1. Chapter 5 - Supply

2. Section One – What is Supply I.An Introduction to Supply i. Supply is the amount of a product that would be offered for sale at all possible prices that could prevail in the market ii. Law of Supply – Suppliers will offer more for sale at higher prices a. The Supply Schedule i. This listing of the various quantities of a particular product supplies at all possible prices in the market. b. The Individual Supply Curve i. The graph showing various quantities supplied at each and every price that might prevail in a market. c. The Market Supply Curve i. The supply curve that shows the quantities offered at various prices by all firms that offer a product for sale in an individual market.

3. II. Change in Quantity Supplied i. The amount producers bring to the market at any given price ii. a change in the amount for sale in response to a change in price (quantity) 1. A movement along the supply curve

4. III. Change in Supply – These make the entire curve move a. Cost of Inputs – This could be either the cost of labor or cost of supplies to make the product b. Productivity – If productivity increases (>Right). If productivity decreases the (<Left) c. Technology – These will lower production costs or increase productivity (>Right) d. Taxes and Subsidies – Businesses view taxes as costs. Increases costs will increase the cost of production (<Left) i. Subsidies are government payments to individuals or groups to encourage or protect a certain type of business activity (>Right)

5. e. Expectations – If producers expect their product to increase in price they may withhold supply ( Right) f. Government Regulations – Increased regulations increase cost, which will cause producers to lower the amount supplied ( Right) g. Number of Sellers – If more sellers enter the market (>Right) If sellers leave the market (<Left)

6. IV. Elasticity of Supply – A measure of the way in which quantity supplied responds to a change in price a. Three Elasticities –

7. b. Determinants of Supply Elasticity – i. If businesses can respond quickly to changes their supply is likely to be elastic ii. If businesses cannot respond as quickly their supply is likely to be inelastic iii. Only production considerations determine supply elasticity

8. Section Two – The Theory of Production I.The Law of Variables Proportions i. Theory of production deals with the relationship between the factors of production and the output of goods and services - Based on short run – a period of production that allows producers to change only the amount of variable labor - Based on long run – a period of production long enough for producers to adjust the quantities of all their resources including capital a. Law of Variable Proportions states that in the short run output will change as one input is varied while the others are held constant. (salt on food) i. How will a farmers yield be affected by the use of fertilizer?

9. II.The Production Function – A concept that describes the relationship between changes in output to different amounts of a single input while other inputs are constant (amount of workers a. Total Product i. total output for one firm b. Total Product Rises i. total output rises as more workers are added (leads to specialization) c. Total Product Slows i. marginal return of workers eventually decreases to the point where additional workers decrease production d. Marginal Product i. the extra output of change in total product caused by the addition of one more unit of variable input (change from one to the next)

10. III.Three Stages of Production (increasing returns, diminishing returns, negative returns) i. Stage One – the first worker cannot work efficiently because there are too many resources per worker - As long as each worker hired contributes more to total output than the worker before, total output rises at a faster rate - This is the stage of increasing returns ii. Stage Two – total production keeps growing but at smaller rates - each additional worker contributes a diminishing return iii. Stage Three – marginal product becomes negative at this point, because each additional worker is actually decreasing the total product

11. Section Three – Cost, Revenue and Profit Maximization I.Measures of Cost i. Fixed Cost – the cost that a business incurs even if the plant is idle and output is zero. (sometimes referred to as overhead) - salaries - interest on bonds - rent - property taxes ii. Variable Cost – a cost that changes when the business rate of operation or output changes. - labor - raw materials

12. i. Marginal Cost – the extra cost when a business produces one additional unit of a product

13. II. Applying Cost Principles a. Self-Services Gas Stations i. Fixed (lot, pumps, tanks, taxes, licensing fees) ii. Variable (labor, electricity, cost of gas sold) b. Internet Stores i. Often have very low fixed costs (no large warehouses or stores)

14. III.Measures of Revenue i. Total Revenue – Number of units sold x average price per unit ii. Marginal Revenue – Extra revenue earned with the production and sale of one additional unit of output - divide the change in total revenue by the marginal product

15. IV.Marginal Analysis i. A cost-benefit decision making process that compares the extra benefits to the extra costs of an action. - break even analysis - profit maximization ii. Break-even point – the total product the business needs to sell in order to cover it’s total costs - As long as the marginal cost is less than the marginal revenue, the business will keep hiring workers iii. The profit-maximizing quantity of output is reached when marginal costs and marginal revenue are equal.