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# Chapter 5 lecture

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### Chapter 5 lecture

1. 1. Producing Goods & Services
2. 2. Supply is the quantities of a product or service that a firm is willing and able to make available for sale at all possible prices.
3. 3. The Law of Supply states that the quantity of goods supplied will be greater at a higher price than it will at a lower price.
4. 4. A supply schedule is a table that shows the quantities of a good or service that would be supplied by a firm at different prices. A supply curve is a graphic representation of the quantities that would be supplied at each price.
5. 5. \$0.00 \$0.20 \$0.40 \$0.60 \$0.80 \$1.00 \$1.20 0 5 10 15 20 Price Quantity Supplied Supply Curve for Bananas Price Quantity \$0.99 18 \$0.89 16 \$0.79 14 \$0.69 12 \$0.59 10 \$0.49 8 \$0.39 6 \$0.29 4 \$0.10 2 \$0.09 0
6. 6. A market supply curve shows the quantities offered at various prices by all firms that offered the product for sale in a given market.
7. 7.  The Quantity Supplied is the amount that producers bring to market at any given price.  A Change in Quantity Supplied is the change in amount offered for sale in response to a change in price.
8. 8. Change in Quantity Supplied The movement along the curve represents how supply changes based on price. The higher the price, the more will be produced and visa versa.
9. 9.  A Change in Supply is where suppliers offer different amounts of products for sale at all possible prices in the market.
10. 10. Anything that is viewed as increasing or decreasing the cost(s) to supply the good or service will change supply. This will shift the curve to the left or to the right. ChangingSupply
11. 11.  Changes in supply can be caused by a number of factors. The three most common causes are and a change in the cost of inputs, productivity, and technological change 1. Costs of Inputs – labor, raw materials, etc. 2. Productivity by working more efficiency the workers produce more 3. Technology – improving productivity 4. Subsidies – government payments 5. Expectations – future prices will affect production 6. Regulations – rules, standards & requirements 7. Number of Sellers – more sellers offering or producing the product
12. 12. Labor, raw materials and shipping costs can increase or decrease supply.
13. 13. Productivity – when workers decide to work more efficiently more products are produced thus increasing productivity.
14. 14.  New technology tends to shift the supply curve to the right. A new machine, process, or chemical, lowers costs thus shifting the curve to the right.
15. 15.  Government – can affect supply through increasing or decreasing product costs.  Taxes paid by the producer adds to costs which raise prices, thus reducing supply.  Subsidies received by the producer reduce costs which lower prices, thus increases supply.  Regulations add to costs which raise prices, thus reducing supply.
16. 16.  Expectation about future price changes will cause the producer to either withhold products or sell products quickly to take advantage of a change in price.  As firms enter or leave the market the market supply will either increase or decrease.
17. 17. Price elasticity of supply measures the responsiveness of the quantity supplied to changes in the product’s price.
18. 18.  Measuring Elasticity from the Supply Side % Change in Quantity Supplied Price Elasticity = % Change in Price 1> Inelastic 1< Elastic 1=1 Unitary
19. 19.  Deals with the relationship between the factors of production and the output of goods and services.  The theory is generally based on the short run, the ability to change a single input, for example labor, versus the long run which allows for changing most if not all inputs.
20. 20.  States that in the short run, output will change as one input is varied (changed), while others are held constant.  The production function describes the relationship between changes in output to different amounts of a single input while all other inputs are held constant.
21. 21.  Total Product is all the units of a product produced in a given period of time.  Average Product is the number of units of output produced per unit of input.
22. 22. Marginal Product is the amount that total product increases or decreases as a result of adding one additional unit of an input.
23. 23.  Stage 1  The first workers hired cannot work efficiently because there are too many resources per worker. As more workers are added they increase productivity.  Stage 2  As more workers are added they add support functions and may assist but not necessarily produce. Production increases but at a diminishing rate.  Stage 3  As more and more workers are added production begins to decrease as workers get in each others way.
24. 24. Diminishing Marginal Product is the principle that as more of one input is added to a fixed amount of other inputs, the marginal product decreases.
25. 25. 0 20 40 60 80 100 120 140 160 0 5 10 15 TotalProduct Workers Production Function Product 0 0 0 Stage I 1 7 7 2 20 13 3 38 18 4 62 24 5 90 28 6 110 20 Stage 2 7 129 19 8 138 9 9 144 6 10 148 4 11 145 -3 Stage 3 12 135 -10 Number of Total Marginal Regions of Workers Product Product Production Increasing Diminishing Negative
26. 26. Production Schedule Number of Workers Total Product Marginal Product* 0 0 0 1 7 7 2 20 13 3 38 18 4 62 24 5 90 28 6 110 20 7 129 19 8 138 9 9 144 6 10 148 4 11 145 –3 12 135 –10 Stages of The Production Function Stage I Stage II Stage III
27. 27.  Increasing = Unit Costs Decrease  Decreasing = Unit Costs Increase  Constant = Unit Costs Remains the Same
28. 28.  Fixed costs cannot be changed in the short run. These costs are incurred even if the business is idle and not operating. Mortgage or rent payments, machinery, Insurance etc.  Fixed costs are also known as overhead.
29. 29.  Variable costs can be changed at any time. Labor, raw materials, electricity, inventories, etc.  Total Cost of production is the sum of fixed costs and Variable costs.
30. 30.  Explicit costs are payments made to others as a cost of running a business.  Opportunity costs are lost revenues and/or earnings given up that one must take into account when running a business.
31. 31.  Total Revenue minus Total Cost equal Profits  Revenues is the number sold multiplied by the average price per unit.  Total cost is Fixed Costs plus Variable Costs.  Profit is the money available for reinvestment.
32. 32.  Breakeven is the point where a company’s total revenue covers its total costs. All additional revenues begin to contribute to profits.
33. 33.  Marginal Revenue is the extra revenue associated with the production and sale of one additional unit of output.  Marginal Costs is the extra cost incurred when a business produces one additional unit of product.  Marginal Analysis – examines the extra benefits of a decision compared to the extra costs.  The profit-maximizing quantity of output is reached when MC=MR.
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