2. Supply in perfectly competitive market

Question 1

Market

Answer 1

Market Equilibrium occurs when the price and the quantity sold of a given good is stable.Alternatively, Market Equilibrium occurs when the equilibrium price is such that the quantity consumers want today is the same as the quantity suppliers want to sell.

Question 2

External Cost

Answer 2

**An External Cost is a cost incurred by someone who is not involved in the production / consumption of a given good.

Question 3

External Benefit

Answer 3

An External Benefit is a benefit accrued to someone who is not involved in the production / consumption of a given good.

Question 4

Marginal Benefit

Answer 4

The Marginal Benefit of producing a certain unit of a given good is the extra benefit accrued by producing that unit.

Question 5

Marginal Cost

Answer 5

The Marginal Cost of producing a certain unit of a given good is the extra cost of producing that unit. (Keep in mind here that the relevant cost is the “opportunity cost” and not just the “absolute cost” of producing the good.)

Question 6

Cost-benefit Principle

Answer 6

The Cost-Benefit Principle states that an action should be taken if the marginal benefit is greater than the marginal cost.

Question 7

Economic Surplus

Answer 7

The Economic Surplus of a certain action is the difference between the marginal benefit and the marginal cost of taking that action.

Question 8

Quantity Supplied

Answer 8

The Quantity Supplied by a supplier represents the quantity of a given good or service that maximizes the profit of the supplier.

Question 9

Supply Curve

Answer 9

The Supply Curve represents the relationship between the price of a good or service and the quantity supplied of that good or service.

Question 10

Law of Supply

Answer 10

<p>The Law of Supply describes the tendency for a producer to offer more of a certain good or service when the price of that good or service increases.</p>

Question 11

Economic Surplus

Answer 11

The Economic Surplus of a certain action is the difference between the marginal benefit and the marginal cost of taking that action.

Question 12

Supply Curve

Answer 12

The Supply Curve represents the relationship between the price of a good or service and the quantity supplied of that good or service.

Question 13

Characteristics of perfectly competitive market

Answer 13

• Consumers and Suppliers are Price-Takers—no control over price, have to take the price set by the market
• Homogeneous Goods—products are completely identical as other firms, they are perfect substitutes for each other, many other small firms that produce the same product
• No Externality (no additional benefits or costs to people outside the transaction)
• Goods are Excludable and Rival
• Full Information— both buyers and sellers have perfect information
• Free Entry and Exit

Question 14

What are the factors that influence the elasticity of supply?

Answer 14

• availability of raw materials
• factors mobility
• inventories/ excess capacity
• time horizon
• change in per unit costs with increased production

Question 15

What is the elasticity of supply?

Answer 15

Percentage change in the quantity supplied resulting from a very small percentage change in price. It measures the responsiveness of the supply to changes in price.

A supply curve is said to be elastic when an increase in price increases the quantity supplied a lot. If the quantity supplied doesn’t vary that much, the supply curve is inelastic.

Question 16

What does it mean if the supply is inelastic or elastic ?

Answer 16

• Inelastic— if an increase in the supply means an increase in costs of production
• Elastic— if an increase in supply requires constant cost of production