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Presentation Plus! Economics: Principles and Practices
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Chapter 5
Supply
CHAPTER INTRODUCTION
SECTION 1 What Is Supply?
SECTION 2 The Theory of Production
SECTION 3 Cost, Revenue, and
Profit Maximization
CHAPTER SUMMARY
CHAPTER ASSESSMENT
3
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Economics and You
About how many hours do you spend studying
every night? How many hours would you study if
you were paid $1 an hour? $10 an hour? If you
will study more for a higher price, you are
following the Law of Supply.
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Economics and You.
4
Chapter Objectives
Section 1: What Is Supply?
• Understand the difference between the
supply schedule and the supply curve. 
• Explain how market supply curves are
derived. 
• Specify the reasons for a change in
supply.
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Chapter Objectives
Section 2: The Theory of Production
• Explain the theory of production. 
• Describe the three stages of production.
6
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Chapter Objectives
Section 3: Cost, Revenue, and Profit
Maximization
• Define four key measures of cost. 
• Identify two key measures of revenue. 
• Apply incremental analysis to business
decisions.
7
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Study Guide
Main Idea
For almost any good or service, the higher the
price, the larger the quantity that will be offered
for sale. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer similar to the one
on page 113 of your textbook by describing how
supply differs from demand.
9
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information. Section 1 begins on page 113 of your textbook.
Study Guide (cont.)
Key Terms
– supply 
– quantity supplied 
– Law of Supply 
– change in quantity
supplied 
– supply schedule 
– supply curve 
– change in supply 
– market supply
curve 
– supply elasticity 
– subsidy 
Objectives
After studying this section, you will be able to: 
– Understand the difference between the
supply schedule and the supply curve.
10
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information. Section 1 begins on page 113 of your textbook.
Study Guide (cont.)
Objectives
– Explain how market supply curves are
derived. 
– Specify the reasons for a change in supply. 
Applying Economic Concepts
Supply The Law of Supply tells us that firms will
produce and offer for sale more of their product
at a high price than at a low price. On another
level, think about your own labor. You are the
supplier, and the higher the pay, the more work
you are willing to supply.
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the Cover Story.
11
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information. Section 1 begins on page 113 of your textbook.
Introduction
• The concept of supply is based on
voluntary decisions made by producers,
whether they are proprietorships working
out of home offices or large corporations
operating out of downtown corporate
headquarters. 
• For example, a producer might decide to
offer one amount for sale at one price and a
different quantity at another price.
12
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Introduction (cont.)
• Supply, then, is defined as the amount of a
product that would be offered for sale at all
possible prices that could prevail in the
market. 
• Because the producer is receiving payment
for his or her products, it should come as
no surprise that more will be offered at
higher prices. 
• This forms the basis for the Law of Supply,
the principle that suppliers will normally
offer more for sale at high prices and less
at lower prices.
13
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Did You Know?
• The energy crisis of the 1970s encouraged
countries to look to nuclear reactors, fueled
by uranium, as a new energy source. When
public utility companies stockpiled uranium,
uranium prices rose as they competed to get
adequate supplies. Rising prices for uranium
stimulated uranium exploration.
Entrepreneur-explorers discovered deposits
in Australia, Africa, and North America. Yet,
slow expansion of nuclear power along with
burgeoning stockpiles of uranium caused
uranium prices to fall by the late 1980s to one
eighth of the highest price offered ten years
before.
14
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An Introduction to Supply
• Supply is the amount of a product that
would be offered for sale at all possible
prices in the market. 
• The Law of Supply states that suppliers will
normally offer more for sale at high prices
and less at lower prices.
15
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An Introduction to Supply
• An individual supply curve illustrates how
the quantity that a producer will make
varies depending on the price that will
prevail in the market. A market supply
curve illustrates the quantities and prices
that all producers will offer in the market
for any given product or service. 
• Economists analyze supply by listing
quantities and prices in a supply schedule
(table). When the supply data is graphed,
it forms a supply curve with an upward
slope.
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The Supply Schedule
Figure 5.1
17
The Market Supply Curve
Figure 5.2
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Discussion Question
How do you explain that prices and
quantities move in the same direction
in a supply schedule?
Producers will produce high
quantities at the highest prices and
low quantities at the lowest prices.
19
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Change in Quantity Supplied
• A change in quantity supplied is the
change in amount offered for sale in
response to a change in price. 
• Producers have the freedom, if prices fall
too low, to slow or stop production or
leave the market completely. If the price
rises, the producer can step up production
levels.
