Chapter 5: Supply

5.1 What is Supply?

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

https://www.youtube.com/wat ch?v=nKvrbOq1OfI 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 https://www.youtube.com/wat ch?v=nKvrbOq1OfI

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

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 https://www.youtube.com/watch?v=6Q_XxwqtwxY Supply elasticity Measure of the degree to which the quantity supplied responds to a change in price

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

5.2 Theory of Production

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

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

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

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

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

5.3 Cost, Revenue and Profit Maximization

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

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

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

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

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

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