1. Supply Chapter 5
Section 2

2. Labor Affects Production
Marginal Product
Change in total output caused by adding one worker
Specialization
Having each worker focus on one aspect of production

3. Labor Affects Production
Increasing Returns
Each new worker adds more total output that the last
Diminishing Returns
Each new worker makes total output grow at a decreasing rate
Negative Returns
Output decreases through crowding, disorganization

4. Production Costs Fixed Costs Variable Costs Total Cost Marginal Cost
Expenses that the owners of a business must pay no matter production
Variable Costs
Costs that vary based on production
Total Cost
Add affixed & variable costs together
Marginal Cost
Additional cost of producing one more unit of good/service

5. Earning the Highest Profit
Marginal Revenue-money made from sales 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)

6. 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
— marginal cost and marginal revenue are equal

7. 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

8. What Factors Affect Supply?
Section-3
What Factors Affect Supply?
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

9. Changes in Quantity Supplied
EXAMPLE: Changes Along a Supply Curve
Change in quantity supplied does not shift the supply curve
— movement to right means increase in price and quantity supplied
— movement to left means decrease in price and quantity supplied
Market supply curves show larger changes than individual curves

10. 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
— input costs, labor productivity, technology, government action, producer expectations, number of producers

11. Changes in Supply Factor 1: Input Costs
Input costs—price of resources needed to produce good or service
— if price of resource increases, costs increase
— if price of resource decreases, costs decrease

12. Changes in Supply Factor 2: Labor Productivity
Labor productivity—amount of product worker can produce in set time
Rise in productivity lowers production costs; supply increases
Specialization can allow producer to make more goods at lower cost
Better-trained workers produce more in less time; decrease costs

13. Changes in Supply Factor 3: Technology
Technology—use of scientific methods, discoveries in production
— results in new products or manufacturing techniques
Manufacturers use technology to make goods more efficiently
Technology enables workers to be more productive

14. Changes in Supply Factor 4: Government Action
Excise tax—tax on production or sale of specific good or service
— often placed on items that government wants to discourage use of
— taxes increase producers’ costs; decrease supply
Regulation—set of rules, laws designed to control business behavior
— examples: banning use of certain resources, worker safety laws

15. Changes in Supply Factor 5: Producer Expectations
Producers have expectations about future price of their product
— expectations affect how much they will supply at present
Expectations of higher price in future may lead to different actions
— Farmer may withhold part of current crop and decrease supply
— Manufacturer may buy more equipment to increase future supply

16. Changes in Supply Factor 6: Number of Producers
When one producer has successful new idea, others enter the market
— supply of good or service increases
Increase in number of producers leads to increased competition
— may drive less-efficient producers out of market

17. Robert Johnson: Supplying African-American Entertainment
EXAMPLE: Expanding the Number of Producers
Johnson recognized cable TV industry ignored African-American market
1980, launched Black Entertainment Television: music, public affairs
Cable operators in U.S., Canada, Caribbean began to buy BET’s shows
Started BET.com—number one Internet portal for African Americans
In 2001, Johnson sold BET, became first black billionaire

18. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
change in quantity supplied and change in supply
input costs and technology
excise tax and regulation

19. What Is Elasticity of Supply?
Section-4
What Is Elasticity of Supply?
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

20. Elasticity of Supply EXAMPLE: Elastic Supply
As product gains popularity, shortage develops, price goes up
Producers can increase supply if
— resources are easy to come by, inexpensive
— production uncomplicated, easy to increase

21. Elasticity of Supply EXAMPLE: Inelastic Supply
Producers can increase supply if
— availability of resources limited
— production capacity cannot be increased
— shipping too costly or unavailable

22. 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
Other industries need a lot of time to shift resources

23. Reviewing Key Concepts
Use each of the terms in a sentence that gives an example of how the term relates to supply:
elastic
inelastic
elasticity of supply

24. Case Study: Robots—Technology Increases Supply
Background
Robots—machines that can be programmed to perform a variety of tasks—perform numerous functions in industry. Half of all industrial robots are used in the automobile industry. Robots are ideal for lifting heavy objects and doing repetitive tasks humans find boring but can perform more refined tasks as well.
What’s the Issue?
How does technology increase supply?

25. Vocabulary
Marginal Product
Change in total output caused by adding one worker
Specialization
Having each worker focus on one aspect of production
Increasing Returns
Each new worker adds more total output that the last
Diminishing Returns
Each new worker makes total output grow at a decreasing rate
Negative Returns
Output decreases through crowding, disorganization
Fixed Costs
Expenses that the owners of a business must pay no matter production
Variable Costs
Costs that vary based on production
Total Cost
Add affixed & variable costs together
Marginal Cost
Additional cost of producing one more unit of good/service
Marginal Revenue
money made from sales of each additional unit sold
Total Revenue
P (Price) x Q (Quantity purchased at that price)

26. Profit Maximizing Output level of production yielding highest profit
Vocabulary
Profit Maximizing Output
level of production yielding highest profit
Change in Quantity Supplied
rise or fall in amount offered for sale because of change in price
Change in Supply
supply—producers offer different amounts at every price
Input Costs
price of resources needed to produce good or service
Labor Productivity
amount of product worker can produce in set time
Technology
use of scientific methods, discoveries in production
Excise Tax
tax on production or sale of specific good or service
Regulation
set of rules, laws designed to control business behavior
Elasticity of Supply
measures producer response to price changes