Chapter 3 | Law of Supply Flashcards
What Does It Really Cost? Costs Are Opportunity Costs
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.
Marginal cost
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.
Differences between smart supply choices and smart demand choices:
– 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).
Sunk costs
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.
Supply
businesses’ willingness to produce a particular product or service because price covers all opportunity costs.
Quantity supplied
quantity you actually plan to supply at a given price.
Marginal opportunity cost
complete term for any cost relevant to a smart decision.
All opportunity costs are marginal costs; all marginal costs are opportunity costs.
What happens when you increase marginal opportunity cost
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.
Market supply
sum of supplies of all businesses willing to produce a particular product or service.
Law of supply
if the price of a product or service rises, quantity supplied increases.
Supply curve
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.
What is Supply
Supply is a catch-all term summarizing all possible influences on businesses’ willingness to produce a particular product or service.
How is quantity supplied changed?
Quantity supplied is changed only by a change in price. Supply is changed by all other influences on business decisions.
How does Supply change?
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
Increase in supply
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.