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Discussion Question
What steps do you suppose a
producer must go through in setting an
introductory price for a product it brings
to the market for the first time?
Answers will vary but students may
indicate that the producer must study
the pricing system for similar
products and risk that competing
producers, in short order, will offer a
like product at a lower price.
21
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Change in Supply
• A change in supply is when suppliers
offer different amounts of products for
sale at all possible prices in the market. 
• Factors that can cause a change in
supply include: the cost of inputs;
productivity levels; technology; taxes or
the level of subsidies; expectations; and
government regulations.
22
Change in Supply (cont.)
• A change in supply is when suppliers
offer different amounts of products for
sale at all possible prices in the market. 
• Factors that can cause Figure 5.3
a change in supply
include: the cost of
inputs; productivity
levels; technology;
taxes or the level of
subsidies;
expectations; and
government
regulations.
23
Discussion Question
Why does using new technology
almost always increase supply?
It generally leads to greater
efficiency, which lowers production
costs, even though producers must
initially train workers and adapt or
create new production processes that
accommodate the new technology.
24
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Elasticity of Supply
• Supply is elastic when a small increase in
price leads to a larger increase in output—
and supply. 
• Supply is inelastic when a small increase
in price cause little change in supply. 
• Supply is unit elastic when in price causes
a proportional change in supply.
25
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Elasticity of Supply (cont.)
• Determinants of supply elasticity are
related to how quickly a producer can act
when the change in price occurs. If
adjusting production can be done quickly,
the supply is elastic. If production is
complex and requires much advance
planning, the supply is inelastic. Another
factor is substitution: if substituting for a
given product is easy, the supply is elastic;
if it is difficult to substitute, the supply is
inelastic.
26
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Elasticity of Supply (cont.)
Figure 5.4a
27
Elasticity of Supply (cont.)
Figure 5.4b
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Elasticity of Supply (cont.)
Figure 5.4c
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Elasticity of Supply (cont.)
Figure 5.4d
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Discussion Question
What is the difference between
demand elasticity and supply
elasticity?
Both measure the way quantity
(whether bought or produced) adjusts
to a change in price.
31
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Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 113
of your textbook, describe how supply
is different from demand.
Demand is the desire, ability, and
willingness to buy, and deals with
how prices affect consumer
spending. Supply is the amount of a
product for sale and deals with how
prices affect quantity supplied.
32
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Section Assessment (cont.)
Describe the difference between the
supply schedule and the supply curve.
Schedule: information on supply in
table form 
Curve: same information in graphic
form
33
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Section Assessment (cont.)
Describe how market supply curves
are obtained.
Determine amount produced by
individual firms. Add numbers and
plot on a graph.
34
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Section Assessment (cont.)
List the factors that can cause a
change in supply.
Factors include cost of inputs,
productivity, technology, number of
sellers, taxes and subsidies,
expectations, and government
regulations.
35
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Section Assessment (cont.)
Understanding Cause and Effect
According to the Law of Supply, how
does price affect the quantity offered
for sale?
Sellers will offer more at higher prices
and less at lower prices.
36
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Section Close
Write a poem, a proverb, or a riddle
that illustrates the relationship
between price and supply.
37
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Study Guide
Main Idea
A change in the variable input called labor, results
in a change in production. 
Reading Strategy
Graphic Organizer As you read about
production, complete a graphic organizer similar
to the one on page 122 of your textbook by
listing what occurs during the three stages of
production.
39
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information. Section 2 begins on page 122 of your textbook.
Study Guide (cont.)
Key Terms
– theory of production 
– short run 
– long run 
– Law of Variable Proportions 
– production function 
– raw materials 
– total product 
– marginal product 
– stages of production 
– diminishing returns
40
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information. Section 2 begins on page 122 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain the theory of production. 
– Describe the three stages of production. 
Applying Economic Concepts
Diminishing Returns Has the quality of your
work ever declined because you worked too
hard at something? Sometimes you reach a
stage where you still make progress but at a
diminished rate.
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to the Cover Story.
41
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information. Section 2 begins on page 122 of your textbook.
Introduction
• Whether they are film producers of
multimillion-dollar epics or small firms that
market a single product, suppliers face a
difficult task. 
• Producing an economic good or service
requires a combination of land, labor,
capital, and entrepreneurs. 
• The theory of production deals with the
relationship between the factors of
production and the output of goods and
services.
42
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Introduction (cont.)
• The theory of production generally is based
on the short run, a period of production
that allows producers to change only the
amount of the variable input called labor. 
