Supply

Question 1

Define Supply/Quantity supplied

Answer 1

The relationship between the amount of a good that producers are willing and able to sell at various prices

Quantity of a commodity that producers are willing to sell at a particular price at a particular time

Question 2

What are the determinants of supply?

Answer 2

• Price of the good
• Price of inputs used to make the good
• Price of related goods
• Expected future prices
• Number of other suppliers
• Technology

Question 3

What is producer surplus?

Answer 3

Difference between the price received for the good and the minimum supply price.

Essentially profit for the supplier. Economic revenue = total revenue - total cost

Question 4

Explain the Production Possibilities Frontier (PPF) and how it demonstrates efficiency/inefficiency

Answer 4

Tool used to demonstrate technical efficiency -> what combinations of output are achievable with the available resources.

Curve is concave to the origin.

If EFFICIENT -> (on the curve) there is a trade-off/opportunity cost in increasing the production of a good (the other would need to decrease), supply could only increase with technological improvement or more resources

If INEFFICIENT -> (within the curve) it is possible to produce more with the current resources

Question 5

What is a fixed input?

Answer 5

Does not vary with the level of output.

Eg. buildings, machine

Question 6

What is a variable input?

Answer 6

Varies with the level of output.

Eg. medication, needles, personnel time

Question 7

Explain Short Run

Answer 7

A decision-making timeframe that within which at least one input can’t be varied (at least one input remains fixed).

Fixed costs remain constant while variable costs increase with production

Average costs increase with production

Question 8

Explain Long Run

Answer 8

A decision-making timeframe over which quantities of all inputs to production can be varied.

All inputs variable (those classified as fixed and variable)

Average costs decrease with production, but will tend to increase at some point in time (AC curve is U-Shaped)

Question 9

Define economies and diseconomies of scale

Answer 9

Economies of scale – the conditions under which long-run average cost decreases as output increases.
MCAC = Diseconomies of scale (Average cost rising)

*Generally referenced in regard to the long run

Question 10

Explain causes of trends in average cost in economies of scale

Answer 10

In the short run:

• Specialisation causes increasing returns to factor (better use of resources)
• Spreading of fixed costs

In the long run:

• Specialisation causes increasing returns to scale
• Spreading of fixed costs
• Decreasing factor prices

Question 11

Explain causes of trends in average cost in diseconomies of scale

Answer 11

In the short run:
- Decreasing returns to factor

In the long run:

• Decreasing returns to scale (due to bureaucracy, organisational constraints)
• Increasing factor prices (can be due to scarcity)

Question 12

What is the cost function?

Answer 12

Relationship between total cost and output

Question 13

What is the production function?

Answer 13

Relationship between inputs and outputs

Question 14

What is marginal product?

Answer 14

Extra output gained for each additional input

Question 15

What is marginal cost?

Answer 15

Change in total cost as each additional output is produced

Question 16

What is marginal productivity?

Answer 16

The relationship between marginal product and output.

Output is maximised when the ratio of marginal productivity to cost of input is the same for all inputs.

Question 17

What is the marginal cost curve?

Answer 17

The relationship between marginal cost and output.

Always intersects with average cost curve at its minimum (point of most efficient production). Comparison with average cost curve allow diagnosis of economies of scale.

Question 18

Explain how supply differs from a simple model in the context of health care

Answer 18

• Assumes profit maximisation
• Large amount of government intervention (not a free market) – subsidies, regulation, public finance
• Healthcare is heterogenous – outputs can’t be objectively measured as healthcare not a homogenous product so difficult to measure inputs and outputs
• Delivered by professionals – provision of healthcare guided by training, ethical codes, regulations