have you ever gone to a store to buy something that was advertised as being on sale, only to discover the store was sold out of the item?
A. Yes, happens all the time
B. Yes, has happened a few times
C. No, has never happened A B C
Section 1

9. What is Supply?
Supply is an amount of product offered for sale at prevailing market prices.
Law of Supply: Producers will offer more product at higher prices and less at lower prices
Section 1

10. An Introduction to Supply
Supply can be illustrated by a supply schedule or a supply curve.
Section 1

11. An Introduction to Supply (cont.)
Suppliers must determine how much to offer for sale at various prices, taking into account the factors of production.
Like demand, supply can be shown in the form of a table—a supply schedule.
When information is plotted on a graph, it forms the supply curve.
Supply of Compact Discs
Section 1

12. An Introduction to Supply (cont.)
Normal supply curves have a positive slope—prices go up; quantity supply goes up.
Economists are more interested in the market supply curve than for a single firm.
Individual and Market Supply Curves
Section 1

13. An Introduction to Supply (cont.)
The quantity supplied is the amount producers bring to market at any given price.
A change in price leads to a change in quantity supplied.
Although the producer has the freedom to adjust production up or down, the interaction of supply and demand usually determines the final price of a product.
Section 1

14. C. Merge with another company D. All of the above A B C D
How might a supplier of quality steaks adjust supply when prices increase?
A. Manufacture more
B. Leave the market
C. Merge with another company
D. All of the above A B C D
Section 1

15. Change in Supply Several factors can contribute to a change in supply.
Section 1

16. Change in Supply (cont.)
A change in supply occurs for several reasons.
Cost of resources
Productivity
Technology
Taxes
A Change in Supply
Section 1

17. Change in Supply (cont.)
Subsidy
Expectations
Government regulations
Number of sellers
Section 1

18. Which way does the supply curve shift if production costs of chicken feed increase?
A. Shifts to the right
B. Shifts to the left A B
Section 1

19. Elasticity of Supply
The response to a change in price varies for different products.
Section 1

20. Elasticity of Supply (cont.)
Supply, like demand, has elasticity.
Supply elasticity measures how the quantity supplied responds to a change in price.
Elasticity of Supply
Section 1

21. Elasticity of Supply (cont.)
Supply elasticity has three forms:
Elastic
Inelastic
Unit elastic
Elasticity of Supply
Section 1

22. Elasticity of Supply (cont.)
Supply elasticity is based solely on production considerations.
A firm’s ability to adjust to new prices quickly is likely to be elastic.
A firm that takes longer to react to a change in prices is likely to be inelastic.
Elasticity of Supply
Section 1

23. A B C If the change in quantity supplied is elastic
A. An increase in price leads to a proportionally larger increase in output.
B. An increase in price leads to a proportionally smaller increase in output.
C. An increase in price causes a proportional change in output. A B C
Section 1

24. Section 1-End

25. Section Preview
In this section, you will learn how a change in the variable input called “labor” results in changes in output.
Section 2-Preview

26. Content Vocabulary Academic Vocabulary production function short run
long run
total product
marginal product
stages of production
diminishing returns
Academic Vocabulary
hypothetical
contributes
Section 2-Key Terms

27. Which factor is considered to be the “variable” factor of production?
A. Land
B. Labor
C. Capital
D. Entrepreneurs A B C D
Section 2

28. The Production Function
The production function shows how output changes when a variable input such as labor changes.
Section 2

29. The Production Function (cont.)
Production can be illustrated with a production function.
Economists focus on the short run when they analyze production.
No changes occur in land, equipment, or technology. Changes in total product are caused by a change in the number of workers.
Short-Run Production
Section 2

30. The Production Function (cont.)
Long run changes involve other factors of production, including capital.
Marginal product—the extra output or change in total product caused by adding one more unit of variable input
Section 2

31. Changes in output over the long run include A. Changes in labor
B. Changes in technology
C. Changes in capital
D. Changes in any of the above A B C D
Section 2

32. Stages of Production
The stages of production help companies determine the most profitable number of workers to hire.
Section 2

33. Stages of Production (cont.)
In deciding how many workers to hire, firm must review the three stages of production.
Increasing returns, Stage I
Diminishing returns, Stage II
Negative returns, Stage III
Profiles in Economics: Kenneth I. Chenault
Section 2

34. Have you ever worked or volunteered at a business that was in Stage III of the stages of production?
A. Yes
B. Possibly
C. No A B C
Section 2

35. Section 2-End

36. Section Preview
In this section, you will learn how businesses analyze their costs and revenues, which helps them maximize their profits.
Section 3-Preview

37. Content Vocabulary Academic Vocabulary fixed costs overhead
variable costs
total cost
marginal cost
e-commerce
break-even point
total revenue
marginal revenue
marginal analysis
profit-maximizing quantity of output
Academic Vocabulary
conducted
generates
Section 3-Key Terms

38. Which cost that businesses occur is considered to be overhead?
A. Rent/mortgage
B. Labor
C. Utilities A B C
Section 3

39. Measures of Cost
Businesses analyze fixed, variable, total, and marginal costs to make production decisions.
Section 3

40. Measures of Cost (cont.)
There are several ways businesses measure costs.
Fixed costs
Total fixed costs, sometimes called overhead, remain the same.
Variable costs
Section 3

