Chapter 4 Flashcards
Define supply
the relationship between various prices sellers receive for a good and the resulting quantities supplied at those price
Define the law of supply
the positive relationship between the price of a good and the quantity supplied of that good
Recognize supply as a schedule
a table showing various prices and the quantities supplied at those prices
Review Table 4.1
Recognize supply as a graph
When supply is represented on a graph, that graphical representation of supply is called a “supply curve.” See Figure 4.1
Recognize supply as a linear equation
slope-intercept form of a line: (y = mx + b)
linear equation for supply written so that quantity supplied is a function of price
(Remember Supply curves are only in the first quadrant)
Compare different representations of supply
Schedule v Graph v Linear equation
Interpret supply as marginal cost
Marginal cost:
the cost of one more unit of a good
Calculate marginal cost given different representations of supply
The positive slope of supply also implies that the marginal cost tends to rise as production of cookies increases. This reflects the fact that the first resources used to produce cookies are likely the resources that had comparative advantage in making cookies. The cost of using those resources to make cookies was relatively low. As more cookies are produced, eventually resources that don’t have a comparative advantage in making cookies are used to make cookies. As a result, the cost of making additional boxes of cookies rises. This principle of increasing marginal cost was introduced in Chapter 1 and empahsized with Comparative advantage in Chapter 2.
Categorize various influences on supply
Changes in the prices of inputs
Changes in the prices of substitutes or complements in production
Changes in price expectations of sellers
Changes in the number of sellers
Changes in technology
(trick: 3PsNT)
Evaluate impact of various influences on supply
Review Figure 4.2 and 4.3 - This is critical
How does changes in price of inputs affect supply
If workers at one of the bakeries making Girl Scout cookies see an increase in their wages, that will make each box of cookies more expensive to produce. As a result, sellers will reduce cookie production at a given price, and supply shifts to the left. In general, when the prices of inputs used in production rise, sellers will decrease supply of any product those inputs produce. If input prices fall, it becomes cheaper or firms to produce, and supply increases (shifts to the right).
What are substitutes in production
Substitutes in production:
goods that can be produced with the same resources
What are complements in production
Complements in production:
goods that are naturally produced at the same time
Describe how changes in technology affect supply
The impact of a change in technology on production costs is the key to determining how changes in technology affect supply. If a technological change reduces production costs—like the development of the assembly line or of a machine that can harvest crops more quickly and more effectively—then that change in technology increases supply.
Describe How Changes in number of sellers affect supply
When more firms enter an industry, that increase in the number of sellers will increase supply (shift supply to the right).
Describe how Changes in price expectations affect supply
If sellers expect prices in the future will be higher than they are today, sellers prefer to hold back their current supply so they can sell their product for those higher future prices.
