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Econ chapter 5
sections: 1, 2, 3
Terms in this set (39)
The Law of Supply
The higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.
Remains of extra products; companies always want to get rid of a surplus.
How does the Law of Supply work?
* Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price.
- The promise for increased revenues when prices are high encourages firms to produce more.
* rising prices draw new firms into a market & add to the quantity supplied of a good.
A Market Supply Schedule is a chart that lists how much of a good all suppliers will offer at different prices.
Market Supply Curve is a graph of the quantity supplied of a good by all suppliers at different prices.
Elasticity of Supply
Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.
An elastic supply is very sensitive to changes in price.
If supply is not very responsive to changes in price, it is considered inelastic.
What Affects Elasity of Supply?
- In the short run, a firm cannot easily change its output level, so supply is inelastic
- In the long run, firms are more flexible, so supply can become more elastic.
A Firm's Labor Decisions
* Business owners have to consider how the number workers they hire will affect their total production.
Marginal Product of Labor
is the change in output from hiring one additional unit of labor, or worker.
Increasing Marginal Returns
* Increasing marginal returns occur when marginal production levels increase with new investment.
returns occur when marginal production levels decrease with new investment.
returns occur when the marginal product of labor becomes negative.
is a cost that does not change, regardless of how much of a good is produced. Examples: rent & salaries
are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs.
equals fixed cost plus variable costs.
- EC + VC = TC
is the cost of producing one more unit of a good.
is the additional income from selling one more unit of a good. It is usually equal to price.
*To determine the best level of output, firms determine the output level at which marginal revenue is equal to marginal cost.
Why is labor an important question for firms?
An important question for firms is labor because firm owners have to answer how many workers to hire, they have to consider how the number of workers they hire will affect their total production.
What does the marginal product of labor measure?
Marginal product of labor measure the change in output at the margin, where the last worker has been hired or fired.
Why does a firm with diminishing marginal returns produce less and less?
A firm with diminishing marginal returns of labor will produce less and less output from each additional unit labor added to the mix and its workers must work with a limited amount of capital.
Is it possible to get negative marginal returns? why?
It is possible for a firm to get negative marginal returns because workers get in each other's way and disrupt the production process, so overall output decreases, therefore it becomes negative.
If the marginal cost of a good continues to increase, what reason would a firm have to continue that trend?
If the marginal cost of a good continues to increase, then a firm must continue that trend because it reflects diminishing returns to labor and specialization.
What is profit? How do you find the level of output with the highest profit? ( setting output)
Profit is defined as total revenue minus total cost to find the level of output where marginal revenue is equal to marginal cost.
What are operating costs? Why would a factory owner want to keep the factory open if it is losing money? (Shutdown Decision)
Operating Cost, is the cost of operating a facility. A factory owner would want to keep the factory open if it was losing money because if it was shut down, it would still have to pay all of its fixed costs.
Any change in cost of an input used to produce a good, such as raw materials, machinery, or labor will affect supply.
Technology lowers cost and increases supply at all levels ( shift to the right).
Government's Influence on Supply
The government can lower or raise production costs for domestic or foreign businesses in various ways:
A government payment that supports a business or market.
Excise tax or Sin tax
A tax on the production or sale of a good. Taxes are a way to increase cost and decrease the quantity produced (shift to the left).
Government intervention in a market that affects the production of a good. For example, pollution control and gas mileage standards for cars. These regulations increase cost and decrease the quantity produced ( shift to the left).
Supply in the Global Economy
A large portion of the goods we use are imported from other countries. Changes in those countries affect our supply and prices. For example, new technology in Japan.
Future Expectations of Prices
If a seller expects rising prices in the future, the seller may wait and sell more in the future. If inflation is expected, producers may hold on to their products rather than selling them for cash because the cash would lose its value due to inflation.
Number of Suppliers
If more suppliers enter a market to produce a certain good, the market supply will rise, and the supply curve will shift the supply curve to the left.
New Technology affects supply by...
Increasing supply at all price with it lowers costs.
The U.S. government subsidized such industries as...
farms and other produces.
An excise tax increases production costs by...
adding an extra cost for each item sold.
During periods of inflation, suppliers may temporarily withhold goods that can be stored for long periods because...
those goods can maintain their value.
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