SUPPLY
Jump Start Chapter 5 section 1
1.
2.
3.
4.
5.
The Law of Supply states that
A.
The quantity supplied varies inversely with its price
B.
The quantity supplied irregularly with its price
C.
The quantity demanded varies inversely with its price
D.
The quantity supplied varies directly with its price
All of the following can cause an increase in supply EXCEPT:
A.
A decrease in the cost of inputs
B.
Fewer sellers in the marketplace
C.
An increase in productivity
D.
A change in taxes or subsidies
Which product is likely to have the most elastic supply curve?
A.
Ice cream cones
B.
Automobiles
C.
Ships
D.
Dishwashing machines
The supply curve is
A.
Downward sloping
B.
Level
C.
Upward sloping
D.
Irregular
Increased government regulations can cause the supply curve to
A.
Shift to the left
B.
Shift to the right
C.
Increase
D.
Decrease
The Law of Supply
• The quantity supplied, or offered for sale,
varies directly with its price.
If prices are high, suppliers will
have more quantities for sale.
price supply
high high-much
made
If prices are low, suppliers
will offer smaller quantities for sale.
price supply
low low-few
made
What is Supply?
• Supply is the quantities that would be
offered for sale and all possible prices
that could prevail in the market.
Figure 5.1
Figure 5.2
SUPPLY CURVES
individual- 1 business supply curve
business1 + business 2 = market
individual- 1 business supply curve
Analysis of supply by economists
Supply Curve
• Individual Curve
– Illustrates how the quantity that a producer makes
changes. Why: Depends on the price that will
prevail in the market (what the consumer will pay)
• Market Curve
– Illustrates the quantities and prices that all
producers will offer in the market for any product
or service
• Economist analyze supply
– by listing quantities and prices in a supply
schedule
– Forms supply curve with and UPWARD slope
Change in Quantity Supplied
• Quantity supplied:
The amount of goods that producers
bring to the market at any given price
• Change in Quantity Supplied;
– The change in the amount offered
for sale in response to a change in price
A change in quantity
supplied will move
along the original
curve.
Change in Supply
When suppliers
offer different amounts
of products for sale
at all possible prices
A change in
overall
supply will
cause the
Supply curve
to shift.
Shift left:
decrease in
supply
Shift right:
Increase in
supply
Figure 5.3
Change in Supply..WHY?
1. Cost of inputs
2. Productivity
3. Technology
4. Taxes and subsidies
5. Expectations
6. Government Regulations
7. Number of Sellers
1.Cost of inputs
Change in Supply..WHY?
Change in cost of land, labor and capital
If price of input increases, producers produce less quantity. ( S ___ )
If price of input decreases, producers produce more quantity. (S ___)
2. Productivity
Change in Supply..WHY?
Same input (workers)
Motivate workers, train workers better = more output (supply)
If productivity increases, producers produce less quantity. ( S ___ )
If productivity decreases, producers produce more quantity. (S ___)
3. Technology
Buy new machine, lowers cost of producing supply.
If technology decreases cost of production,the
producers make more quantity. (S ___)
This is a shift to the _________
Change in Supply..WHY?
4. Taxes and Subsidies
Change in Supply..WHY?
If business pays more taxes,
then business will make _____ Supply will_____ (shift to the _____ S __)
If business pays less taxes
then business will make ______Supply will ____ (shift to the ____ S __)
5. Expectations
Producers (businesses) think about the
future.
IF they think price will go up, then
they produce (make) ___________ S2
IF they think price will go down, then
they will produce (make)_________S1
Summer
Price
$99.00
Winter coming soon!
Price
$125.00
Change in Supply..WHY?
6. Government regulations
Sometimes the Government regulates
(controls )business activity.
If the Government wants to lower
standards, this will decrease the cost of
making cars. Then carmakers will
produce (make)_______ S2
If the Government wants better emission
standards, this will increase the cost of
making cars. Carmakers will then produce
(make)_______ S1
Change in Supply..WHY?
7. Number of Sellers
In the market for any product there are
businesses that compete for customers.
If more companies enter the market for a
product then supply will_______ S2
If companies leave the market for a
product then supply will_______ S1
Change in Supply..WHY?
Supply Elasticity: a measure that shows how quantity supplied responds to a
change in price
Figure 5.4b
Figure 5.4a
Figure 5.4d
Figure 5.4c
45°angle
Elasticity of Supply
• Supply Elasticity: a measure that shows how
quantity supplied responds to a change in price
• Elastic
– Small increase in price leads to a larger increase in
output—supply
• Inelastic
– small increase in price causes little change in supply
• Unit Elastic
– A change in price causes a proportional change in
supply
Determinants of Supply Elasticity
• How quickly a producer can act when a
change in price occurs:
– Adjust quickly = elastic (ice cream)
– Complex/advance planning = inelastic (cars)
• Factor of Substitution:
– Easy = elastic
– Difficult = inelastic
Chapter 5 section 1 Vocabulary
Supply
Quantity supplied
1.
2.
3.
Supply curve
Supply elasticity
Subsidy
4.
5.
