Chapter 5: Supply
Supply, like demand, is another important microeconomic concept.
Together, supply and demand explain how prices are determined
and how markets function.
Section 1 defines supply as the quantities of output that
producers will bring to market at each and every price. Like
demand, supply can be presented in the form of a supply schedule,
or graphically as a supply curve. Individual producers have
their own supply curves, and the market supply curve is the
sum of individual supply curves. The Law of Supply states
that more output will be offered for sale at higher prices
and less at lower prices. A change in quantity supplied is
represented by a movement along the supply curve, whereas
a change in supply is represented by a shift of the supply
curve to the left or right. Changes in supply are caused by
changes in the cost of inputs, productivity, technology, taxes,
subsidies, expectations, government regulations, and the number
of sellers in the market. Supply elasticity describes how
producers will change the quantity they supply in response
to a change in price.
Section 2 introduces the theory of production, which deals
with the way output changes in the short run when a single
productive input is varied. This relationship is presented
graphically in the form of a production function. The two
most important measures of output are total product and marginal
product. Three stages of productionincreasing returns, diminishing
returns, and negative returnsshow how marginal product changes
as additional variable inputs are added. The profit-maximizing
firm will produce in Stage II, the region with diminishing
returns to scale.
3 adds cost and revenue to the theory of production. Several
important measures of cost are introduced, including fixed
cost, variable cost, total cost, and marginal cost. Total
revenue and marginal revenue are the most important measures
of revenue. The firm reaches the break-even point when the
revenue from sales is large enough to cover the total cost
of production. The firm finds its profit-maximizing quantity
of output where the marginal cost of production is exactly
equal to marginal revenue from the sale of the product.