chapter 5 supply. definition of supply supply – the willingness and ability of producers to offer...
TRANSCRIPT
Chapter 5 Supply
Definition of Supply
• Supply – the willingness and ability of producers to offer goods and services for sale.
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.
Supply Schedule Shows the law of supply in chart form.
Price Per Pound of Tomatoes Quantity Supplied 2.00 50 1.75 40 1.50 30 1.25 20 1.00 10 .75 0
Individual Supply Schedule
Supply CurveShows the supply schedule in a graph form.
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.
• 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.
• Number of Producers – an increase in the number of producers of a certain product will increase demand.
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?
Production Cost Schedules
• Remember schedules in economics are charts.
• Product Cost Schedule will show you the relationship between labor and production.
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
• Diminishing returns – each new worker can actually cause a decrease in marginal product
Product Schedule for making PizzaNumber of workers Total Product Marginal Product
0 0 0
1 3 3
2 7 4
3 12 5
4 19 7
5 23 4
6 21 -2
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
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.
Production Costs Schedule
# of Workers
Total Product
Fixed Costs Variable Costs
Total Costs Marginal Costs
0 0 40 0 40 ---
1 3 40 30 70 10
2 7 40 62 102 8
3 12 40 97 137 7
4 19 40 132 172 5
5 23 40 172 212 10
6 21 40 211 251 ---
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
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
Simple Math!!!
• Calculating profit – total revenue minus total cost
• Profit = total revenue – total cost
Production Costs and Revenue Schedule
# of workers
Total Product
Total Costs
Marginal Costs
Marginal Revenue
Total Revenue
Profit
0 0 40 ---- ---- 0 -40
1 3 70 10 12 36 -34
2 7 102 8 12 84 -18
3 12 137 7 12 144 7
4 19 172 5 12 228 56
5 23 212 10 12 276 64
6 21 251 ---- 12 252 1
$$$$$$$$$$$$$$$
• 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!!!!!!!!!
Elasticity of Supply
• 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.
Examples
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.