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Contents

CHAPTER INTRODUCTION

SECTION 1 What Is Supply?

SECTION 2 The Theory of Production

SECTION 3 Cost, Revenue, andProfit Maximization

CHAPTER SUMMARY

CHAPTER ASSESSMENT

Click a hyperlink to go to the corresponding section.Press the ESC key at any time to exit the presentation. 4

Chapter Introduction 1

Economics and YouAbout how many hours do you spend studyingevery night? How many hours would you study ifyou were paid $1 an hour? $10 an hour? If youwill study more for a higher price, you arefollowing the Law of Supply.

Click the Speaker button to listen toEconomics and You.

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Chapter Objectives

• Understand the difference between thesupply schedule and the supply curve.

• Explain how market supply curves arederived.

• Specify the reasons for a change insupply.

Section 1: What Is Supply?

Click the mouse button or press the Space Barto display the information. 6


Chapter Objectives

• Explain the theory of production. • Describe the three stages of production.

Section 2: The Theory of Production

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7


Chapter ObjectivesSection 3: Cost, Revenue, and Profit

Maximization


• Define four key measures of cost. • Identify two key measures of revenue. • Apply incremental analysis to business

decisions.

End of Chapter Introduction

Click the mouse button to return to the Contents slide.

9

Section 1-1

Study GuideMain Idea

For almost any good or service, the higher theprice, the larger the quantity that will be offeredfor sale.

Reading StrategyGraphic Organizer As you read the section,complete a graphic organizer similar to the oneon page 113 of your textbook by describing howsupply differs from demand.

Click the mouse button or press the Space Bar to display theinformation. Section 1 begins on page 113 of your textbook. 10

Key Terms

– Law of Supply – supply schedule – supply curve – market supply

curve

– supply

Section 1-2

Study Guide (cont.)

Click the mouse button or press the Space Bar to display theinformation. Section 1 begins on page 113 of your textbook.

– quantity supplied – change in quantity

supplied – change in supply – subsidy – supply elasticity

ObjectivesAfter studying this section, you will be able to: – Understand the difference between the

supply schedule and the supply curve.

11

Section 1-3

Objectives– Explain how market supply curves are

derived.

Applying Economic ConceptsSupply The Law of Supply tells us that firms willproduce and offer for sale more of their productat a high price than at a low price. On anotherlevel, think about your own labor. You are thesupplier, and the higher the pay, the more workyou are willing to supply.

Study Guide (cont.)

– Specify the reasons for a change in supply.

Click the Speaker button to listen tothe Cover Story.


Section 1-4


Introduction• The concept of supply is based on

voluntary decisions made by producers,whether they are proprietorships workingout of home offices or large corporationsoperating out of downtown corporateheadquarters.

• For example, a producer might decide tooffer one amount for sale at one price and adifferent quantity at another price.

13

Section 1-5


Introduction (cont.)

• Supply, then, is defined as the amount of aproduct that would be offered for sale at allpossible prices that could prevail in themarket.

• Because the producer is receiving paymentfor his or her products, it should come asno surprise that more will be offered athigher prices.

• This forms the basis for the Law of Supply,the principle that suppliers will normallyoffer more for sale at high prices and lessat lower prices.

14

Section 1-6


An Introduction to Supply• All suppliers of economic products must

decide how much to offer for sale at variousprices–a decision made according to whatis best for the individual seller.

• What is best depends, in turn, upon thecost of producing the goods or services.

• The concept of supply, like demand, can beillustrated in the form of a table or a graph.

15

Section 1-7

• The supplyschedule is alisting of the variousquantities of aparticular productsupplied at allpossible prices inthe market.

The Supply ScheduleFigure 5.1

16

Section 1-8

The Supply Schedule (cont.)

• The only real difference between a supplyschedule and a demand schedule is thatprices and quantities now move in thesame direction for supply–rather than inopposite directions as in the case ofdemand.

17

Section 1-9


• The data presented in the supply schedulecan also be illustrated graphically as anupward-sloping line.

• To draw it, we transfer each of the price-quantity observations in the schedule overto the graph, and then connect the points toform the curve.

• The result is a supply curve, a graphshowing the various quantities supplied ateach and every price that might prevail inthe market.

The Individual Supply Curve

18

Section 1-10


The Individual Supply Curve (cont.)

• All normal supply curves slope from thelower left-hand corner of the graph to theupper right-hand corner.

• This is a positive slope and shows that ifone of the values goes up, the other will goup too.

19

Section 1-11

The Market Supply Curve• The market supply curve shows the

quantities offered at various prices by allfirms thatoffer theproduct forsale in agiven market.

Figure 5.2

20

Section 1-12


• The quantity supplied is the amount thatproducers bring to market at any givenprice.

