Week 3 - Supply

Question 1

Define marginal cost

Answer 1

The marginal cost of supplying an additional unit of a good is the minimum amount a producer would need to be paid to supply it

Question 2

What is a pure exchange economy?

Answer 2

One where no production occurs and each agent is endowed with a bundle of commodities. The focus is on a single representative agent with 1 commodity.

Question 3

What is marginal cost in a pure exchange economy

Answer 3

If a consumer wats more, they purchase it by trading. Net supply is how much is sold. Supply is measured leftwards

Question 4

Explain increasing marginal costs

Answer 4

Higher production means more resources, which are scarce, are needed. These resources are increasingly more valuable elsewhere but are diverted to more more.

Technology displays diminishing marginal product of labour and since the producer is a price taker, every unit of l has diminishing returns. This implies there are increasing marginal costs.

Question 5

Difference between short and long run?

Answer 5

In the short fun, there are fixed (sunk) costs. In the long run all costs are variable.

Question 6

Formula for Total variable costs

Answer 6

TVC = Sum of marginal costs = area under the curve

Question 7

What is revenue?

Answer 7

The area above the curve of p *q

Question 8

What is producer surplus?

Answer 8

The area above the curve but beneath the price. The difference between the minimum they would accept and what consumers paid.

Question 9

What are 3 things that can cause supply to shift?

Answer 9

1) price of inputs
2) technology
3) destruction of capital stock (in the short run)

Question 10

Formula for Producer surplus

Answer 10

Revenue - total variable costs