Supply: Thinking Like a Seller Flashcards
What is supply?
Supply is the willingness and ability for a producer to place there goods and services onto the market at a prevailing price in a given period of time
Explain the upward slopping supply curve?
As the quantity supplied for a good/or service increases then the price increases
What are the 5 characteristics of a perfectly competitive market?
Sell homogenous goods
Many buyers and sellers
Freedom of entry and exit into the market
Perfect knowledge
Price takers - accept the prevailing price which is based of the interaction of demand and supply
Apply the marginal principle to a supply decision
‘Should I buy one more’
Apply the cost-benefit principle to a supply decision
The decision to buy an extra unit is dependant on the marginal benefits and costs. MB > MC, then buy
Apply the opportunity cost to a supply decision
Compare costs of producing another extra unit of a good/or service or not producing. How else are you using the resources or what are you sacrificing
What do marginal costs include and exclude?
Includes variable costs and excludes fixed costs
What is the difference between fixed and variable costs? + examples
Variable costs are costs that change directly with output, e.g. labour/raw materials
Fixed costs are costs that do not vary with output and remain constant, e.g. rent
Apply interdependence principle to a supply decision
For now, neglect other factors - hold them constant
What is the rational rule for sellers in a competitive market?
Sell one more item if the price (MB) is greater than or equal to the marginal cost.
What is the profit maximisation point?
MR = MC
Why is the supply curve upward sloping?
As you increase the QS of a goos, the MC of producing that extra unit increases because of DMP. The law of DMP states that adding more units of a variable input to a fixed output, increases output at first. However, after a certain number of inputs are added, the marginal products begin to decrease.
What is market supply? + formula
Market supply is the sum of the quantity supplied by each individual seller. Individual supply x no of sellers
What causes movement along the supply curve?
Price
What 4 factors shift the individual and market supply curves?
Input prices, productivity, prices of related outputs (substitutes and compliments in production), expectations