• A change in quantity supplied is thechange in amount offered for sale inresponse to a change in price.

• Note that the change in quantity suppliedcan be an increase or a decrease,depending on whether more or less of aproduct is offered.

Change in Quantity Supplied

21

Section 1-13

Change in Quantity Supplied (cont.)

• While the interaction of supply anddemand usually determines the final pricefor the product, the producer has thefreedom to adjust production.

22

Section 1-14

• Sometimes something happens to causea change in supply, a situation wheresuppliers offer different amounts ofproducts for sale at all possible prices inthe market.

Change in Supply

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• When both old andnew quantitiessupplied are plottedin the form of agraph, it appears asif the supply curvehas shifted to theright, showing anincrease in supply.

Section 1-15

Change in Supply (cont.)

Figure 5.3

24

Section 1-16


• For a decrease in supply to occur, lesswould be offered for sale at each and everyprice, and the supply curve would shift tothe left.

• Changes in supply, whether increases ordecreases, can occur for several reasons.

Change in Supply (cont.)

25

Section 1-17


Cost of Inputs• A change in the cost of inputs can cause

a change in supply. • Supply might increase because of a

decrease in the cost of inputs, such aslabor or packaging.

• If the price of the inputs drops, producersare willing to produce more of a product ateach and every price, thereby shifting thesupply curve to the right.

26

Section 1-18


Cost of Inputs (cont.)

• If labor or other costs rise, producers wouldnot be willing to produce as many units ateach and every price.

• Instead, they would offer fewer products forsale, and the supply curve would shift to theleft.

27

Section 1-19


Productivity• When management motivates its workers,

or if workers decide to work moreefficiently, productivity should increase.

• The result is that more is produced at everyprice, which shifts the supply curve to theright.

• On the other hand, if workers areunmotivated, untrained, or unhappy,productivity could decrease.

• The supply curve shifts to the left becausefewer goods are brought to the market atevery possible price.

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Section 1-20


• New technology tends to shift the supplycurve to the right.

• The introduction of a new machine,chemical, or industrial process can affectsupply by lowering the cost of productionor by increasing productivity.

• When production costs go down, theproducer is usually able to produce moregoods and services at each and everyprice in the market.

Technology

29

Section 1-21


• Firms view taxes as costs. • If the producer’s inventory is taxed or if

fees are paid to receive a license toproduce, the cost of production goes up.

• This causes the supply curve to shift to theleft.

• Or, if taxes go down production costs godown, supply then increases and thesupply curve shifts to the right.

Taxes and Subsidies

30

Section 1-22


Taxes and Subsidies (cont.)

• A subsidy is a government payment to anindividual, business, or other group toencourage or protect a certain type ofeconomic activity.

• Subsidies lower the cost of production,encouraging current producers to remain inthe market and new producers to enter.

• When subsidies are repealed, costs go up,producers leave the market, and the supplycurve shifts to the left.

31

Section 1-23


• Expectations about the future price of aproduct can also affect the supply curve.

• If producers think the price of their productwill go up, they may withhold some of thesupply, causing supply to decrease and thesupply curve to shift to the left.

• On the other hand, producers may expectlower prices for their output in the future.

• In this situation, they may try to produceand sell as much as possible right away,causing the supply curve to shift to theright.

Expectations

32

Section 1-24


• When the government establishes newregulations, the cost of production can beaffected, causing a change in supply.

• In general, increased–or tighter–government regulations restrict supply,causing the supply curve to shift to theleft.

• Relaxed regulations allow producers tolower the cost of production, whichresults in a shift of the supply curve tothe right.

Government Regulations

33

Section 1-25


• A change in the number of supplierscauses the market supply curve to shift tothe right or left.

• As more firms enter an industry, the supplycurve shifts to the right. In other words, thelarger the number of suppliers, the greaterthe market supply.

• If some suppliers leave the market, fewerproducts are offered for sale at all possibleprices. This causes supply to decrease,shifting the curve to the left.

Number of Sellers

34

Section 1-26


Number of Sellers (cont.)

• In the real world, sellers are entering themarket and leaving the market all thetime.

• Some economic analysts believe that, atleast initially, the development of theInternet will result in larger numbersentering the market than in leaving.

• They point out that almost anyone withInternet experience and a few thousanddollars can open up his or her own Internetstore.

35

Section 1-27


• If a small increase in price leads to arelatively larger increase in output, supply iselastic.

• If the quantity supplied changes very little,supply is inelastic.

• Supply elasticity is a measure of the wayin which quantity supplied responds to achange in price.

Elasticity of Supply

36

Section 1-28

• The supply curve in Figure 5.4a is elasticbecause the change in price causes arelatively larger change in quantitysupplied.

