Supply and Demand

Question 1

Fixed cost

Answer 1

Cost that does not depend on output

Question 2

Variable cost

Answer 2

Cost that depends on output

Question 3

Average cost

Answer 3

Total cost divided by output level

Question 4

Marginal cost

Answer 4

The cost of one additional unit

Question 5

Total cost

Answer 5

Sum of fixed and variable cost

Question 6

What can a firm decide with average cost?

Answer 6

Whether to produce at all

Question 7

What can a firm decide with marginal cost?

Answer 7

How much to produce

Question 8

Increase output level if…

Answer 8

P>MC

Question 9

Decrease output level if…

Answer 9

P<MC

Question 10

Optimal output level

Answer 10

P=MC

Question 11

Fixed costs in the short run

Answer 11

Sunk cost
> Accept price as low as minimum of AVC

Question 11

Fixed costs in the long run

Answer 11

Have to be paid over and over again
> Only accept price as low as minimum of AC

Question 12

Supply curve

Answer 12

For a given price, the supply curve corresponds to the output level that the firm is willing to supply

Question 13

Inverse supply curve

Answer 13

For a given out put level, the inverse supply curve corresponds to the lowest price such that the firm is willing to supply that level

Question 14

Market supply

Answer 14

Sum all individual firm’s supplies

Question 15

Demand curve

Answer 15

gives the quantity demanded for a given price

Question 16

Inverse demand curve

Answer 16

gives the price for a given demand

Question 17

Demand function

Answer 17

gives quantity demanded for a given price and in addition to price, includes other factors
influencing quantity demanded (e.g., income, other prices)

Question 18

Market demand

Answer 18

Sum of all individual’s demands

Question 19

Reasons for market demand increase after price decrease

Answer 19

1. Individual buyers increase demand
2. New buyers enter the market

Question 20

Production function

Answer 20

gives the output level for a given cost

Question 21

Cost function (inverse production function)

Answer 21

gives the lowest cost required for a given output level