Economic Notes Chapter 5
Topic 13 What is Supply?
Supply Quantity produced at each and every price.
- Producer determines how much to produce. Seller determines how much they will sell.
Supply is represent by
- Supply Schedule lists quantities offered at each and every possible price
- Supply Curve graph that shows the quantities produced at each and every possible price.
Law of Supply Quantity varies directly with price. How does this compare to Law of Demand?
- Quantity [dependent variable] supplied varies directly with price [independent variable].
- High price mean large quantities will be supplied. Low prices mean small quantities will be produced.
Quantity Supplied
- Quantity offered for sale at a given price. A point on the supply curve.
- Quantity produced at a given price. A point on the supply curve.
Change in Quantity Supplied change in Quantity [dependent] in response to a change in price [independent variable]
- Any movement along the supply curve.
Change in Supply change in the quantity that will be supplied at each and every price/
A shift of the supply curve.
- Increase in Supply shift of the supply curve to the right.
- Decrease in Supply shift of the supply curve to the left.
Causes: Factors that can cause an increase or a decrease in supply.
Cost of Inputs increases in cost moves curve to the left, decrease to the right.
Productivity increases in productivity moves curve to the right, decreases to the left.
Technology new technology shifts supply curve to the right.
Sellers more producers mean more supply, curve moves to the right.
Taxes (cost) increase means curve moves left, decreases in taxes moves curve to the right.
Subsidy payment to encourage/protect a certain economic activity. Moves curve to the right
Expectations producers move the curve depending on their outlook at future prices.
Government Regulations (increase costs) means curve moves left.
Supply Elasticity responsiveness of quantity supplied to a change in price.
Elastic change in price causes a large change in quantify supplied.
Inelastic change in price cause a very small change in quantity supplied.
Unit Elastic Change in price causes a proportional change in quantity. Revenue remains constant.
What is the difference between Supply and Demand Elasticity?
Demand is quantity purchased.
Supply is quantity produced.
What is the difference between change in "Quantity Supplied" and "Change in Supply"?
Review What is meant by supply?
Topic 14 The Theory of Production
Theory of Production relationship between factors of production and output [goods & services]
Short Run so short a time, only variable inputs can be changed. (Usually Labor)
Long Run long enough for a change in input to vary (including capital)
Law of Variable Proportions Total Output will change as all inputs except one are fixed.
Quantity of output will vary as increasing units of a single input are added.
- Variable used is generally labor. [review Law of Diminishing Return]
Production Function change in output caused by a single input with other inputs held constant.
Production Represented
Production Schedule lists quantities produced at using varying amounts of labor
Production graph graph showing total output with a change of a single input.
Production Function graph showing how a change in the amount of a single variable input affects total output.
No changes occur in the amount of machinery, capital, technology or raw materials.
Raw materials unprocessed natural resources.
The two most important measures of output are:
Total Product total output produced by the firm.
Marginal Product the extra output gained by adding one more unit of input.
How is it measured?
Three Stage of Production marginal product changes as variable inputs are added.
1. Increasing Returns marginal product is increasing & total product is increasing
2. Diminishing Returns marginal product is declining & total product is increasing
3. Negative Returns. marginal product is negative & total product is decreasing
Diminishing Returns stage of production where output increases at a decreasing rate as more units of variable input are added.
Businesses generally operate in the Stage II: Diminishing Returns.
Review What are the three stages of production?
Topic 15 Supply and the Role of Cost
Productivity and Cost Productivity and Cost Effectiveness.
Measures of Cost
Fixed Cost Overhead Costs that remain the same regardless of output. (Machines, Capital Goods)
- management, property taxes, buildings (taxes), depreciation (wear & tear on equipment), etc.
Variable Cost varies as output changes; labor, energy, raw materials.
- Businesses with high fixed cost need to operate longer Paper Mills, Oil Refineries
Total Cost Sum of fixed and variable.
Marginal Cost The cost to produce one additional unit.
- the increase in variable costs that stems from producing an additional unit of output.
- (no change in fixed cost but the additional variable cost of an additional unit)
- When marginal costs are small, businesses tend to stay open longer.
Businesses use two measures of revenue to decide what amount of output will produce the greatest profits.
The two measures are total revenue and marginal revenue,
Total Revenue units sold by the average price per unit. [define average price per unit]
Marginal Revenue Revenue associated with the production and sale of one additional unit.
- Marginal Revenue generally decrease as additional units are produced and sold.
Marginal Analysis decision making comparing the benefits to the costs of an action.
Break-Even Point The total output needed to cover total costs.
Profit-maximizing quantity of output when marginal cost and marginal revenue are equal
- A business maximizes its profits when the marginal cost is exactly equal to marginal revenue.
- Other quantities of output may yield the same profit, but none will yield more.
Review What are the four main measures of cost?
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January 29 1998