3.3: Supply Flashcards
If a firm supplies a good or service, the firm:
1) Has the resources and technology to produce it.
2) Can profit from producing it.
3) Plans to produce it and sell it.
What constraints limit what is possible (to produce)?
Resources and technology
Why does supply reflect a decision about which technologically feasible items to produce?
Many useful things can be produced, but they are not produced unless it is profitable to do so.
What is quantity supplied?
The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.
The quantity supplied is not necessarily the same amount as the quantity actually sold. Sometimes the quantity supplied is greater than the quantity demanded, so the quantity sold is less than the quantity supplied.
Also measured as an amount per unit of time. Without the time dimension, we cannot tell whether a particular quantity supplied is large or small.
What does the law of supply state?
Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; the lower the price of a good, the smaller is the quantity supplied.
Why does a higher price increase the quantity supplied?
It is because marginal cost increases. As the quantity produced of any good increases, the marginal cost of producing the good increases.
What is marginal cost?
Change in cost for only one extra unit made (ONE UNIT of change)
When would it not be worth producing a good?
If the price received for the good does not at least cover the marginal cost of producing it.
When the price of a good rises, other things remaining the same, producers are willing to…
incur a higher marginal cost, so they increase production. The higher price brings forth an increase in the quantity supplied.
What is supply on a graph?
The term supply refers to the entire relationship between the price of a good and the quantity supplied of it. Supply is illustrated by the supply curve and the supply schedule.
What is quantity supplied on a graph?
The term quantity supplied refers to a point on a supply curve—the quantity supplied at a particular price.
What relationship does the supply curve show?
A supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. The supply curve is a graph of a supply schedule.
What’s a supply schedule?
A supply schedule lists the quantities supplied at each price when all the other influences on producers’ planned sales remain the same.
What can the supply curve be interpreted as?
A minimum-supply-price curve—a curve that shows the lowest price at which someone is willing to sell. This lowest price is the marginal cost.
Why does marginal cost of each unit increase when quantity produced increases?
If a small quantity is produced, the lowest price at which someone is willing to sell one more unit is low. But as the quantity produced increases, the marginal cost of each additional unit rises, so the lowest price at which someone is willing to sell an additional unit rises along the supply curve.
Eg. if 15 million bars are produced each week, the lowest price at which someone is willing to sell the 15 millionth bar is $2.50. But if 10 million bars are produced each week, someone is willing to accept $1.50 for the last bar produced.
