Producing Goods & Services

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1 Producing Goods & Services

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 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 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 Price Price Quantity $ $ $ $ $ $ $1.20 $1.00 $0.80 $0.60 $0.40 Supply Curve for Bananas $ $ $ $0.20 $ Quantity Supplied $0.09 0

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 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 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 A Change in Supply is where suppliers offer different amounts of products for sale at all possible prices in the market.

10 Changing Supply 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.

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. Change in Costs of Inputs labor, raw materials, etc. 2. Productivity by working more efficiency the workers produce more 3. Technology improving productivity

12 Productivity when workers decide to work more efficiently more products are produced thus increasing productivity.

13 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.

14 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.

15 Price elasticity of supply measures the responsiveness of the quantity supplied to changes in the product s price.

16 Measuring Elasticity from the Supply Side Price Elasticity = % Change in Quantity Supplied % Change in Price 1> Inelastic 1< Elastic 1=1 Unitary

17 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.

18 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.

19 Total Product Number of Total Marginal Regions of Workers Product Product Production Stage I Stage Stage Production Function Product Increasing Diminishing Negative Workers

20 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.

21 Marginal Product is the amount that total product increases or decreases as a result of adding one additional unit of an input.

22 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.

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 Stages of The Production Function Number of Workers Production Schedule Total Product Marginal Product* Stage I Stage II Stage III

25 Increasing = Unit Costs Decrease Decreasing = Unit Costs Increase Constant = Unit Costs Remains the Same

26 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.

27 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.

28 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.

29 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.

30 Breakeven is the point where a company s total revenue covers its total costs. All additional revenues begin to contribute to profits.

31 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. The profit-maximizing quantity of output is reached when MC=MR.

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