SUPPLY CHAPTER 5

SEC. 1 What is Supply? Supply- amount of a product that would be offered for sale at all possible prices that could prevail (exist) in the market. Law of Demand v. Law of Supply (suppliers will offer more for sale at high prices and less at lower prices) Supply Schedule and Supply Curve

Change in Quantity Supplied Quantity supplied – amount of products producers bring to the market Change on quantity supplied – change in amount offered for sale in response to a change in price.

Changes in Supply 1. Cost of inputs- if prices drop, producers are willing to produce more. Supply curve shifts to the right. 2. Productivity- workers motivation. 3. Technology- tends to shift the supply curve to the right. Introducing new technology can affect lowering the cost of production or by increasing cost of productivity. 4. Taxes and Subsidies- if the business is highly taxed, or if fees are paid to receive a license the supply curve moves to the left. Subsidy- a gov. payment to an individual, business, or other group to protect a certain type of economic activity. 5. Expectations- if producers think the price for the product will go up, they withhold some of the supply. 6. Government regulations 7. Number of Sellers

Elasticity of Supply Supply elasticity- is a measure of the way in which supplied responds to a change in price. What is the difference between demand/supply elasticity? - Very little.

Determinants of Supply Elasticity Elastic- kites, candies, other products that can be made quickly without huge amount of capital and skilled labor. - if consumers are willing to pay twice the price for any of these products, producers increase production. Inelastic- the supply curve for oil, companies will find difficult to increase output because of the amount of capital and technology needed.

Sec. 2 The Theory of Production Theory of factors of production- relationship between the factors of production and the output of goods and services. Short run v. long run Ex. If Ford Motors hire 300 extra workers is short run, if they built a new factory is a long run. Law of Variable Proportions: in the short run, output will change as one input is varied while the others are held constant.

The Production Function Production function- a concept that describes the relationship between changes in output to different amounts of a single input while others inputs are held constant.

3 Stages of Production Stage I( increasing returns): More resources than workers. Stage II (diminishing returns): diminishing returns, the stage where output increase at a diminishing rate as more units of a variable input are added. Ex. When the 6 th worker is added. Stage III (negative returns):begins when the 11 th worker is added. More workers cause production to decrease.

Sec. 3 Cost, Revenue, and Profits Maximization Measure of Cost: -Fixed of cost- the cost that business incurs even if the plant inactive and output (production) is zero. (salaries to executives, rent, taxes, depreciation on machinery) - Variable cost- changes the business rate of operation or output changes. ( labor & raw materials: wage-earning workers may be laid off, electric power to run machines, freight charges to ship the final product) - Total cost- sum of fixed and variable. - Marginal cost- extra cost acquired when a business produces one additional unit of a product.

Applying Cost Principles The cost and combination of inputs affect the way businesses produce. - Self-Service gas Station- large fixed cost - Internet Stores- overall fixed cost of operation is low. e-commerce does not need a large sum of money. Just investment in a software and little inventory.

Measure of Revenue Businesses use two key measures of revenues to find the amount of output that will produce the profits. 1. Total revenue- # of units sold multiplied by the average price per unit. EX. 7 units x $15 each= $105 revenue 2. Marginal Revenue- extra revenue associated with the production of sales of one additional unit of output.

Marginal Analysis A type of cost- benefit decision making that compares the extra benefits to the extra cost of an action. Break-even point- the total output or total product the business needs to sell in order to cover its total cost. Profit-maximizing quantity of output- this is reached when marginal cost and marginal revenue are equal.

Create a Venn diagram to compare and contrast supply and demand List the factors that cause a change in supply, and explain each. Create a supply schedule and supply graph that shows the following information: American automakers are willing to sell 200,000 cars per year when the price of a car is $6,000. They are willing to sell 400,000 when the price is $12,000, and 600,000 at a price of $18,000.