Chapter 5 Supply

1. Chapter 5 Supply

2. Definition of Supply • Supply – the willingness and ability of producers to offer goods and services for sale.

3. Law of Supply • Law of Supply – producers are willing to sell more of a good or service at a higher price. • If the price of a product falls producers will want to supply less of it. • This is a direct relationship.

4. Supply Schedule Shows the law of supplyin chart form. Individual Supply Schedule

5. Supply Curve Shows the supply schedule in a graph form.

6. Factors Affecting Supply • Input costs – the price of the resources used to make products • Labor Productivity – the amount of goods and services that a person can produce in a given time. • Technology – new discoveries in the production process means new manufacturing techniques.

7. Government Action (excise tax) – a tax on the production or sale of a specific good or service. • Producer Expectations – the expectation of a products price rising or falling will affect how much that producer is willing to produce.

8. Number of Producers – an increase in the number of producers of a certain product will increase demand.

9. Costs of Production • At my pizzeria I charge 12.00 for a large pizza. • It cost me (overhead, fixed + variable costs) 4.00 to make a large pizza. • What is my overhead?

10. Production Cost Schedules • Remember schedules in economics are charts. • Product Cost Schedule will show you the relationship between labor and production.

11. Terms to Know • Marginal Product – the change in total product that results from hiring one more worker. • Specialization – each worker being hired focuses on a particular part of production

12. Diminishing returns – each new worker can actually cause a decrease in marginal product

13. Product Schedule for making Pizza

14. As an owner what are your costs? • Fixed costs – examples include mortgage, insurance, utilities • Variable costs – wages, more material or overhead if production goes up • Total costs – the sum of fixed and variable costs

15. Terms to Know • Marginal Costs – additional costs of producing one more item • Marginal Cost is calculated by dividing the change in total cost by the change in total product.

16. Production Costs Schedule

17. How do we earn the highest profit • Since we can stand to lose money by producing at a rate that is not efficient, we have to calculate how much profit we can make before we start to produce

18. Simple Math!!! • Marginal revenue – the money made from the sale of each additional unit of output. Basically the price of an item. • Total revenue – a company’s income from selling its products. Total Revenue = P x Q • P = price / Q = quantity sold • Calculate by multiplying total product by marginal revenue

19. Simple Math!!! • Calculating profit – total revenue minus total cost • Profit = total revenue – total cost

20. Production Costs and Revenue Schedule

21. $$$$$$$$$$$$$$$ • Profit Maximizing Output – level of production at which business realizes the greatest amount of profit. • Marginal Revenue = Marginal Costs • This is where you want to be and stay!!!!!!!!!

22. Elasticity of Supply

23. Elasticity of supply – a measure of how responsive producers are to price change. • If a change in price leads to a change in quantity supplied, the supply is elastic. • If a change in price leads to a very small change in quantity supplied, the supply is inelastic.

24. Examples

26. Factors of Elasticity • The ability of a company to change production to respond to price changes. • Given enough time most companies will make their supply more elastic by expanding or downsizing.