41. Measures of Cost (cont.)
Total cost
Marginal cost
Production, Costs, and Revenues
Section 3

42. Marginal cost is more useful in measuring than what other cost?
A. Variable cost
B. Total cost
C. Fixed cost A B C
Section 3

43. Applying Cost Principles
Fixed and variable costs affect the way a business operates.
Section 3

44. Applying Cost Principles (cont.)
People engage in e-commerce conducted on the Internet because
Overhead costs are low.
There is a low need for inventory.
Section 3

45. Applying Cost Principles (cont.)
After businesses measure their costs, they determine the break-even point.
Businesses wanting to do better than break even apply principles of marginal analysis to their costs and revenues.
Section 3

46. A B C What is the break-even point?
A. Level of production where revenue covers marginal costs
B. Level of production where revenue covers total costs
C. Level of production where revenue covers fixed and marginal costs A B C
Section 3

47. Marginal Analysis and Profit Maximization
Businesses compare marginal revenue with marginal cost to find the level of production that maximizes profits.
Section 3

48. Marginal Analysis and Profit Maximization (cont.)
Two key measures of revenue are used to find the amount of output that will produce the greatest profits:
Total revenue
Marginal revenue
The Global Economy & YOU Air & Ground Shipping Market
Section 3

49. Marginal Analysis and Profit Maximization (cont.)
Like businesses, we use marginal analysis in our own decision making.
When marginal cost is less than marginal revenue, hire more variable inputs (labor) to expand output.
Section 3

50. Marginal Analysis and Profit Maximization (cont.)
Profit-maximizing quantity of output is reached when marginal cost and marginal revenue are equal.
Section 3

51. What happens to a firm’s variable costs if it operates 24 hours a day?
A. Costs go up
B. Costs go down
C. Costs remain constant A B C
Section 3

52. Section 3-End

53. Law of Supply When the price of a product goes up, quantity supplied goes up. When the price goes down, quantity supplied goes down.
VS 1

54. Production Function The production function helps us find the optimal number of variable units (labor) to be used in production. As workers are added in Stage I, production increases at an increasing rate. In Stage II, production increases at a decreasing rate because of diminishing returns. In Stage III, production decreases because more workers cannot make a positive contribution.
VS 2

55. Cost and Revenue While businesses have several types of costs, they can find the profit-maximizing quantity of output by comparing marginal cost to their marginal revenue.
VS 3

56. VS-End

57. Figure 1

58. Figure 2

59. Figure 3

60. Figure 4

61. Figure 5

62. Figure 6

63. Figure 7

64. Kenneth I. Chenault (1952– )
first African American to be CEO of a top-100 company
responsible for continuing American Express’s 155-year-old tradition of “reinvention” during global change
Profile

65. DFS Trans 1

66. DFS Trans 2

67. DFS Trans 3

68. supply amount of a product offered for sale at all possible prices
Vocab1

69. Law of Supply
principle that more will be offered for sale at higher prices than at lower prices
Vocab2

70. supply schedule
a table showing how much a producer will supply at all possible prices
Vocab3

71. supply curve
a graph that shows the different amounts of a product supplied over a range of possible prices
Vocab4

72. market supply curve
a graph that shows the various amounts offered by all firms over a range of possible prices
Vocab5

73. quantity supplied
amount offered for sale at a given price
Vocab6

74. change in quantity supplied
change in amount offered for sale when the price changes
Vocab7

75. change in supply
situation where different amounts are offered for sale at all possible prices in the market; shift of the supply curve
Vocab8

76. subsidy
government payment to encourage or protect a certain economic activity
Vocab9

77. supply elasticity
a measure of how the quantity supplied responds to a change in price
Vocab10

78. various
different
Vocab11

79. interaction
action of one on the actions of another
Vocab12

80. production function
a graph showing how a change in the amount of a single variable input changes total output
Vocab13

81. short run
production period so short that only the variable inputs (usually labor) can be changed
Vocab14

82. long run
production period long enough to change the amounts of all inputs
Vocab15

83. total product
total output or production by a firm
Vocab16

84. marginal product
extra output due to the addition of one more unit of input
Vocab17

85. stages of production
phases of production that consist of increasing, decreasing, and negative marginal returns
Vocab18

86. diminishing returns
stage where output increases at a decreasing rate as more units of variable input are added
Vocab19

87. hypothetical
assumed but not proven
Vocab20

88. contributes
gives time, money, or effort
Vocab21

89. fixed costs
costs that remain the same regardless of level of production or services offered
Vocab22

90. overhead
broad category of fixed costs that includes rent, taxes, and executive salaries
Vocab23

91. variable cost
production costs that change when production levels change
Vocab24

92. total cost
the sum of fixed costs and variable costs
Vocab25

93. marginal cost
extra cost of producing one additional unit of production
Vocab26

94. e-commerce
electronic business conducted over the Internet
Vocab27

95. break-even point
production level where total cost equals total revenue
Vocab28

96. total revenue
total amount earned by a firm from the sale of its products
Vocab29

97. marginal revenue
extra revenue from the sale of one additional unit of output
Vocab30

98. marginal analysis
decision making that compares the extra costs of doing something to the extra benefits gained
Vocab31

99. profit-maximizing quantity of output
level of production where marginal cost is equal to marginal revenue
Vocab32

100. conducted
handled by way of
Vocab33

101. generates
produces or brings into being
Vocab34

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