Three Elasticities

Figure 5.4a

37

Section 1-29

• The supply curve in Figure 5.4b is inelasticbecause the change in price causes arelatively smaller change in quantitysupplied.

Three Elasticities (cont.)

Figure 5.4b

38

Section 1-30

• The supply curve in Figure 5.4c is a unitelastic supply curve because the changein price causes a proportional change inthe quantity supplied.


Figure 5.4c

39

Section 1-31


Figure 5.4d

40

Section 1-32


• If a firm can adjust to new prices quickly,then supply is likely to be elastic.

• If the nature of production is such thatadjustments take longer, then supply islikely to be inelastic.

• The elasticity of a business’s supply curvedepends on the nature of its production.

Determinants of Supply Elasticity

41

Section 1-33


– First, the number of substitutes has nobearing on the elasticity of supply.

– In addition, considerations such as the abilityto delay the purchase or the portion of incomeconsumed have no relevance to supplyelasticity even though they are essential fordemand elasticity.

• The elasticity of supply is different from theelasticity of demand in several importantrespects.

Determinants of Supply Elasticity (cont.)

42

Section 1-Assessment 1

Section Assessment

Main Idea Using your notes from thegraphic organizer activity on page 113of your textbook, describe how supplyis different from demand.Demand is the desire, ability, andwillingness to buy, and deals withhow prices affect consumerspending. Supply is the amount of aproduct for sale and deals with howprices affect quantity supplied.

Click the mouse button or press the Space Barto display the answer.

43


Section Assessment (cont.)

Describe the difference between thesupply schedule and the supply curve.

Schedule: information on supply intable formCurve: same information in graphicform

Click the mouse button or press the Space Barto display the answer. 44



Describe how market supply curvesare obtained.

Determine amount produced byindividual firms. Add numbers andplot on a graph.


45



List the factors that can cause achange in supply.

Factors include cost of inputs,productivity, technology, number ofsellers, taxes and subsidies,expectations, and governmentregulations.




Supply Provide an example of aneconomic good whose producer wouldincrease the quantity supplied if theprice were to go up.Answers will vary.


47



Understanding Cause and EffectAccording to the Law of Supply, howdoes price affect the quantity offeredfor sale?Sellers will offer more at higher pricesand less at lower prices.



Write a poem, a proverb, or a riddlethat illustrates the relationshipbetween price and supply.

Section Close

End of Section 1

Click the mouse button to return to the Contents slide.50

Section 2-1



A change in inputs–labor, machinery, tools–resultsin a change in production.

Reading StrategyGraphic Organizer As you read aboutproduction, complete a graphic organizer similarto the one on page 122 of your textbook bylisting what occurs during the three stages ofproduction.

51

Section 2-2


Key Terms

– short run – long run – Law of Variable Proportions – production function – raw materials – total product – marginal product – stages of production – diminishing returns

– theory of production

Study Guide (cont.)

52

Section 2-3

Click the Speaker button to listento the Cover Story.


ObjectivesAfter studying this section, you will be able to:

Applying Economic ConceptsDiminishing Returns Has the quality of yourwork ever declined because you worked toohard at something? Sometimes you reach astage where you still make progress but at adiminished rate.

Study Guide (cont.)

– Explain the theory of production. – Describe the three stages of production.

53

Section 2-4


Introduction• Producing an economic good or service

requires a combination of land, labor,capital, and entrepreneurs.

• The theory of production deals with therelationship between the factors ofproduction and the output of goods andservices.

• The theory of production generally is basedon the short run, a period of productionthat allows producers to change only theamount of the variable input called labor.

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Section 2-5


Introduction (cont.)

• This contrasts with the long run, a periodof production long enough for producers toadjust the quantities of all their resources,including capital.

• For example, Ford Motors hiring 300 extraworkers for one of its plants is a short-runadjustment.

• If Ford builds a new factory, this is a long-run adjustment.

55

Section 2-6


Law of Variable Proportions• The Law of Variable Proportions states

that, in the short run, output will changeas one input is varied while the others areheld constant.

• The law helps answer the question: How isthe output of the final product affected asmore units of one variable input or resourceare added to a fixed amount of otherresources?

56

Section 2-7

The Production Function• The Law of Variable Proportions can be

illustrated by using a productionfunction–a concept that describes therelationship between changes in output todifferent amounts of a single input whileother inputs are held constant.

57

Section 2-8


The Production Function (cont.)

• The production function can be illustratedwith a schedule, such as the one in Figure5.5a.

• The productionschedule in thefigure listshypotheticaloutput as thenumber ofworkers is variedfrom zero to 12.

Figure 5.5a

58

Section 2-9

• The information may also be shownwith a graph.

The Production Function (cont.)

