Chapter 7 SUPPLY

 

 

                                                 

 


                       10                                B

 

$        5                      A

                        

                        1

                          
                                                10        20       30 units 

                                                        Q   

 

 

Change in price only. As price increases, supply increases. The more the producer can charge, the more the producer is willing to make. This supply curve shows a change in quantity supplied due to a change in price.

 

The Law of Supply = The quantity of goods supplied will be greater at a higher price than at a lower price.

 

 

                                                                Percent Change in Quantity Supplied

Price Elasticity of Supply  =  

                                                                          Percent Change in Price

 

                                                    Units of Output

Average Product =             

                                                     Units of Input

 

The number of units of output produced per unit of output.

In other words, if 10 workers are able to make 40 units a day, the average product would be 4 per day.

 

                                                     Change in Output

Marginal Product =           

                                                      Change in Input

 

The amount that total product increases or decreases as a result of adding one additional unit of input.

So the previous average output was 4 with 10 workers producing 40 units. We added 1 more worker and the total production increased to 42 units. The marginal product would be 42/11 = 3.8 per day.

 

 

Aggregate supply is total supply.

 

 

Four Factors of production:

1. Cost of Inputs: land, labor, capital (investments/goods used for production), entrepreneurship

 

                                                  S2 (decrease in supply)

 


                                                        S1 (increase in supply)

 

$

 

 

 

                                                        Q   

 

                                                        (the curve to the left indicates less supply)

                                                        (as cost increases, supply decreases – from the viewpoint of producers)

 

2. Technology – increases supply and subsequently will decrease price eventually

3. Government – taxes, tariffs, regulations

4. Disaster – uncontrollable events: weather, war, terrorist attack, natural disasters

 

Diminishing Marginal Product – as one or more of one input is added to a fixed amount of other inputs, the marginal product decreases. For example, if Starbucks hired another person to make coffee but did not buy another coffee machine, the efficiency of the store will decrease even if the output increases a bit. (Their sales will not increase dramatically.)

 

Scale of Production – when all inputs in crease, production will increase. For example, if Starbucks hired another person, bought another machine and added more seats – production will increase.

 

Explicit Costs = payments made to others as a cost of running a business.

 

Opportunity Costs = time, resources and money needed