SUPPLY

Jump Start Chapter 5 section 11. The Law of Supply states that

A. The quantity supplied varies inversely with its price B. The quantity supplied irregularly with its price C. The quantity demanded varies inversely with its price D. The quantity supplied varies directly with its price

2. All of the following can cause an increase in supply EXCEPT:A. A decrease in the cost of inputs B. Fewer sellers in the marketplace C. An increase in productivity D. A change in taxes or subsidies

3. Which product is likely to have the most elastic supply curve?A. Ice cream cones B. Automobiles C. Ships D. Dishwashing machines

4. The supply curve is A. Downward sloping B. Level C. Upward sloping D. Irregular

5. Increased government regulations can cause the supply curve to A. Shift to the left B. Shift to the right C. Increase D. Decrease

What is Supply?

• Supply is the quantities that would be offered for sale and all possible prices that could prevail in the market.

Figure 5.1Figure 5.1

The Law of Supply

• The quantity supplied, or offered for sale, varies directly with its price.

• If prices are high, suppliers will offer greater quantities for sale. If prices are low, suppliers will offer smaller quantities for sale.

• A change in overall supply will cause the Demand curve to shift.

• A change in quantity demanded will move along the original curve.

Supply Curve

• Individual Curve– Illustrates how the quantity that a producer makes

varies depending on the price that will prevail in the market

• Market Curve – Illustrates the quantities and prices that all

producers will offer in the market for any given product or service

• Economist analyze supply – by listing quantities and prices in a supply

schedule – Forms supply curve with and UPWARD slope

Figure 5.2Figure 5.2

• Quantity supplied:– The amount that producers bring to the

market at any given price

• Change in Quantity Supplied;– The change in the amount offered for sale in

response to a change in price

Change in Quantity Supplied

• Illustrates a change in quantity supplied – Shows as a movement

along the line – Can increase or

decrease amount of the product (movement from a to b)

Figure 5.1Figure 5.1

• Situation where suppliers offer different amounts of products for sale at all possible prices

Change in Supply

Figure 5.3Figure 5.3

Change in Supply

• Cost of inputs

• Productivity

• Technology

• Number of sellers

• Taxes and subsidies

• Expectations

• Government Regulations

Elasticity of Supply

• Supply Elasticity: a measure of the way in which a quantity supplied responds to a change in price

• Elastic – Small increase in price leads to a larger increase in

output—supply • Inelastic

– small increase in price causes little change in supply • Unit Elastic

– A change in price causes a proportional change in supply

Figure 5.4aFigure 5.4a Figure 5.4bFigure 5.4b

Figure 5.4cFigure 5.4c

Figure 5.4dFigure 5.4d

Determinants of Supply Elasticity

• How quickly a producer can act when a change in price occurs:– Adjust quickly = elastic – Complex/advance planning = inelastic

• Factor of Substitution:– Easy = elastic – Difficult = inelastic

Chapter 5 section 1 Vocabulary A. Supply B. Quantity supplied C. Supply curve D. Supply elasticity E. Subsidy

1. Amount that producers bring to the market at any given price

2. Measure of the way in which quantity supplied responds to a change in price

3. A graph showing the various quantities supplied at each and every price that might prevail in the market

4. The amount of a product that would be offered for sale at all possible prices that could prevail in the market

5. A government payment to an individual, business, or other group to encourage or protect a certain type of economic activity

Jump Start Chapter 5 section 11. The Law of Supply states that

A. The quantity supplied varies inversely with its price B. The quantity supplied irregularly with its price C. The quantity demanded varies inversely with its price D. The quantity supplied varies directly with its price

2. All of the following can cause an increase in supply EXCEPT:A. A decrease in the cost of inputs B. Fewer sellers in the marketplace C. An increase in productivity D. A change in taxes or subsidies

3. Which product is likely to have the most elastic supply curve?A. Ice cream cones B. Automobiles C. Ships D. Dishwashing machines

4. The supply curve is A. Downward sloping B. Level C. Upward sloping D. Irregular

5. Increased government regulations can cause the supply curve to A. Shift to the left B. Shift to the right C. Increase D. Decrease

The Theory of Production

Jump Start Chapter 5 section 21. All of the following are stages of production EXCEPT:

A. Increasing returns B. Diminishing returns C. Equaling returns D. Negative returns

2. The period of production that allows producers to change only the amount of the variable input called labor is:

A. The long run B. The short run C. The production function D. A stage of production

3. A production function shows A. Changes in output in response to changes in inputB. Changes in input that result from changes in output C. The optimum level of production D. The optimum level of the four factors of production

4. In what order do the three stages of production occur?A. Negative returns, diminishing returns, increasing returns B. Diminishing returns, increasing returns, negative returns C. Increasing returns, diminishing returns, negative returns D. Increasing returns, negative returns, diminishing returns

5. The stages of production are based on A. The way total product changes over time B. The way marginal product changes as variable inputs are added C. The way inputs change in response to business decisions D. The way output changes independent of input

The Law of Variable Proportions

• Short Run:– Output will change as one variable input is altered,

but other inputs are kept constant – i.e.: salting a meal (amount of input –salt- varies; so

does the output – quality of the meal) • Final Product is affected

– How is the output of the final product affected as more units of one variable input or resources are added to a fixed amount of other resources?