Figure 5.5b

• In this example, only the number ofworkers changes.No changes occurin the amount ofmachinery used orthe quantities ofraw materials–unprocessednatural productsused in production.

59

Section 2-10


Total Product• The second column in the production

schedule shows total product, or totaloutput produced by the firm.

• The numbers indicate that the plant barelyoperates when it has only one or twoworkers.

• As a result, some resources stand idlemuch of the time.

60

Section 2-11


• As more workers are added, total productrises.

• More workers can operate more machinery,and plant output rises.

• Additional workers also means that theworkers can specialize.

• For example, one group runs the machines,another handles maintenance, and a thirdgroup assembles the products.

• By working in this way–as a coordinatedwhole–the firm can be more productive.

Total Product Rises

61

Section 2-12


• As even more workers are added outputcontinues to rise, but it does so at a slowerrate until it can grow no further.

• Finally, the addition of the eleventh andtwelfth workers causes total output to godown because these workers just get in theway of the others.

• Although the ideal number of workerscannot be determined until costs areconsidered, it is clear that the eleventh andtwelfth workers will not be hired.

Total Product Slows

62

Section 2-13

• Marginal product is the extra output orchange in total product caused by theaddition of one more unit of variableinput.

Marginal Product

63

Section 2-14


Three Stages of Production• When it comes to determining the optimal

number of variable units to be used inproduction, changes in marginal productare of special interest.

• The three stages of production–increasing returns, diminishing returns,and negative returns–are based on theway marginal product changes as thevariable input of labor is changed.

• In Stage I, the first workers hired cannotwork efficiently because there are toomany resources per worker.

64

Section 2-15


Three Stages of Production (cont.)

• As the number of workers increases, theymake better use of their machinery andresources.

• As long as each new worker hiredcontributes more to total output than theworker before, total output rises at anincreasingly faster rate.

• Because marginal output increases by alarger amount every time a new worker isadded, Stage I is known as the stage ofincreasing returns.

65

Section 2-16


• As soon as a firm discovers that each newworker adds more output than the last, thefirm is tempted to hire another worker.

• In Stage II, the total production keepsgrowing, but by smaller and smalleramounts.

• Any additional workers hired may stockshelves, package parts, and do other jobsthat leave the machine operators free to dotheir jobs.

• The rate of increase in total production,however, is now starting to slow down.


66

Section 2-17


• Stage II illustrates the principle ofdiminishing returns, the stage whereoutput increases at a diminishing rate asmore units of a variable input are added.

• In the third stage, the firm has hired toomany workers, and they are starting to getin each other’s way.

• Marginal product becomes negative andtotal plant output decreases.

• Most companies do not hire workers whoseaddition would cause total production todecrease.


67


Section Assessment

Main Idea Using your notes from thegraphic organizer activity on page 122,explain how production is affected by achange in inputs.As input changes, production ofoutputs also changes. First, eachinput will cause an increase. Then,each input will cause an increase, butin increasingly smaller increments.Finally, each input will cause adecrease.




Describe the relationship on which thetheory of production is based.

The theory of production states thatchanging factors of production(inputs) will change the output ofgoods and services.


69



Explain how marginal productchanges in each of the three stagesof production.

In Stage I, marginal productincreases. In Stage II, marginalproduct continues to increase, but ata slower rate. In Stage III, marginalproduct becomes negative.




Identify what point will eventually bereached if companies continue addingworkers.

Workers will be in each other’s wayand output will decrease.


71



Diminishing Returns Provide anexample of a time when you entered aperiod of diminishing returns or evennegative returns. Explain why thismight have occurred.

Answers will vary.




Sequencing Information You need to hireworkers for a project you are directing. Youmay add one worker at a time in a mannerthat will allow you to measure the addedcontribution of each worker. At what point willyou stop hiring workers? Relate this processto the three stages of the production function.Stop hiring workers just before Stage IIbegins. In Stage I, as each worker is added,total product and marginal product increase.In Stage II, as each worker is added,marginal product is positive but decreasing.Therefore, the marginal product is greatestjust before Stage II.


73


Discuss the following statement:The most important economicconcept for business managers tounderstand is that of marginalproduct.

Section Close

End of Section 2


75

Section 3-1


Profit is maximized when the marginal costs ofproduction equal the marginal revenue fromsales.

Reading StrategyGraphic Organizer As you read the section,complete a graphic organizer similar to the oneon page 127 of your textbook by explaining howtotal revenue differs from marginal revenue.Then provide an example of each.


Section 3-2

Key Terms

– overhead – variable cost – total cost – marginal cost – e-commerce

– fixed cost

Study Guide (cont.)


– total revenue – marginal revenue – marginal analysis – break-even point – profit-maximizing

quantity of output

77

Section 3-3

Click the Speaker button tolisten to the Cover Story.


