Chapter 5: Supply

What is supply?

amount of a product that would be offered for sale at all possible prices in the market

What is the Law of Supply?

suppliers will offer more of a product for sale at higher prices and less at lower prices

• when price increases, supply increases

What is a supply schedule?

listing/chart

What is a supply curve?

graph

What is a market supply curve?

shows quantities supplied at various prices by all companies that offer a particular product

What is change in quantity supplied?

change in amount offered for sale in response to a change in price

What causes a change in supply?

• Cost of resources (land, labor, capital); if labor costs rise/fall, amount supplied will rise/fall

• Productivity: more production = more supply; less production = less supply

• Technology: improved efficiency, cheaper production costs, machine malfunctions, rise of Internet shopping, etc.

• Taxes/subsidies; subsidy: government payment to encourage/protect certain economic activity

  • Paying farmers not to grow crops

• Expectations: expectations about future price of a product; if producers expect price to go up, they may produce more later (vice versa)

• Government regulations: new safety features/standards

• Number of sellers: businesses open and close stores; entrepreneurs “rush to profit”

What is elasticity of supply?

measure of the way in which quantity supplied responds to a price change

What are ways supply can be elastic?

• If price increase leads to proportional large increase in supply, then supply is elastic

• If price increase leads to a proportional supply change, then supply is unit elastic

  • example: toys, candy (easily made products): elastic

What are ways supply can be inelastic?

If price increase leads to a proportional small change in supply, then supply is inelastic

• example: supply of nuclear energy: inelastic

What is production function?

total output changes when amount of labor changes

What is total product?

total output produced

What is marginal product?

extra output/change in total product caused by adding one more unit of labor

What is how many workers should a company hire determined?

three stages of production

What is stage 1 of production?

Increasing marginal returns: marginal product of each additional worker increase

What is stage 2 of production?

decreasing marginal returns: total production continues to grow, but it does so by smaller and smaller amounts

What is stage 3 of production?

negative marginal returns: too many workers get in each other’s way, so production decreases

What are fixed costs?

costs paid out even if there is little or no activity; salaries, interest, rent, taxes, etc

total fixed costs, aka, overhead

What are variable costs?

costs that change based on rate of operation or production; wages, utilities, shipping costs, etc

What is total cost?

fixed costs + variable costs

What is marginal cost?

extra cost incurred when producing one more unit of output

Why is there a rise in internet business?

due to lower costs/overhead

• Paying less money for building rentals,  less inventory costs, software that tracks accounting, shipping, etc. (less labor costs)

What is break-even point?

level of production that makes just enough revenue to cover operating costs

What is total revenue?

all revenue earned

What is marginal revenue?

extra revenue received from production & sale of one additional unit of output

What is marginal analysis?

comparing extra benefits of an action to the extra costs of taking the action

What is profit-maximizing quantity of output?

when marginal cost and marginal revenue are equal