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

Chapter Intro 1 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 2 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-End

Section 1-Preview 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-Key Terms Content Vocabulary supply Law of SupplyLaw of Supply supply schedulesupply schedule supply curve market supply curvemarket supply curve quantity suppliedquantity supplied change in quantity suppliedchange in quantity supplied Academic Vocabulary various interaction change in supplychange in supply subsidy supply elasticity

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

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

Section 1 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.supply schedule When information is plotted on a graph, it forms the supply curve.supply curve Supply of Compact Discs

Section 1 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.market supply curve Individual and Market Supply Curves

Section 1 An Introduction to Supply (cont.) The quantity supplied is the amount producers bring to market at any given price.quantity supplied A change in price leads to a change in quantity supplied.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 Change in Supply Several factors can contribute to a change in supply.

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

Section 1 –SubsidySubsidy –Expectations –Government regulations –Number of sellers Change in Supply (cont.)

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

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

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

Section 1 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 (cont.) Elasticity of Supply

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

Section 2-Key Terms Content Vocabulary production functionproduction function short run long run total product marginal productmarginal product stages of productionstages of production Academic Vocabulary hypothetical contributes diminishing returnsdiminishing returns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Section 3-End

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

VS 2 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 3 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.

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Profile 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

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

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

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

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

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

Vocab6 quantity supplied amount offered for sale at a given price

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

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

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

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

Vocab11 various different

Vocab12 interaction action of one on the actions of another

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

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

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

Vocab16 total product total output or production by a firm

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

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

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

Vocab20 hypothetical assumed but not proven

Vocab21 contributes gives time, money, or effort

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

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

Vocab24 variable cost production costs that change when production levels change

Vocab25 total cost the sum of fixed costs and variable costs

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

Vocab27 e-commerce electronic business conducted over the Internet

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

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

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

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

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

Vocab33 conducted handled by way of

Vocab34 generates produces or brings into being

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