ObjectivesAfter studying this section, you will be able to:

Applying Economic ConceptsOverhead Overhead is one type of fixed costthat we try to avoid whenever we can. How canoverhead change the way people do business?

Study Guide (cont.)

– Define four key measures of cost. – Identify two key measures of revenue. – Apply incremental analysis to business

decisions.

78

Section 3-4

Introduction• Overhead is one of many different

measures of costs.

79

Section 3-5


• Because the cost of inputs influencesefficient production decisions, a businessmust analyze costs before making itsdecisions.

• To simplify decision making, cost is dividedinto several different categories.

• The first category is fixed cost–the costthat a business incurs even if the plant isidle and output is zero.

Measures of Cost

80

Section 3-6


Measures of Cost (cont.)

• It makes no difference whether thebusiness produces nothing, very little, ora large amount. Total fixed cost, oroverhead, remains the same.

• Fixed costs include salaries paid toexecutives, interest charges on bonds, rentpayments on leased properties, and localand state property taxes.

• Fixed costs also include depreciation, thegradual wear and tear on capital goodsover time and through use.

81

Section 3-7

• The nature of fixed costs is illustrated in thefourth column of the table below.


Figure 5.6

82

Section 3-8


• Another kind of cost is variable cost, acost that changes when the business rateof operation or output changes.

• While fixed costs generally are associatedwith machines and other capital goods,variable costs generally are associated withlabor and raw materials.

• The total cost of production is the sum ofthe fixed and variable costs.

• Total cost takes into account all the costs abusiness faces in the course of itsoperations.


83

Section 3-9


• Another category of cost is marginal cost–the extra cost incurred when a businessproduces one additional unit of a product.

• Because fixed costs do not change fromone level of production to another, marginalcost is the per-unit increase in variablecosts that stems from using additionalfactors of production.


84

Section 3-10


Applying Cost Principles• The cost and combination, or mix, of inputs

affects the way businesses produce. • The examples on the following slides

illustrate the importance of costs tobusiness firms.

85

Section 3-11


• Consider the case of a self-serve gasstation with many pumps and a singleattendant who works in an enclosedbooth.

• This operation is likely to have large fixedcosts, such as the cost of the lot, thepumps and tanks, and the taxes andlicensing fees paid to state and localgovernments.

• The variable costs, on the other hand, arerelatively small.

Self-Service Gas Station

86

Section 3-12


Self-Service Gas Station (cont.)

• When all costs are included, however, theratio of variable to fixed costs is low.

• As a result, the owner may operate thestation 24 hours a day, seven days a weekfor a relatively low cost.

87

Section 3-13


• Many stores are using the Internet becausethe overhead, or the fixed cost of operation,is so low.

• An individual engaged in e-commerce–electronic business or exchange conductedover the Internet–does not need to spendlarge sums of money to rent a building andstock it with inventory.

Internet Stores

88

Section 3-14


• Businesses use two key measures ofrevenue to find the amount of output thatwill produce the greatest profits.

• The total revenue is the number of unitssold multiplied by the average price perunit.

• The second, and more important, measureof revenue is marginal revenue, the extrarevenue associated with the production andsale of one additional unit of output.

Measures of Revenue

89

Section 3-15


Measures of Revenue (cont.)

• The marginal revenues are determined bydividing the change in total revenue by themarginal product.

• Marginal revenue is not always constant.Businesses often find that marginalrevenues start high and then decrease asmore and more units are produced andsold.

90

Section 3-16


• Economists use marginal analysis, a typeof cost-benefit decision making thatcompares the extra benefits to the extracosts of an action.

• Marginal analysis is helpful in a number ofsituations, including break-even analysisand profit maximization.

• The break-even point is the total output ortotal product the business needs to sell inorder to cover its total costs.

Marginal Analysis

91

Section 3-17


Marginal Analysis (cont.)

• A business wants to do more than breakeven, however. It wants to make as muchprofit as it can.

• The owners of the business can decidehow many workers and what level of outputare needed to generate the maximumprofits by comparing marginal costs andmarginal revenues.

• In general, as long as the marginal cost isless than the marginal revenue, thebusiness will keep hiring workers.

92

Section 3-18


• When marginal cost is less than marginalrevenue, more variable inputs should behired to expand output.

• The profit-maximizing quantity of outputis reached when marginal cost andmarginal revenue are equal.

Marginal Analysis (cont.)

93


Section Assessment

Main Idea Using your notes from thegraphic organizer activity on page 127,describe how cost affects totalrevenue.The cost of inputs influences supply.The supply influences the numbersold. The number sold multiplied bythe average price per unit is the totalrevenue.





List the four measures of cost.

The four measures of cost are fixedcost, variable cost, total cost, andmarginal cost.

