Supply Flashcards
How do we distinguish between different types of firms?
Competition
How do you measure competition?
The availability of substitutes
How do you calculate accountant profit?
Total revenue - total cost
How do you calculate total revenue?
P*Q
How do you calculate total cost?
wages + rent + interest
How do you calculate economic profit?
Total revenue - total OPPORTUNITY cost
How do you calculate total opportunity cost?
wages + rent + interest + opportunity cost
What do you do if economic profit is 0?
You stay in the market, this is called normal profit.
What is normal profit?
The minimum amount required to stay. TR = TC
What is it called if economic profit is greater than 0?
Abnormal profit
Supernormal profit
Excess profit
Economic rent
Do we always look at total revenue?
No we don’t like to look at total so we look at marginal revenue and marginal cost.
What is marginal revenue?
The extra revenue you receive for each extra unit consumed or supplied.
MR =
MR = ∆TR/∆Q
so MR = ∆P*Q/∆Q the ∆Q cancel out
so MR = P
When P>MC?
Stay
When P=MC?
Stay
When P
Out
When price increases what happens to quantity supplied?
Quantity supplied increases
What is quantity supplied?
The number of units you are willing to supply at a given price.
What is the relationship between P and Qs?
There is a positive relationship between P and Qs. (Law of supply)
What is the law of supply?
The law of supply means there is a positive relationship between price and quantity supplied, Ceteribus peribus.
Other names of the supply curve?
MC
Opportunity cost
Willingness to accept
Minimum supply price
It also shows normal profit
How can you read the supply graph?
- The cost of the 10th unit is $5
- If the price is $5, u am willing to produce 10 units.
- The minimum amount I will accept for the 10th unit is $5.
Why are you willing to supply the 10th unit at $5, if the cost of the 10th unit is $5?
Because on the line you are making normal profit (0 profit) so you are not losing. The cost includes your opportunity cost.
What is the total cost on the graph?
The area below the supply curve.
What is the total revenue on the graph?
The total area below the graph and to the left of the graph.
What is the profit on the graph?
The TR - TC
So a + b - b
So a
This is abnormal profit
Factors that effect supply:
- Price of the good itself
- Price of related goods
- Expected future price
- Number of suppliers
- Cost of production
- Technology
What is the relationship between quantity supplied and the price of the good itself?
Positive. (Law of supply)
What is the relationship between quantity supplied and the price of the substitute in production?
Negative
If you increase the price of a car the quantity supplied of cars will increase so the supply of trucks will decrease.
What is a compliment in production?
A biproduct
Cows and leather for example
What is the relationship between quantity supplied and the price of compliments in production?
Positive
If the price of beef goes up the quantity supplied of beef goes up and the supply of leather increases
What is the relationship between quantity supplied and the expected future price?
Negative
If the expected future price goes up then the quantity supplied now will go down
What is the relationship between quantity supplied and the number of suppliers?
Positive, obviously.
More suppliers, more supply
What is the relationship between quantity supplied and the cost of production?
Negative
If the cost of production goes up you will produce less.
What is the relationship between quantity supplied and technology?
Positive
If technology improves you are able to supply more b
What do we look at with change in Qs?
Cause:
Change in the price of the good itself only
Graph:
It is shown as a movement along the graph
How is an increase in Qs shown on the graph?
Movement up to the right
How is decrease in Qs shown on the graph?
A movement down to the left.
What do we look at with change in S?
Cause:
A change in any other factors but price
Graph:
A shift of the entire supply curve
How do you know whether it is a movement or a shift?
If something on the axis changes it will cause a movement. If something not on the axis changes it will cause a shift.
How do you show a decrease in supply on a graph?
A shift up to the left
How do you show an increase in supply on a graph?
A shift down to the right
Where is E on a graph showing S and D?
Where S and D meet
Where are PE and QE on a graph showing S and D?
The level that price is at E
The level that Q is at E
When are we at equilibrium with PE and QE?
As long as market failure and government intervention are absent we are at E.
What is disequilibrium?
When we move away from E
Can excess demand/supply last?
Yes, with government intervention. If they place a price ceiling.
What happens when there is excess demand?
Consumers are unhappy so they bid up the price.
What does bidding up the price lead to?
Decrease in Qd (movement up left)
Increase in Qs (movement up right)
They are moving to E
What is it called when
Qs > Qd
Excess supply or surplus
How do you calculate surplus?
Qs - Qd
What happens when there is surplus?
Producers are unhappy so they bid down the price.
What does bidding down the price lead to?
Decrease in Qs (movement down left)
Increase in Qd
(movement down right)
What can bidding down lead to?
Government intervention - a price floor.
What is the relationship between (PE and QE) and demand?
There is a positive relationship.
What is the relationship between PE and QE and supply?
If there is a change in supply, QE will move in the same direction and PE will move in the opposite direction.
What happens when D and S change at the same time in the same direction?
QE will follow that direction and PE will be undetermined.
What happens when D and S change at the same time in opposite directions?
PE will follow the direction and QE will be undetermined.
How do you get from an individual demand curve to a market demand curve?
A market demand curve is a horizontal summation of individual demand curve.
How do you calculate consumer surplus?
The willingness to pay - the actual price
The area under the demand, above the price.
What is a substitute in production?
Two goods that are made of the same thing that the producer can switch to making.
