CHAPTER 4 Flashcards
Define Total Output:
“Total output can be defined as
the sum total of the quantity of the commodity
produced at a given period of time in the
economy.’’
Define Stock:
Stock is the total quantity of a commodity available for sale with a seller at a specific point in time. It serves as the source of supply and can be increased by boosting production. It is potential Supply.
Definition of Supply by Paul Samuelson:
Supply refers to the relation between market prices and the amount of goods that producers are willing to supply.
Meaning of Supply:
Supply refers to the quantity of a commodity
that a seller is willing and able to offer for sale
at a given price, during a certain period of time.
Supply Schedule:
A supply schedule is a tabular representation
of the functional relationship between price and
quantity supplied of a particular commodity.
Individual Supply Schedule:
It is a tabular representation of various quantities of a commodity that a producer is willing to offer for sale at different prices during a given period of time.
Market Supply Schedule:
It is a tabular representation of various quantities of a commodity, or for sale by different sellers at different prices during a given period of time. It is obtained by a horizontal summation of all individual supply.
Individual Supply Curve:
It is a graphical representation of an individual supply schedule. It slopes upwards from left to right, showing the direct relationship between price and quantity supplied.
Market Supply Curve:
It is a graphical representation of market supply schedule. It slopes upwards from left to right, indicating direct relationship between price and quantity supplied.
Determinants of Supply
- Price of Commodity
- State of Technology
- Cost of Production
- Infrastructural Facility
- Government Policy
- Natural Conditions
- Future Expectations about price
- Other Factors like Nature of the market, Relative prices of other goods, exports and imports, availability of factors of production etc. If favourable supply increases and vice versa
Introduction of the law of supply:
The law of supply, introduced by Prof. Alfred Marshall in his book “Principles of Economics” 1890, is a key economic principle that explains the relationship between price and quantity supplied. It is as fundamental as the law of demand.
Statement of the law of Supply:
Other things being constant, higher the price of a commodity, more is the quantity supplied and lower the price of a commodity less is the quantity supplied.
Symbolic representation of the Law of Supply:
Sx = f (Px)
S = Supply
x = Commodity
f = Function
P = Price of commodity
How does a Supply curve slope?
A Supply curve slopes upward from left to right. Indicates a positive / direct relationship between price and quantity supplied.
Assumptions of the Law of Supply:
- Constant Cost of Production
- Constant Technique of Production
- No changes in weather conditions
- No changes in Government Policy
- No change in Transport Cost
- Prices of Other Goods remain Constant
- No future expectations
Exceptions to the Law of Supply:
- Supply of Labour
- Agricultural Goods
- Urgent need of Cash
- Perishable Goods
- Rare Goods
Variations in Supply:
When quantity supplied of a commodity
varies due to change in its price, other factors
remaining constant, it is known as variations
in supply.
Expansion of Supply:
It refers to a rise in quantity supplied due to a rise in price while other factors remain constant. It indicates an upward movement on the same supply curve.
Contraction of Supply:
It refers to a fall in quantity supplied due to a fall in price while other factors remain constant. It shows a downward movement of on the same supply curve.
Increase in Supply:
It refers to an increase in supply due to favourable changes in other factors while price remains constant. In this case there is a rightward shift of the supply curve.
Decrease in Supply:
It refers to a fall in quantity supplied due to unfavourable changes in the other factors while price remains constant. In this case there is a leftward shift of the supply curve.
Total Cost:
Total Cost (TC) : Total cost is the total
expenditure incurred by a firm on the factors
of production required for the production of
goods and services. Total cost is the sum
of total fixed cost and total variable cost at
various levels of output.
TC = TFC + TVC
TC = Total cost
TFC = Total Fixed Cost
TVC = Total Variable Cost
Total fixed cost:
Total Fixed Cost (TFC) : Total fixed costs
are those expenses of production which
are incurred on fixed factors such as land,
machinery etc.
Total Variable Cost:
Total Variable Cost (TVC) : Total variable
costs are those expenses of production
which are incurred on variable factors such
as labour, raw material, power, fuel etc.
Average Cost:
Average Cost (AC) : Average cost refers to
cost of production per unit. It is calculated
by dividing total cost by total quantity of
production.
AC = TC / TQ
AC = Average cost
TC = Total cost
TQ = Total quantity
Marginal Cost:
Marginal cost (MC) : Marginal cost is the
net addition made to total cost by producing
one more unit of output.
MCn = TCn – TCn-1
n = Number of units produced
MCn = Marginal cost of the nth unit
TCn = Total cost of nth unit
TCn-1 = Total cost of previous units
Total Revenue:
Total Revenue (TR) : Total revenue is the
total sales proceeds of a firm by selling a
commodity at a given price. It is the total
income of a firm. Total revenue is calculated
as follows :
Total revenue = Price × Quantity
Average Revenue:
Average Revenue (AR) : Average revenue
is the revenue per unit of output sold. It is
obtained by dividing the total revenue by
the number of units sold.
AR = TR / TQ
AR = Average Revenue
TR= Total Revenue
TQ =Total Quantity
Marginal Revenue:
Marginal Revenue: Marginal revenue is
the net addition made to total revenue by
selling an extra unit of the commodity.
MRn = TRn – TRn-1
MRn = Marginal revenue of nth unit
TRn = Total revenue of nth unit
TRn-1 = Total Revenue of previous units
n = Number of units sold