95




Describe the two measures ofrevenue.

The total revenue is the number ofunits sold multiplied by the averageprice per unit. The marginal revenueis the extra revenue associated withthe production and sale of oneadditional unit of output.

96




Explain the use of marginal analysisfor break-even and profit-maximizingdecisions.

By comparing the marginal revenueand the marginal cost of adding unitsof variable input, break-even andprofit-maximizing points can beestablished.

97




Overhead How might overhead affectthe price of a new car?

A car manufacturer or dealer withhigh overhead may need to chargemore.

98




Understanding Cause and EffectMany oil-processing plants operate 24hours a day, using several shifts ofworkers to maintain operations. Howdo you think a plant’s fixed andvariable costs affect its decision tooperate around the clock?

When variable costs are smallrelative to fixed costs, the additionalcost of operating around the clock islow.

99


Consider which, if any, of society’seconomic goals are furthered byprofit maximization.

Section Close

End of Section 3


101

Chapter Summary 1

Section 1: What Is Supply?


• Supply is the quantities of output that producerswill bring to market at each and every price.Supply can be represented in a supply schedule,or graphically as a supply curve.

• The Law of Supply states that the quantities of aneconomic product offered for sale vary directlywith its price. If prices are high, suppliers will offergreater quantities for sale. If prices are low, theywill offer smaller quantities for sale.

• The market supply curve is the sum of theindividual supply curves.

• A change in quantity supplied is represented bya movement along the supply curve.

102

Chapter Summary 2


Section 1: What Is Supply? (cont.)

• A change in supply is a change in the quantitythat will be supplied at each and every price. Anincrease in supply is presented graphically as ashift of the supply curve to the right, and adecrease in supply appears as a shift of thesupply curve to the left.

• Changes in supply can be caused by a change inthe cost of inputs, productivity, new technology,taxes, subsidies, expectations, governmentregulations, and number of sellers.

• Supply elasticity describes how a change inquantity supplied responds to a change in price.

103

Chapter Summary 3

Section 1: What Is Supply? (cont.)

• If supply is elastic, a given change in price willcause a more than proportional change in quantitysupplied. If supply is inelastic, a given change inprice will cause a less than proportional change inquantity supplied. If supply is unit elastic, a givenchange in price will cause a proportional changein quantity supplied.

104

Chapter Summary 4


Section 2: The Theory of Production• The theory of production deals with the

relationship between the factors of production andthe output of goods and services.

• The theory of production deals with the short run,a production period so short that only the variableinput (usually labor) can be changed. This contraststo the long run, a production period long enoughfor all inputs–including capital–to vary.

• The Law of Variable Proportions states that thequantity of output will vary as increasing units of asingle input are added. This law is presentedgraphically in the form of a production function.

105

Chapter Summary 5


Section 2: The Theory ofProduction (cont.)

• The two most important measures of output aretotal product and marginal product, the extraoutput gained from adding one additional unit ofinput.

• Three stages of production–increasing returns,diminishing returns, and negative returns–showhow marginal product changes when additionalvariable inputs are added. Production takes placein Stage II under conditions of diminishing returns.

106

Chapter Summary 6


Section 3: Cost, Revenue, and ProfitMaximization

• Four important measures of cost exist: total cost,which is the sum of fixed cost and variable cost,and marginal cost, which is the increase in totalcost that stems from producing one additional unitof output.

• The mix of variable and fixed costs that a businessfaces affects the way the business operates.

• The key measure of revenue is marginalrevenue, which is the change in total revenuewhen one more unit of output is sold.

107

Chapter Summary 7

Section 3: Cost, Revenue, and ProfitMaximization (cont.)

• The profit-maximizing quantity of output occurswhen marginal cost is exactly equal to marginalrevenue. Other quantities of output may yield thesame profit, but none yield more.

End of Chapter Summary


109

A. depreciation G. production functionB. diminishing returns H. profit-maximizingC. fixed cost I. total costD. marginal analysis J. variable costE. marginal product K. overheadF. marginal revenue L. total product

Click the mouse button or press the Space Bar to display theanswer. The Chapter Assessment is on pages 134–135.

Chapter Assessment 1

Identifying Key TermsMatch the letter of the term best described by each statement.

C

D

B

___ a production cost that does not change as totalbusiness output changes

___ decision making that compares the additionalcosts with the additional benefits of an action

___ associated with Stage II of production

110



Identifying Key Terms (cont.)Match the letter of the term best described by each statement.

___ a production cost that changes when outputchanges

___ a graphical representation of the theory ofproduction

___ the additional output produced when one additionalunit of input is added


J

G

E

111




___ change in total revenue from the sale of oneadditional unit of output

___ the gradual wearing out of capital goods___ the sum of variable and fixed costs___ when marginal revenue equals marginal cost


F

AIH

112




___ total output produced by a firm___ total fixed costs


LK

113



Describe what is meant by supply.

quantities of a product offered for saleat all possible prices that could prevailin the market

Reviewing the Facts

114



Distinguish between the individualsupply curve and the market supplycurve.

