Chapter 5 Lesson 1

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SUPPLYChapter 5Lesson 1

What is Supply? Supply is the quantities that would beoffered for sale and all possible pricesthat could prevail in the market.

Figure 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 greaterquantities for sale. If prices are low, supplierswill offer smaller quantities for sale. A change in overall supply will cause theDemand curve to shift. A change in quantity demanded will movealong the original curve.

Supply Curve Individual Curve– Illustrates how the quantity that a producer makesvaries depending on the price that will prevail inthe market Market Curve– Illustrates the quantities and prices that allproducers will offer in the market for any givenproduct or service Economist analyze supply– by listing quantities and prices in a supplyschedule– Forms supply curve with and UPWARD slope

Figure 5.2

Practice making supplycurvesexamples on page 129

Supplier 2: Headphones To GoSets SuppliedPrice per Setper Month 2015,000 2520,000 3025,000 3530,000 4035,000 4540,000 5045,000 5550,000

Practice Supply Curves:Price Per Golf BallGolf Balls Supplied .505,000 1.0010,000 1.5015,000 2.0020,000 2.5025,000 3.0030,000

Price Per Slice ofPizzaSlices Supplied 1.00100 2.00150 3.00200 4.00250 5.00300 6.00350

Change in Quantity Supplied Quantity supplied:– The amount that producers bring to themarket at any given price Change in Quantity Supplied;– The change in the amount offered for salein response to a change in price

Quality SuppliedFigure 5.1 Illustrates a changein quantity supplied– Shows as amovement along theline– Can increase ordecrease amount ofthe product(movement from a tob)

Change in Supply Situation where suppliers offer differentamounts of products for sale at allpossible prices

Figure 5.3

Change in Supply(cont) Supply Curves can also shift inresponse to the following factors:– Resource costs: cost to purchasefactors of production will influencebusiness decisions– Productivity: increases whenevermore output is produced with thesame amount of inputs

Change in Supply (Cont.)– Technology: improvements inproduction increase ability of firms tosupply– Taxes: firms view taxes as a cost ofproduction and lobby for lower taxes– Subsidies: government subsidesencourage production, while taxesdiscourage production

Change in Supply (cont)– Number of sellers: how many firms arein the market– Expectations: businesses considerfuture prices and economic conditions

Elasticity of Supply Supply Elasticity: a measure of the way inwhich a quantity supplied responds to achange in price Elastic– Small increase in price leads to a larger increasein output—supply Inelastic– Small increase in price causes little change insupply Unit Elastic– A change in price causes a proportional change insupply

Figure 5.4aFigure 5.4bFigure 5.4dFigure 5.4c

Determinants of SupplyElasticity How quickly a producer can act when achange in price occurs:– Adjust quickly elastic– Complex/advance planning inelastic Factor of Substitution:– Easy elastic– Difficult inelastic

Copy and answer the followingquestions (lesson1)1. What does the Law of Supply State?2. Explain each of the following: SupplySchedule, Supply Curve, MarketSupply Curve3. What does a change in quantitysupplied respond to?4. Why does the supply curve shift to theleft?

Copy and answer the followingquestions5. Name the eight factors thatdetermine whether supplies increaseor decrease.6. What is supply elasticity?7. What Characterizes an inelasticsupply curve?8. What changes does a unit elasticsupply curve?

Theory of ProductionLesson 2

The Production Function Concept that describes the relationshipbetween changes in output to differentamounts of a single input while othersare constant

The Production Period Short Run:– Output will change as one variableinput is altered, but other inputs arekept constant– i.e.: salting a meal (amount of input –salt- varies; so does the output –quality of the meal)

cont. Final Product is affected– How is the output of the final productaffected as more units of one variableinput or resources are added to afixed amount of other resources?– i.e.: farmer may have all the land,machines, workers, and other itemsneeded to produce a crop, but mayhave questions about the use offertilizers.

Cont. Possible to vary all the inputs at thesame time– Economist prefer only a single variable bechanged at a time– b/c more than one harder to gauge theimpact of a single variable

Total Product Total product is the total output thecompany produces– Total Product Rises As more workers are added, total product risesuntil a point that adding more workers causesa decline in total product– Total product Slows As more workers are added output continuesto rise it does so at a slower rate until ti cangrow no further– More workers “get in the way”

Marginal Product Marginal Product is the extra output orchange in total product caused byadding one more unit of variable output– i.e.: worker 1’s output is 7; worker 2’soutput is 13 together their output is 20(figure 5.5)

Figure 5.5a

Figure 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 ofincrease is smaller– Each worker is still making a positive contributionto total output (but diminishing) Stage III: negative returns– Marginal product becomes negative– Decreasing total plant output

Copy and answer Lesson 2questions1. Describe the relationship on which thetheory of production is based.2. Explain how marginal product changes ineach of the three stages of production3. Identify what point will eventually bereached if companies continue addingworkers.

Cost, Revenue and ProfitMaximizationLesson 3

What kinds of cost do youhave to consider? Fixed Cost – the cost that a business incurseven if the plant idle and output is zero.Sometimes called overhead.––––SalariesRentProperty TaxesVariable Cost – cost that does change when thebusiness rate of operation or output changes– Electric power– Shipping charges

What kinds of cost do youhave to consider? Variable Cost – cost that does changewhen the business rate of operation oroutput changes– Electric power– Shipping charges Total Cost – Sum of the fixed andvariable costs Marginal Cost – Extra cost incurredwhen a business produces oneadditional unity of a product.

Figure 5.6

Measure of Revenue Average Revenue -The average price that every unit ofoutput sells forTotal revenue – Number of units sold multiplied by the averageprice per unit Marginal Revenue – The extra revenue connected with producingand selling an additional unit

Marginal Analysis Profit maximization quantity of outputis reached when marginal cost andmarginal revenue are equal Break-even point is the total output ortotal product the business needs to sellin order to cover its total cost

Applying Cost Principles Self-service Principles– Gas station is an example of high fixedcost with low variable cost– Ration of variable to fixed cost is low E-Commerce– An industry with low fixed cost

–i.e.: worker 1’s output is 7; worker 2’s output is 13 together their output is 20 (figure 5.5) Marginal Product. Figure 5.5a. Figure 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 .

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