Amount that producers bring to the
market at any given price
Measure of the way in which quantity
supplied responds to a change in
price
A graph showing the various
quantities supplied at each and every
price that might prevail in the market
The amount of a product that would
be offered for sale at all possible
prices that could prevail in the market
A government payment to an
individual, business, or other group
to encourage or protect a certain type
of economic activity
The Theory of Production
Jump Start Chapter 5 section 2
1.
2.
3.
4.
5.
All of the following are stages of production EXCEPT:
A.
Increasing returns
B.
Diminishing returns
C.
Equaling returns
D.
Negative returns
The period of production that allows producers to change only the amount of the variable input
called labor is:
A.
The long run
B.
The short run
C.
The production function
D.
A stage of production
A production function shows
A.
Changes in output in response to changes in input
B.
Changes in input that result from changes in output
C.
The optimum level of production
D.
The optimum level of the four factors of production
In what order do the three stages of production occur?
A.
Negative returns, diminishing returns, increasing returns
B.
Diminishing returns, increasing returns, negative returns
C.
Increasing returns, diminishing returns, negative returns
D.
Increasing returns, negative returns, diminishing returns
The stages of production are based on
A.
The way total product changes over time
B.
The way marginal product changes as variable inputs are added
C.
The way inputs change in response to business decisions
D.
The way output changes independent of input
The Production Function
• Concept that describes the relationship
between changes in output to different
amounts of a single input while others are
constant
The Production Function
• Total product is the total output the
company produces
– Total Product Rises
• As more workers are added, total product rises
until a point that adding more workers causes a
decline in total product
– Total product Slows
• As more workers are added output continues to
rise = it does so at a slower rate until ti can grow
no further
– More workers “get in the way”
The Production Function
• Marginal Product is the extra output or change in
total product caused by adding one more unit
Product
output
increases
Product
output
decreases
Product
output
negative
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 of
increase is smaller
– Each worker is still making a positive contribution to
total output (but diminishing)
• Stage III: negative returns
– Marginal product becomes negative
– Decreasing total plant output
Chapter 5 section 2 Vocabulary
Production function
Total product
Marginal product
1. Concept that describes the
relationship between changes
in output to different amounts
of a single input while other
inputs are held constant
2. Total output produced by a
firm
3. The extra output or change in
total product caused by the
addition of one more unit of
variable output
Cost, Revenue and Profit
Maximization
Jump Start Chapter 5 section 3
1.
2.
3.
4.
5.
Cost and benefit decision making that compares the extra benefits to the extra cost of
an action is called?
A.
Marginal revenue
B.
Marginal cost
C.
Marginal analysis
D.
Marginal output
The total cost of production is determined by
A.
Adding fixed cost and variable cost
B.
Adding marginal and fixed cost
C.
Multiplying fixed and variable cost
D.
Multiplying marginal and fixed cost
All of the following are examples of variable costs EXCEPT:
A.
Labor
B.
Freight
C.
Interest payments on bonds
D.
Electricity
If a business’s fixed cost are large relative to its variable cost, it is likely to
A.
Be more profitable than a firm whose fixed costs are small relative to variable cost.
B.
Produce in stage III of the production function
C.
Produce durable goods rather than service
D.
Operate longer hours than a firm whose fixed cost are small relative to variable
cost
Profit is maximized when
A.
Marginal cost is less than marginal revenue
B.
Marginal cost is equal to marginal revenue
C.
Marginal cost is greater than marginal revenue
D.
Marginal cost is growing at the same rate as marginal revenue
What kinds of cost do you have
to consider?
1. Fixed Cost – the cost to have a business
» with or without production
– Salaries ($ you pay workers-employees)
– Rent
– Property Taxes
2. Variable Cost– cost that does change when the
business rate of operation or output changes
– Electric power
– Shipping charges
Figure 5.6
What kinds of cost do you have
to consider?
• Variable Cost – cost that does change
when the business rate of operation or
output changes
– Electric power(if closed use little power,
if open, use more power)
– Shipping charges
• Total Cost – Sum of the fixed + variable
costs
• Marginal Cost – Extra cost when one more
of something added (ex. Worker)
Applying Cost Principles
• E-Commerce- business done on the
internet
– An industry with low fixed cost
Measure of Revenue
• Total revenue =
– Number of units sold multiplied by the
average price per unit
• Marginal Revenue =
– The extra revenue connected with producing
and selling an additional unit
Marginal Analysis
• Marginal Analysis comparing the extra
benefits to the extra cost of a particular
decision
• Break-even point is the total output or total
product the business needs to sell in order
to cover its total cost
Marginal Analysis
• Businesses want
– # of workers and level of output that
generates max. profits
– Profit-maximizing: quantity of output is
reached when marginal cost and marginal
revenue are equal
Chapter 5 Section 3 Vocabulary
Fixed cost
Marginal cost
Variable cost
E-commerce
Total revenue
1. Cost that a business incurs even if
the plant is idle and output is zero
2. Extra cost incurred when a business
produces one additional unit of
product
3. Cost that changes when the
business rate of operation or output
changes
4. Electronic business or exchange
conducted over the internet
5. The number of units sold multiplies
by the average price per unit