• This contrasts with the long run, a period
of production long enough for producers to
adjust the quantities of all their resources,
including capital.
43
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Introduction (cont.)
• For example, Ford Motors hiring 300 extra
workers for one of its plants is a short-run
adjustment. 
• If Ford builds a new factory, this is a longrun adjustment.
44
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Did You Know?
• Industrial production managers held about
255,418 jobs in 2000. In many plants, one
production manager is responsible for all
aspects of production. In large plants with
several operations, managers are in charge
of each operation, such as machining,
assembly, or finishing. Many have a
college degree in business administration
or industrial engineering. Some have a
master’s degree in business administration
(MBA). Some have worked their way up
the ranks after having worked as
supervisors in other industries.
45
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Law of Variable Proportions
• In the short run, output will change as one
variable input is altered, but others inputs
are kept constant. 
• The Law of Variable Proportions looks at
how the final product is affected as more
units of one variable input or resource are
added to a fixed amount of other
resources. 
• Economists prefer that only a single
variable be changed at any one time so the
impact of this variable on total output can
be measured.
46
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Discussion Question
Imagine you have a sales job in which
you are evaluated on the number of
sales transactions you make per shift.
What changes could you make in your
“labor” that might improve the number
of sales you generate?
Answers will vary. Students should
explain how their recommendations
illustrate the Law of Variable
Proportions.
47
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The Production Function
• The concept illustrates the Law of
Variable Proportions within a production
schedule or a graph. 
• It describes the relationship between
changes in output to different amounts of
a single input while others are held
constant.
48
The Production Function (cont.)
• Total product is the total output the
company produces: a production
schedule shows that, as more workers
are added, total product rises until a point
that adding more workers causes a
decline in total product. 
• Marginal product is the extra output or
change in total product caused by adding
one more unit of variable input.
49
The Production Function (cont.)
Figure 5.5a
50
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The Production Function (cont.)
Figure 5.5b
51
Discussion Question
From you experience in working in
groups for a class assignment, how
many students make up a productive
team? When is adding more group
members likely to “cause a decline in
total product”?
Students should support their
opinions with examples.
52
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Three Stages of Production
• In Stage I, (increasing returns), marginal
output increases with each new worker.
Companies are tempted to hire more
workers, which moves them to Stage II. 
• In 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 it is
diminishing.
53
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Three Stages of Production (cont.)
• In Stage III (negative returns), marginal
product becomes negative, decreasing total
plant output.
54
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Discussion Question
What skills and personality traits would
help make an effective production
manager?
Answers will vary. Students should
support their answers with a rational
as to how each skill or trait relates to
analyzing production inputs, outputs,
and total product.
55
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Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 122,
explain how production is affected by a
change in inputs.
As input changes, production of
outputs also changes. First, each
input will cause an increase. Then,
each input will cause an increase, but
in increasingly smaller increments.
Finally, each input will cause a
decrease.
56
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Section Assessment (cont.)
Describe the relationship on which the
theory of production is based.
The theory of production states that
changing factors of production
(inputs) will change the output of
goods and services.
57
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Section Assessment (cont.)
Explain how marginal product
changes in each of the three stages
of production.
In Stage I, marginal product
increases. In Stage II, marginal
product continues to increase, but at
a slower rate. In Stage III, marginal
product becomes negative.
58
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Section Assessment (cont.)
Identify what point will eventually be
reached if companies continue adding
workers.
Workers will be in each other’s way
and output will decrease.
59
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Section Assessment (cont.)
Sequencing Information You need to hire
workers for a project you are directing. You
may add one worker at a time in a manner
that will allow you to measure the added
contribution of each worker. At what point will
you stop hiring workers? Relate this process
to the three stages of the production function.
Stop hiring workers just before Stage II
begins. In Stage I, as each worker is added,
total product and marginal product increase.
In Stage II, as each worker is added,
marginal product is positive but decreasing.
Therefore, the marginal product is greatest
just before Stage II.
60
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Section Close
Discuss the following statement:
The most important economic
concept for business managers to
understand is that of marginal
product.
61
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Study Guide
Main Idea
Profit is maximized when the marginal costs of
production equal the marginal revenue from
sales. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer similar to the one
on page 127 of your textbook by explaining how
total revenue differs from marginal revenue.
Then provide an example of each.
63
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Study Guide (cont.)
Key Terms
– fixed cost 
– total revenue 
– overhead 
– marginal revenue 
– variable cost 
– marginal analysis 
– total cost 
– break-even point 
– marginal cost 
– profit-maximizing
quantity of output
– e-commerce 
64
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Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Define four key measures of cost. 
