Chapter 3 | Law of Supply Flashcards

1
Q

What Does It Really Cost? Costs Are Opportunity Costs

A

Businesses must pay higher prices to obtain more of an input because opportunity costs change with circumstances. The marginal costs of additional inputs (like labour) are ultimately opportunity costs — the best alternative use of the input.

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2
Q

Marginal cost

A

additional opportunity cost of increasing quantity supplied, changing with circumstances.

– For the working example, you are supplying time, and the marginal cost of your time increases as you increase the quantity of hours supplied.

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3
Q

Differences between smart supply choices and smart demand choices:

A

– For supply, marginal cost increases as you supply more.
– For demand, marginal benefit decreases as you buy more.
– For supply, marginal benefit is measured in $ (wages you earn); marginal cost is the opportunity cost of time.
– For demand, marginal benefit is the satisfaction you get; marginal cost is measured in $ (the price you pay).

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4
Q

Sunk costs

A

past expenses that cannot be recovered.

Sunk costs are the same no matter which fork in the road you take, so they have no influence on smart choices.

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5
Q

Supply

A

businesses’ willingness to produce a particular product or service because price covers all opportunity costs.

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6
Q

Quantity supplied

A

quantity you actually plan to supply at a given price.

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7
Q

Marginal opportunity cost

A

complete term for any cost relevant to a smart decision.

All opportunity costs are marginal costs; all marginal costs are opportunity costs.

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8
Q

What happens when you increase marginal opportunity cost

A

Increasing marginal opportunity costs arise because inputs are not equally productive in all activities.

– Where inputs are equally productive in all activities, marginal opportunity costs are constant.

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9
Q

Market supply

A

sum of supplies of all businesses willing to produce a particular product or service.

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10
Q

Law of supply

A

if the price of a product or service rises, quantity supplied increases.

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11
Q

Supply curve

A

shows the relationship between price and quantity supplied, other things remaining the same.

– There are two ways to read a supply curve.
– As a supply curve, read over and down from price to quantity supplied.
– As a marginal cost curve, read up and over from quantity supplied to price. A marginal cost curve shows the minimum price businesses will accept that covers all marginal opportunity costs of production.

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12
Q

What is Supply

A

Supply is a catch-all term summarizing all possible influences on businesses’ willingness to produce a particular product or service.

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13
Q

How is quantity supplied changed?

A

Quantity supplied is changed only by a change in price. Supply is changed by all other influences on business decisions.

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14
Q

How does Supply change?

A

Supply changes with changes in technology, environment, prices of inputs, prices of related products or services produced, expected future prices, and number of businesses. For example, supply increases with:

– improvement in technology
– environmental change helping production
– fall in price of an input
– fall in price of a related product or service
– fall in expected future price
– increase in number of businesses

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15
Q

Increase in supply

A

increase in businesses’ willingness to supply. Can be described in two ways:

– At any unchanged price, businesses are now willing to supply a greater quantity.
– For producing any unchanged quantity, businesses are now willing to accept a lower price.

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16
Q

Decrease in supply

A

decrease in business’s willingness to supply.