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Splash Screen. What is Supply?. Supply is an amount of product offered for sale at prevailing market prices. Law of Supply : Producers will offer more product at higher prices and less at lower prices. Section 1. An Introduction to Supply.

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  1. Splash Screen

  2. What is Supply? • Supplyis an amount of product offered for sale at prevailing market prices. • Law of Supply:Producers will offer more product at higher prices and less at lower prices Section 1

  3. An Introduction to Supply Supply can be illustrated by a supply schedule or a supply curve. Section 1

  4. An Introduction to Supply (cont.) • Suppliers must determine how much to offer for sale at various prices, taking into account the factors of production. • Like demand, supply can be shown in the form of a table—a supply schedule. • When information is plotted on a graph, it forms the supply curve. Supply of Compact Discs Section 1

  5. An Introduction to Supply (cont.) • Normal supply curves have a positive slope—prices go up; quantity supply goes up. • Economists are more interested in the market supply curvethan for a single firm. Individual and Market Supply Curves Section 1

  6. An Introduction to Supply (cont.) • The quantity supplied is the amount producers bring to market at any given price. • A change in price leads to a change in quantity supplied. • Although the producer has the freedom to adjust production up or down, the interaction of supply and demand usually determines the final price of a product. Section 1

  7. Change in Supply Several factors can contribute to a change in supply. Section 1

  8. Change in Supply (cont.) • A change in supply occurs for several reasons. • Cost of resources • Productivity • Technology • Taxes A Change in Supply Section 1

  9. Change in Supply (cont.) • Subsidy • Expectations • Government regulations • Number of sellers Section 1

  10. Elasticity of Supply The response to a change in price varies for different products. Section 1

  11. Elasticity of Supply (cont.) • Supply, like demand, has elasticity. • Supply elasticity measures how the quantity supplied responds to a change in price. Elasticity of Supply Section 1

  12. Elasticity of Supply (cont.) • Supply elasticity has three forms: • Elastic • Inelastic • Unit elastic Elasticity of Supply Section 1

  13. Elasticity of Supply (cont.) • Supply elasticity is based solely on production considerations. • A firm’s ability to adjust to new prices quickly is likely to be elastic. • A firm that takes longer to react to a change in prices is likely to be inelastic. Elasticity of Supply Section 1

  14. The Production Function The production function shows how output changes when a variable input such as labor changes. Section 2

  15. The Production Function (cont.) • Production can be illustrated with a production function. • Economists focus on the short runwhen they analyze production. • No changes occur in land, equipment, or technology. Changes intotal product are caused by a change in the number of workers. Short-Run Production Section 2

  16. The Production Function (cont.) • Long run changes involve other factors of production, including capital. • Marginal product—the extra output or change in total product caused by adding one more unit of variable input Section 2

  17. Stages of Production The stages of production help companies determine the most profitable number of workers to hire. Section 2

  18. Stages of Production (cont.) • In deciding how many workers to hire, firm must review the three stages of production. • Increasing returns, Stage I • Diminishing returns, Stage II • Negative returns, Stage III Profiles in Economics:Kenneth I. Chenault Section 2

  19. Measures of Cost Businesses analyze fixed, variable, total, and marginal costs to make production decisions. Section 3

  20. Measures of Cost (cont.) • There are several ways businesses measure costs. • Fixed costs • Total fixed costs, sometimes called overhead, remain the same. • Variable costs Section 3

  21. Measures of Cost (cont.) • Total cost • Marginal cost Production, Costs, and Revenues Section 3

  22. Applying Cost Principles Fixed and variable costs affect the way a business operates. Section 3

  23. Applying Cost Principles (cont.) • People engage in e-commerce conducted on the Internet because • Overhead costs are low. • There is a low need for inventory. Section 3

  24. Applying Cost Principles (cont.) • After businesses measure their costs, they determine the break-even point. • Businesses wanting to do better than break even apply principles of marginal analysis to their costs and revenues. Section 3

  25. Marginal Analysis and ProfitMaximization Businesses compare marginal revenue with marginal cost to find the level of production that maximizes profits. Section 3

  26. Marginal Analysis and ProfitMaximization (cont.) • Two key measures of revenue are used to find the amount of output that will produce the greatest profits: • Total revenue • Marginal revenue The Global Economy & YOUAir & Ground Shipping Market Section 3

  27. Marginal Analysis and ProfitMaximization (cont.) • Like businesses, we use marginal analysisin our own decision making. • When marginal cost is less than marginal revenue, hire more variable inputs (labor) to expand output. Section 3

  28. Marginal Analysis and ProfitMaximization (cont.) • Profit-maximizing quantity of output is reached when marginal cost and marginal revenue are equal. Section 3

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