Chapter 5:
Supply
5.1
What is Supply?
• Supply
– Amount of a product offered for sale at all possible prices
in a market
• The Law of Supply
– States that more product will be offered for sale at higher
prices than at lower prices
• Supply Schedule
– Chart showing the quantities offered for sale at each
possible price in the market
• Individual supply curves
– Have a positive slope that goes
up from left to right; if price
goes up, quantity of supply
increases
• Market supply curve
– Shows the quantities offered by
all producers in a given market
• https://www.youtube.com/wat
ch?v=nKvrbOq1OfI
• Change in quantity supplied
– Change in the quantity of a product
offered for sale in direct response to a
change in price
– Occurs only when prices change
• Factors that can cause a change in supply
– Cost of resources
– Productivity
– Technology
– Taxes
– Subsidies
• Government payment to encourage or protect a certain type of
economic activity
– Government regulations
– Number of sellers, and future expectations
– https://www.youtube.com/watch?v=6Q_XxwqtwxY
• Supply elasticity
– Measure of the degree to which the quantity supplied responds
a change in price
to
• Like demand, supply can be elastic, inelastic, or unit
elastic
• Production considerations alone determine supply
elasticity.
– If a firm can adjust to new prices quickly, then
supply is likely to be elastic.
– If adjustments take much longer, then supply is
likely to be inelastic
5.2
Theory of Production
•
Production function
– Graph that shows how a change in one
production variable affects total output
– Shows the changes in output in response
to changes in input
– Analyzed in terms of short-run or long-run
relationships between inputs and outputs
– Short-Run
• period of production that allows
producers to change only the amount of
the variable input called labor
– Long-Run
• Period of production in which producers
can adjust the quantities of their
resources, including capital
• Marginal product
– Extra output or change in
total product caused by
adding one more unit of
outputs
– Changes as more workers
are added
Stage 1
Increasing Returns
• Few workers not all resources
are used
• Some machines are idle
• Each extra worker adds more
than the previous
• Workers begin to specialize
and work as a unit
Stage 2
Diminishing Returns
• Eventually the plant is at full
employment
• All resources are maximized
• Marginal products are still
positive, but decrease steadily
• Adding more workers still
increases production
• But each worker adds less than
the previous
Stage 3
Negative Returns
• Finally there are just too many
workers
• They get in each other’s way
and slow down production
• Each worker actually subtracts
from total production
5.3
Cost, Revenue and Profit Maximization
• Fixed costs
– Costs an organization incurs
even when there is little or no
activity
– Ex: rent, executive salaries,
property taxes
• Variable costs
– Usually associated with labor,
or raw materials, and change
with the business’s rate of
operation and output
• Total cost
– Sum of fixed and variable
costs
• Marginal costs
– Extra cost incurred to
produce one more unit of
output
• Average revenue
– The average price of every unit of output
• Total revenue
– All of the revenue a business receives
• Marginal Revenue
– Extra revenue a business receives from the
production and sale of one additional unit out output
– The most important measure of revenue
• Break-even point
– Level of production that generates enough revenue to
cover total operating costs
• The internet is one of the fastest-growing areas of business
today
• E-commerce
– Lower overhead
– Does not require as much inventory as traditional retail
stores
– The break-even point of sales is much lower