Individual supply curves showquantities of a product supplied ateach and every market price; marketsupply curves show quantities of aproduct at various prices by all firmsthat market the product.

Reviewing the Facts (cont.)

115




Explain what is meant by a changein quantity supplied.

the change in the amount of a productoffered for sale in response to a pricechange

116




Identify the factors that cause achange in supply.

cost of inputs, productivity,technology, number of sellers, taxesand subsidies, expectations,government regulations

117




Describe the Law of VariableProportions.

In the short run, output will change asone input is varied while othersremain constant.

118




Explain the difference between totalproduct and marginal product.

Total product is total output producedby a firm; marginal product is extraoutput generated by adding one moreunit of variable input.

119




Identify the three stages ofproduction.

increasing returns, diminishingreturns, and negative returns

120




Describe the relationship betweenmarginal cost and total cost.

Marginal cost is the change in totalcost incurred by producing oneadditional unit of a product. Total costis the sum of fixed and variable costs.

121




Identify four measures of cost.

total cost, fixed cost, variable cost,marginal cost

122




Describe one practical application ofcost principles.

Answers should reflect anunderstanding of the importance ofcost to business firms.

123



Thinking Critically

Making Comparisons Create a chartlike the one on page 134 of yourtextbook to help you explain howsupply differs from demand.Charts should reflect anunderstanding of supply and demand.

124



Thinking Critically (cont.)

Making Generalizations Why mightproduction functions tend to differfrom one firm to another?

Because different firms have differenttechnologies and use differentamounts of variable inputs, theproduction function for each firm willvary.

125



Thinking Critically (cont.)

Understanding Cause and EffectExplain why e-commerce reducesfixed costs.

Fixed costs, like employee salaries,interest charges on bonds, rentpayments, and property taxes do notapply to e-commerce. Web accessand software are the only fixed costsfor e-commerce businesses.

126



Applying Economic Skills

Supply According to the Law of Supply,what will happen to the number ofproducts a firm offers for sale when pricesgo down? What will happen to the cost ofadditional units of production when a firmstarts having diminishing returns? Whatwill happen to the number of products afirm will offer for sale if its cost ofproduction increases while prices remainthe same?When prices go down, the amount offeredfor sale will also go down. Each unit ofproduction will cost more. There will be adecrease in supply.

127



Applying Economic Skills (cont.)

Marginal Analysis Give an exampleof a recent decision you made inwhich you used the tools ofmarginal analysis.Examples should reflect anunderstanding of marginal analysis.

128


Suppose economists predict that theprice of oil will rise by 25 percent inthe next two years. How might thisaffect the number of wildcatters–people who drill for oil in hopes offinding new supplies?The number of wildcatters would likelygo up, as more people would seek oilto sell at higher prices.


End of Chapter Assessment


Economic Concepts 1

Focus Activity 1.1

Continued on next slide.

Focus Activity 1.2

Focus Activity 2.1


Focus Activity 2.2

Focus Activity 3.1


Focus Activity 3.2

Extra Credit Project

Monitor television newscasts and newspapers tofind three stories that discuss supply. Write abrief explanation of how the situation in eachstory might affect price and supply.

Economics Online

Explore online information about thetopics introduced in this chapter.

Click on the Connect button to launch your browser and go to theEconomics: Principles and Practices Web site. At this site, youwill find interactive activities, current events information, and Websites correlated with the chapters and units in the textbook.When you finish exploring, exit the browser program to return tothis presentation. If you experience difficulty connecting to theWeb site, manually launch your Web browser and go tohttp://epp.glencoe.com

BusinessWeek Online

Explore online information about thetopics introduced in this chapter.

Click on the Connect button to launch your browser and go to theBusinessWeek Web site. At this site, you will find up-to-dateinformation dealing with all aspects of economics. When youfinish exploring, exit the browser program to return to thispresentation. If you experience difficulty connecting to the Website, manually launch your Web browser and go tohttp://www.businessweek.com

Infobyte 3

Measures of Cost Variable costs representexpenses a corporation incurs that change withthat company’s level of business activity. Fixedcosts represent expenses a corporation incursthat remain relatively stable despite a change inthe level of that company’s business activity.Expense items which generally remain fixed forany given reporting period include rent,depreciation, property tax, and executivesalaries.

GE 3

Master Marketer Giving a gift to a businesspartner from another culture must be consideredcarefully. Some American businesspeopledecided to send crystal clocks to their Chinesebusiness partners. Luckily, before the gifts weresent, the Americans discovered that clocks areseen as symbols of death in China.

