Transcript Chapter 5 Notes

Supply
SUPPLY
 The amount of a product that would be offered for sale
at all possible prices that could prevail in a market
 Law of Supply- suppliers will offer more for sale at
higher prices than at lower prices

A supply line is an upward sloping line represented
by SS
Supply
 Supply curve is a graph
showing the various
quantities supplied at
each and every price that
might prevail in a market
 Market supply curve is a
curve that shows prices
by all firms that offer the
product
 Supply schedule, is a
listing of various
quantities of a particular
product supplied at all
possible prices in the
market
g
 Quantity supplied- amount producers bring to a
market at any given
 Change in quantity supplied- change in the amount
offered for sale in response to a change in price
 Change in supply- a situation where suppliers offer
different amounts of products for sale at all possible
prices in the market
Reasons for Changes in Supply
 1. costs of inputs, supply increases because of
decreases in the cost of inputs such as labor or
packaging
 -producers are more willing to purchase and produce
for cheaper inputs
 2. productivity, when workers decide to work more
efficiently or if managers motivate productivity goes
up
 -same for the opposite
 3. technology, new technology tends to change supply
curve. Introduction of new machines, industrial
processes which can lower the cost of production
 4. Taxes and Subsidies, if taxes are raised on businesses
their production goes up and vice versus
 Subsidy- government payment to an individual
business to encourage production of a certain activity
(example, farmers)
continued
 5. Expectations, if a producer anticipates a rise in price
in products they may withhold their supplies and if
they expect prices to go down they will try and sell
 6. Government Regulations, for example, when the
government mandates new auto safety features such as
air bags cars cost more to produce
 7. Number of sellers, the more suppliers the more
supply pushes the curve to the right
Fat Pants Again
 Supply elasticity- measures the way in which quantity
supplied responds to a change in price
 A small change in price leads to relatively large increase
in output than the supply is elastic
Determinants of elasticity
 Can businesses adjust quickly to new prices
 As long as consumers are willing to pay more money
 How different is supply different from demand
elasticity?
 1. number of substitutes has no bearing on supply
 2. ability to delay the purchase or a portion of has no
bearing
Theory of Production
 The relationship between the factors of production
and the output of goods and services
 It looks at how output changes when input changes
 It is based on the short run where inputs such as labor
change
Law of Variable Proportions
 In the short run, output will change as one input is
varied, while the others are held constant
 For example: make chili
 Add a pinch of chili powder
 Taste better
 Add more
 Taste better
 At some point it will not taste good
Production Function
 When we want to see the effect a change in input has
on output
 Relates the changes in output with changes in input
while everything else remains the same
 Production schedule- create when you want to know
what varying amounts of labor will have on your
output
Columns- FIX ON YOUR
OUTLINE
 First Column is the varying number of input, for
example: workers
 Second Column is the varying numbers of total
production based on the changing number of input
Total production- it id the total output produced by that
business
Third Column is marginal product- it is the extra
output produced by adding another input
 It is a change in total production caused by an addition
of an input
Three Stages of Production
 Stage 1- each new input contributes positively
 Marginal product increases
 Producers normally don’t stay here because they want
MORE production
Stage 2
 Total production keeps growing but by smaller and
smaller increments
 Each worker makes a diminishing but positive
contribution to the total output
 Diminishing returns- as more input is added, for
example, labor, total output rises but at smaller and
smaller amounts
Stage 3
 Negative returns, at this point the producers start to
lose money as they add more input
 Marginal product is negative and total output
decreases
Section 3
Making Production Choices
 Obviously producer want cheap products
 Consumers want cheap prices but quality
 How do we make everyone happy?
 Pay attention to productivity and cost
Cost is divided
 1. fixed cost- cost a business incurs regardless of how
busy or not they are
 This includes salaries paid executives, rent, taxes
 Also includes depreciation- the gradual wear and tear
on capital goods
 2. variable costs- a cost that changes when the business
rate of operation changes or output changes
 Example: labor, raw materials
continued
 3. total cost- it is the sum of the fixed cost and variable
cost
 Takes in all costs of a business during operation
 4. marginal cost- extra cost incurred when a business
produces one additional unit
Revenue
 Businesses measure their revenue to find out profit
 Total revenue- is number of units sold multiplied by
the average price per unit
 Example: if 42 units are sold at $2 than the total
revenue is……….
 Marginal revenue- extra revenue associated with the
production and sale of 1 additional unit of output
 Determined by dividing the change in total revenue by
the marginal product
Let’s figure it out
 Marginal analysis- decision making that compares the
extra benefits to the extra cost of action
 All businesses are in it to make money!!
 All business want to reach the break-even point,
which is the total output or total product the business
needs to sell in order to cover its total costs
 However, business want to MAKE money so they go
beyond
 Profit-maximizing quantity of output- is reached
when marginal cost and marginal revenue are equal