Chapter 5
What is Supply?
Bell ringer
• Transparency 14
Supply
• The amount of product that would be offered
to sale at all possible prices that could prevail
in the market.
• Law of Supply: the principle that the suppliers
will normally offer more for sale at higher
prices and less at lower prices.
• Shows information for a single firm (and/or
individual).
– You = your labor is a service supplies
Introduction to supply
• Supply can be illustrated by a supply schedule or a
supply curve. See figure 5.1 on page 118
• Supply schedule is a listing of the various quantities
of a particular product supplied at all possible prices
in a market.
• Quantity goes up when $price goes up.
• Supply curve graphically illustrates the supply
schedule data.
• Normally have a positive slope that goes up from the
lower left-hand corner to the upper right-hand
corner.
Market Supply Curve
• A graph that shows various amounts offered
by all firms over a range of possible prices.
• Example Figure 5.2 page 119
Activity 1 & 2- Chapter 5
• 1. Using the apple farm supply schedule
create a supply curve and a supply market
curve.(20 points)
– Make sure you title the graphs correctly.
– Make sure you label the graph correctly.
– Use color markers or pencils to make graph
visible.
2. Using the internet search for a supply schedule
for an agriculture product and use excel to create
a supply curve for you. (20 points)
A Change in Quantity Supplied
• Amount offered for sale at a given price.
• Change in quantity supplied is the change in
amount offered for sale in response to a
change in price.
– Can be an increase or decrease
• Interaction of supply and demand usually
determines the final price of the product
Change in Supply
• Several factors can contribute to a change in
supply.
– Cost of resources
– Productivity
– Technology
– Taxes and subsidies
– Expectations
– Government regulations
– Number of sellers
Cost of Resources
• A change in the cost of production inputs such
as land, labor, and capital can cause a change
in supply.
• If the price of inputs drops, producers are
willing to produce more, thereby the curve
shifts to the right.
• Increase in the costs has the opposite effect.
Shift to the left
Productivity
• When management trains or motivates
workers, productivity usually goes up.
• Unhappy, unmotivated workers
Technology
• New technology shifts curve to right
• Production cost go down makes it possible to
produce more.
• Example:
– Milking machine, vaccinations, feed supplements
Taxes & Subsidies
• Tax viewed as a cost/increase in production
costs
• Taxes goes down
• Subsidy: government payment to an
individual, business, or other group to
encourage or protect a certain type of
economic activity. Lower the cost of
production.
• Examples of industries that receive subsidies
• Wheat, cotton, corn, soybean, milk
• Expectations: future prices of a product can
affect supply.
• Government regulations: if new regulations
change the cost of production this can change
the supply. Example Prop 2
• Number of sellers: change in number of sellers
can change the market supply curve.
• More sellers
• Fewer sellers
Elasticity of Supply
• The response to a change in price varies for
different products.
• If an increase in price leads to a proportionally
large increase in outputs, supply is elastic.
• Proportionally small change in outputs is
inelastic.
Determinants of supply elasticity
• Firms that can adjust to new prices quickly
elastic.
• If nature of production is such that
adjustments take longer this is inelastic.
• Activity: list 2 agriculture industries that have
elastic and inelastic supply and explain why?
Chapter 5, Section 1 Review
• Page 125
• Questions 2-8.
Chapter 5, Section 2
• The Production Function: shows how outputs
changes when a variable input such as labor
changes.
• See figure 5.5
• Make a production schedule and production
function curve.
• Short run: a period that is so brief that only
the amount of the variable input can be
changed.
• Long run: changes during a longer period of
time that a firm can adjust the quantities of all
productive resources, including capital.
– Examples: Car dealers shut down some dealers
now and will have to close down production lines
because the amount of capital used for
production changes.
– Example:
Total Production
• Total out put produced by firm.
• Short term relationship
• Only one variable changes and other
resources remain unchanged.
Marginal Production
• Extra output or change in total production
caused by adding one more unit of variable
input.
• Sum of marginal production= total production
• See page 128 figure 5.5
Stages of Production
• Help companies determine the most
profitable number of workers to hire.
• Stage 1- Increasing Marginal Returns
• Stage 2- Decreasing marginal Returns
• Stage 3- Negative Marginal Returns
Stage 1
• As long as each worker contributes more to
total output than the worker before, total
output rises at an increasing rate.
Stage 2
• Production keeps growing, but it does by
smaller and smaller amount.
• Each additional worker then, is making a
diminishing, but still positive, contribution to
total output.
Stage 3
• Outputs start to fall
• Marginal products of additional workers are
negative.
• Workers are not as efficient and production
decreases.
Chapter 5, Section 2 review
• Page 130
• Questions 2-7
Chapter 5 Section 3
• Measures of Cost: Business analyzed fixed,
variable, total, and marginal costs to make
production decisions.
• All used to keep an eye on their costs.
Fixed Costs
• The costs that an organization incurs even if
there is little or no activity.
• It makes no difference whether the business
produces nothing, very little, or a large
amount.
• Sometimes called overhead
• Includes salaries paid to executives, interest
charges on bonds, rent payments on leased
properties, state and local taxes
• Also includes depreciation on capital goods
Variable Costs
• Costs that changes when business rate of
operation or outputs change.
• Usually associated with labor and raw
materials. Labor, power, freight charges
• Largest variable labor
Total Cost
• the sum of the fixed and variable costs, taking
in account all of the cost a business faces in
the course of operation.
Marginal Cost
• The extra cost incurred when producing one
more unit of output.
• See page 134 for examples using figure 5.6
Applying Cost Principles
• Fixed and variable costs affect the way a
business operated.
• Internet business: fixed costs of operation, on
the Internet are so low. Also no need for large
inventory.
Break-Even Point
• The level of production that generates just
enough revenue to cover its total operating
costs.
Marginal Analysis and Profit
Maximization
• Businesses compare marginal revenue with
marginal cost to find the level of production
that maximizes profits.
• Businesses use two key measures of revenue
to find the amount of outputs that will
produce the greatest profit.
– Total revenue: all revenue that the business receives.
– Marginal revenue : the extra revenue a business receives from the production
and sale of one additional unit of production. Dividing the change in total
revenue by the marginal product
Marginal Analysis:
• Decision making that compares the
extra costs of doing something to the
extra benefits gained.
Profit Maximization Quantity of
Output
• Level of production where marginal cost is
equal to marginal revenue.
• Marginal cost = marginal revenue
– Extra cost for making one more = extra revenue
from addition production or one additional unit or
output.
Chapter 5 Section 3 Review
• Page 137 Questions 2-7
Chapter 5 review
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Page 140-141
Review Content Vocabulary 1-12
Review main Ideas 19-28
Critical Thinking 29-34
Applying Economic concepts 36
Thinking Like an Economist 37
Analyzing Visuals 38
Test will be on Chapt. 4 & 5 Supply & Demand