– Identify two key measures of revenue. 
– Apply incremental analysis to business
decisions. 
Applying Economic Concepts
Overhead Overhead is one type of fixed cost
that we try to avoid whenever we can. How can
overhead change the way people do business?
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listen to the Cover Story.
65
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Introduction
• Overhead is one of many different
measures of costs.
66
Did You Know?
• During the early 1950s, the hotel-motel
industry faced major revenue challenges.
The sluggish economy of 1991 meant
mediocre occupancy rates of only 60.1
percent. The market allowed only slight
room price increases in line with inflation. A
limited-service hotel-motel industry gained
popularity, keeping prices competitive.
67
Did You Know?
• To ride the times out, the full-service hotelmotel industry employed several costcutting strategies—it moderated salary
raises among it s top executives (fixed
costs), refinanced debt at lower rates, and
kept other variable costs down.
68
Measures of Cost
• Fixed costs are those that a business has
even if it has no output. These include
management salaries, rent, taxes, and
depreciation on capital goods. 
• Variable costs are those that change when
the rate of operation or production
changes, including hourly labor, raw
materials, freight charges, and electricity.
69
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Measures of Cost (cont.)
• Total cost is the sum of all fixed costs and
all variable costs. 
• Marginal cost is the extra (variable) costs
incurred when a business produces one
additional unit of a product.
70
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Measures of Cost (cont.)
Figure 5.6
71
Discussion Question
What are the fixed costs of running a
high school? The variable costs?
Answers will vary, but students
should consider fixed costs as
including expenses during the
months that school is not in session.
72
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Applying Cost Principles
• A self-service gas station is an example of
high fixed costs with low variable costs.
The ratio of variable to fixed costs is low. 
• E-commerce is an example of an industry
with low fixed costs.
73
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Discussion Question
What might be among an e-seller’s
fixed costs?
Answers will vary, but may include:
computer equipment and software,
training in Web sit development,
Internet connection, and hosting fees.
74
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Measures of Revenue
• Total revenue is the number of units
sold multiplied by the average price
per unit. 
• Marginal revenue is the extra revenue
connected with producing and selling an
additional unit of output.
75
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Discussion Question
Why do you think marginal revenues
may start high but then decrease as
more units are produced and sold?
Answers will vary, but may students
should demonstrate an
understanding of marginal revenue
and potential effects of worker
productivity.
76
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Marginal Analysis
• Marginal analysis, is comparing the extra
benefits to the extra costs of a particular
decision. 
• The break-even point is the total output
or total product the business needs to
sell in order to cover its total costs. 
• Businesses want to find the number of
workers and the level of output that
generates maximum profits. The profitmaximizing quantity of output is reached
when marginal cost and marginal revenue
are equal.
77
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Discussion Question
Imagine you need extra money for an
upcoming special event. Conduct a
marginal analysis, comparing the costs
of selling more of your labor to the
benefits of earning more money.
Answers will vary, but students
should demonstrate an
understanding of the concept of
marginal analysis by considering the
activities they must give up or
postpone as they work more hours.
78
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Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 127,
describe how cost affects total
revenue.
The cost of inputs influences supply.
The supply influences the number
sold. The number sold multiplied by
the average price per unit is the total
revenue.
79
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Section Assessment (cont.)
List the four measures of cost.
The four measures of cost are fixed
cost, variable cost, total cost, and
marginal cost.
80
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Section Assessment (cont.)
Describe the two measures of
revenue.
The total revenue is the number of
units sold multiplied by the average
price per unit. The marginal revenue
is the extra revenue associated with
the production and sale of one
additional unit of output.
81
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Section Assessment (cont.)
Explain the use of marginal analysis
for break-even and profit-maximizing
decisions.
By comparing the marginal revenue
and the marginal cost of adding units
of variable input, break-even and
profit-maximizing points can be
established.
82
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Section Assessment (cont.)
Understanding Cause and Effect
Many oil-processing plants operate 24
hours a day, using several shifts of
workers to maintain operations. How
do you think a plant’s fixed and
variable costs affect its decision to
operate around the clock?
When variable costs are small
relative to fixed costs, the additional
cost of operating around the clock is
low.
83
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New Directions for
PC Markets
Understanding Cause and Effect
Why are companies moving away
from producing PCs?
The price of PCs has been plummeting for
the past two years. Companies are not
producing as many PCs because they are
not making much profit from them.
Continued on next slide.
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answer. This feature is found on page 126 of your textbook.