Ch. 3 - Supply & Producer Choice

Question 1

What is an Individual Supply Curve?

Answer 1

Plots the quantity of an item that a business plans to sell at each price

• Holds all other things constant
• Always follows the law of supply, will have an upward slope
• Supply curve = marginal cost

Question 2

What is the Law of Supply?

Answer 2

The tendency for the quantity supplied to be higher when the price is higher

Question 3

What is Perfect Competition? What is the best way to operate in a perfectly competitive market?

Answer 3

Markets in which:

1. All businesses in an industry sell an identical good
2. There are many sellers and many buyers, each of whom is small relative to the size of the market

• When operating in a perfectly competitive market, your best strategy is to charge a price identical to what your competitors are charging

Question 4

What are Price-Takers?

Answer 4

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price

• Managers in a perfectly competitive market are price takers

Question 5

What are Variable Costs? What are Fixed Costs? Which type of costs do marginal costs exclude?

Answer 5

Variable Costs - Costs (like labour & raw materials) that very with the quantity of output you produce

Fixed Costs - Costs that don’t vary when you change the quantity of output you produce

• Marginal Costs include variable but exclude fixed costs

Question 6

What is the Rational Rule for Sellers in a Competitive Market?

Answer 6

Sell one more item if the price is greater than or equal to the marginal cost

Question 7

What is Marginal Product?

Answer 7

The increase in output that arises from an additional input, like labour

Question 8

What is Diminishing Marginal Product?

Answer 8

The marginal product of an input declines as you use more of that input

• Diminishing marginal product leads to rising marginal costs

Question 9

What is the Market Supply Curve?

Answer 9

Plots the total quantity of an item supplied by the entire market, at each price

Question 10

What will cause movement on the supply curve (not shift)? What will the outcome be?

Answer 10

Price changes, yielding a change in quantity supplied

Question 11

What will cause the supply curve to shift (not movement)?

Answer 11

When you no longer hold all else constant, the supply curve may shift

• This occurs when factors beyond price are considered (Interdependence Principle)
• Any factors that change your marginal cost will shift your demand curve
• A right shift is an increase in supply
• A left shift is a decrease in supply

Question 12

What are the 5 Factors Shifting the Supply Curve?

Answer 12

1. Input Prices
2. Productivity & Technology
3. Prices of Related Outputs
4. Expectations
5. The type & number of sellers (only shifts market supply)

Question 13

What are Substitutes-in-Production? What are Compliments-in-Production?

Answer 13

Substitutes-in-Production - Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises

Compliments-in-Production - Goods that are made together. Your supply of a good will increase if the price of a compliment-in-production rises