GE 1

Oil Supply OPEC, the Organization ofPetroleum Exporting Countries, usesadjustments in oil production to counterchanges in prices. In the late 1990s, just afterOPEC agreed to increase production, the Asianeconomy unexpectedly collapsed. With demanddown, an oil glut resulted, and oil prices fellsharply. In time, the members of OPEC agreedto cut production, leading to a rise in oil prices.

All costs are variable in the long run.

FYI 3 Cybernomics 1.1

Technology and Farming Many U.S. farmersnow use computers, the Internet, and e-mail toget information about the supply of crops thatwill come to market, prices offered, yield peracre, and other data. This information helpsfarmers decide how much to plant and where tosell their products. State agriculturaldepartments and universities have Web sites tohelp farmers use electronic informationeffectively.

BW Newsclip 1


The price of the average desktop computershrank by 17.3% in just one year. As pricescontinue to fall, computer makers are scramblingto find other ways to make a profit.Read the BusinessWeek Newsclip article onpage 126 of your textbook. Learn how computermakers are finding other ways to make a profit.

New Directions forPC Markets

This feature is found on page 126 of your textbook. Clickthe Speaker button to listen to an audio introduction.


BW Newsclip 2


Understanding Cause and EffectWhy are companies moving awayfrom producing PCs?The price of PCs has been plummeting forthe past two years. Companies are notproducing as many PCs because they arenot making much profit from them.

Click the mouse button or press the Space Bar to display theanswer. This feature is found on page 126 of your textbook.



BW Newsclip 3

Making Generalizations What aresome companies doing in order tostay competitive in the computerindustry?Some companies are developing e-commerce business and producing non-PC products like cell phones and Webaccess machines.

NBR 1.1

• Explain the law of supply. • Identify some factors that can cause a

change in the supply of a product. • Define marginal product.

After viewing What Is Supply?, you should beable to:

Economics and YouVideo 6: What Is Supply?



NBR 1.2

Side 1Disc 1

Chapter 6Click the Videodisc buttonanytime throughout thissection to play the completevideo if you have a videodiscplayer attached to yourcomputer.

Click the Forward button toview the discussion questionsand other related slides.



Click inside this box to play the preview.

NBR 1.3


Side 1Disc 1

Chapter 6


What is the law of supply?

The law of supply states thatwhen prices of a product arehigher, sellers will supply a largerquantity of the product.

SWS 1


Outlining may be used as a starting point fora writer. The writer begins with the roughshape of the material and gradually fills in thedetails in a logical manner. You may also useoutlining as a method of note taking andorganizing information as you read.

This feature is found on page 132 of your textbook.

Outlining

SWS 2


Learning the Skill

Outlining

• There are two types of outlines–formal and informal.Making an informal outline is similar to takingnotes–you write words and phrases needed toremember main ideas. A formal outline has astandard format. Follow these steps to formallyoutline material. – Read the text to identify the main ideas. Label

these with Roman numerals.

Click the mouse button or press the Space Bar to display theinformation. This feature is found on page 132 of your textbook.

SWS 3


Learning the Skill (cont.)

Outlining

– Write subtopics under each main idea. Label theseideas with capital letters.

– Write supporting details for each subtopic. Labelthese with Arabic numerals.

– Each level should have at least two entries andshould be indented from the level above.

– All entries use the same grammatical form,whether phrases or complete sentences.


SWS 4

Practicing the Skill

Outlining

• On a separate sheet of paper, copy the outline onpage 132 of your textbook of the main ideas in thefirst part of Section 1 of Chapter 5.

• Then use your textbook to fill in the missing subtopicsand details.


Profiles in Economics 1.1

This feature is found on page 121 of yourtextbook.


Click a picture on the following slide to learnmore about Richard Sears, Milton Hershey, orJohn Johnson. Be prepared to answer thequestions that follow.

Profiles in Economics 1.1A

This feature is found on page 121 of yourtextbook.


Richard Sears Milton Hershey John Johnson


Making Generalizations Explain howpersistence played a role in thesuccess of each of these men.

Answers will vary. Sears persisted for24 years before he opened his firstretail store; Hershey was poor,uneducated, a multiple-business failure,and broke before he achieved success;Johnson persisted in the face of racism.





For Further Research Find out theetymology of entrepreneur and explainwhy the word is used as it is today.The word entrepreneur comes from the French,and it means “one who undertakes some task.” Itsdeeper root is Latin, originating in words that mean“to grasp” or “to seize.” It shares these roots withthe word “enterprise.” Entrepreneurship thusmeans something akin to seizing an opportunity.Today, it denotes one who seizes a businessopportunity.

End of Custom Shows

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