– i.e.: farmer may have all the land, machines, workers, and other items needed to produce a crop, but may have questions about the use of fertilizers ,

The Production Function

• Concept that describes the relationship between changes in output to different amounts of a single input while others are constant

• Possible to vary all the inputs at the same time – Economist prefer only a single variable be

changed at a time – b/c more than one = harder to gauge the

impact of a single variable

The Law of Variable Proportions

• Total product is the total output the company produces – Total Product Rises

• As more workers are added, total product rises until a point that adding more workers causes a decline in total product

– Total product Slows• As more workers are added output continues to

rise = it does so at a slower rate until ti can grow no further

– More workers “get in the way”

The Production Function

• Marginal Product is the extra output or change in total product caused by adding one more unit of variable output– i.e.: worker 1’s output is 7; worker 2’s output

is 13 together their output is 20 (figure 5.5)

The Production Function

Figure 5.5aFigure 5.5a

Figure 5.5bFigure 5.5b

Three Stages of Production

• Stage I: increasing returns – Marginal output increases with each new worker – Companies are tempted to hire more workers (moves

them to stage II)• Stage II: diminishing returns

– Total production keeps growing but the rate of increase is smaller

– Each worker is still making a positive contribution to total output (but diminishing)

• Stage III: negative returns – Marginal product becomes negative – Decreasing total plant output

Chapter 5 section 2 Vocabulary

A. Law of variable Proportions

B. Production function

C. Raw materials D. Marginal product E. Total product

1. Concept that describes the relationship between changes in output to different amounts of a single input while other inputs are held constant

2. Total output produced by a firm

3. The extra output or change in total product caused by the addition of one more unit of variable output

4. Unprocessed natural products used in production

5. States that in the short run, output will change as one input is varied while the others are held constant

Jump Start Chapter 5 section 21. All of the following are stages of production EXCEPT:

A. Increasing returns B. Diminishing returns C. Equaling returns D. Negative returns

2. The period of production that allows producers to change only the amount of the variable input called labor is:

A. The long run B. The short run C. The production function D. A stage of production

3. A production function shows A. Changes in output in response to changes in inputB. Changes in input that result from changes in output C. The optimum level of production D. The optimum level of the four factors of production

4. In what order do the three stages of production occur?A. Negative returns, diminishing returns, increasing returns B. Diminishing returns, increasing returns, negative returns C. Increasing returns, diminishing returns, negative returns D. Increasing returns, negative returns, diminishing returns

5. The stages of production are based on A. The way total product changes over time B. The way marginal product changes as variable inputs are added C. The way inputs change in response to business decisions D. The way output changes independent of input

Cost, Revenue and Profit Maximization

Jump Start Chapter 5 section 3 1. Cost and benefit decision making that compares the extra benefits to the extra cost of

an action is called?A. Marginal revenue B. Marginal cost C. Marginal analysis D. Marginal output

2. The total cost of production is determined by A. Adding fixed cost and variable cost B. Adding marginal and fixed cost C. Multiplying fixed and variable cost D. Multiplying marginal and fixed cost

3. All of the following are examples of variable costs EXCEPT:A. Labor B. Freight C. Interest payments on bonds D. Electricity

4. If a business’s fixed cost are large relative to its variable cost, it is likely toA. Be more profitable than a firm whose fixed costs are small relative to variable cost.B. Produce in stage III of the production function C. Produce durable goods rather than service D. Operate longer hours than a firm whose fixed cost are small relative to variable

cost 5. Profit is maximized when

A. Marginal cost is less than marginal revenue B. Marginal cost is equal to marginal revenue C. Marginal cost is greater than marginal revenue D. Marginal cost is growing at the same rate as marginal revenue

What kinds of cost do you have to consider?

• Fixed Cost – the cost that a business incurs even if the plant idle and output is zero.– Salaries– Rent– Property Taxes

What kinds of cost do you have to consider?

• Variable Cost – cost that does change when the business rate of operation or output changes– Electric power– Shipping charges

• Total Cost – Sum of the fixed and variable costs

• Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

Figure 5.6Figure 5.6

Applying Cost Principles

• Self-service Principles – Gas station is an example of high fixed cost

with low variable cost– Ration of variable to fixed cost is low

• E-Commerce – An industry with low fixed cost

Measure of Revenue

• Total revenue = – Number of units sold multiplied by the

average price per unit

• Marginal Revenue =– The extra revenue connected with producing

and selling an additional unit

Marginal Analysis

• Marginal Analysis comparing the extra benefits to the extra cost of a particular decision

• Break-even point is the total output or total product the business needs to sell in order to cover its total cost

• Businesses want – # of workers and level of output that

generates max. profits – Profit-maximizing: quantity of output is

reached when marginal cost and marginal revenue are equal

Marginal Analysis

Chapter 5 Section 3 Vocabulary

A. Fixed cost B. Variable cost C. Marginal costD. Total revenue E. E-commerce

1. Cost that a business incurs even if the plant is idle and output is zero

2. Extra cost incurred when a business produces one additional unit of product

3. Cost that changes when the business rate of operation or output changes

4. Electronic business or exchange conducted over the internet

5. The number of units sold multiplies by the average price per unit

Jump Start Chapter 5 section 3 1. Cost and benefit decision making that compares the extra benefits to the extra cost of

an action is called?A. Marginal revenue B. Marginal cost C. Marginal analysis D. Marginal output

2. The total cost of production is determined by A. Adding fixed cost and variable cost B. Adding marginal and fixed cost C. Multiplying fixed and variable cost D. Multiplying marginal and fixed cost

3. All of the following are examples of variable costs EXCEPT:A. Labor B. Freight C. Interest payments on bonds D. Electricity

4. If a business’s fixed cost are large relative to its variable cost, it is likely toA. Be more profitable than a firm whose fixed costs are small relative to variable cost.B. Produce in stage III of the production function C. Produce durable goods rather than service D. Operate longer hours than a firm whose fixed cost are small relative to variable

cost 5. Profit is maximized when

A. Marginal cost is less than marginal revenue B. Marginal cost is equal to marginal revenue C. Marginal cost is greater than marginal revenue D. Marginal cost is growing at the same rate as marginal revenue