Econ Ch. 3

What is marginal cost and benefit in the context of individual supply?

Marginal cost: cost of PRODUCING 1 more unit. Marginal benefit: $ that the business is demanding for one more unit.

What is bang for your buck?

Marginal product of an input/ price of input.

What does an upward sloping market supply curve reflect? (What is intensive and extensive margin)?

Intensive margin: The higher the price, the more each seller produces. Extensive margin: The higher the price, the more sellers enter the market.

What is the shutdown condition?

Shut down and produce nothing if your revenues do not exceed your recoverable(non-sunk) costs. DOES NOT MEAN TO SHUT DOWN IF YOU MAKE AN ECONOMIC LOSS. Shut down when (accounting costs - sunk costs) > revenue

What are the 5 factors shifting the market supply curve? Which ones shift individual supply curve and therefor shift market supply?*

1. Cost of your inputs(*) 2. Your productivity and technology(*) 3. Other opportunities., price of other outputs(*) 4. Expectations(*) 5. Number and type of sellers

What are the four steps to estimating market supply?

1. Survey possible suppliers and ask what quantity they would sell at each price(include those who aren't currently selling but could be) 2. Add up total quantity supplied for each price 3. Scale quantities supplied by survey respondents so that they represent the whole market. Multiple survey supplied by (size of market/size of survey) 4. Plot market supply curve (can be curved or straight line)

What is perfect competition?

All businesses in the market sell an identical product, all buyers and sellers are small relative to the market. Implies: you can sell whatever quantity you want at the market place. Follow the market price as a given.

Why do supply curves slope upward(what is increasing marginal cost)?

At some point, producing each additional item comes at a higher marginal cost than the previous item. Increase in variable inputs will (at some point) yield smaller increase in output.

How does rising input price cause marginal cost to rise?

Buying more of an input increases opportunity costs of that input. Search costs: harder to find that input. Transportation costs: buy it from further away Exhausted low cost suppliers: have to buy from high cost supplier.

What are fixed costs?

Costs that stay the same regardless of the quantity of output produced. ex. managers, buildings, etc.

What are variable costs?

Costs that vary with quantity of output produced ex. wages, oil, etc.

TRUE OR FALSE Marginal costs are always increasing.

FALSE There can be decreasing marginal cost (as a benefit of mass production. Eventually, there will be increasing marginal costs (because of diminishing marginal product and rising input costs).

What do individual supply curves show?

How much one company is willing to sell at each price.

What is the rational trade off rule?

Keep buying more labor as long as bang for your buck of labor is more than or equal to bang for your buck of capitol and other inputs.

What is the theory of marginal costs?

Keep selling until the price is equal to the marginal cost.

SHIFTER 5: NUMBER AND TYPE OF SELLERS How does it shift the market supply curve?

Number of sellers changes: doesn't shift individual supply, shifts market supply. More sellers means more market supply, vise versa.

What is an economic loss?

Occurs when economic costs are greater than revenues.

SHIFTER 2: PRODUCTIVITY AND TECHNOLOGY How do they shift the market supply curve?

Productivity increase: transforms inputs into outputs more efficiently, causing a decline in marginal cost. Technology: can produce same output with fewer workers, lowering marginal cost.

Why is marginal cost rising?

REASON 1: Diminishing marginal product. REASON 2: Rising input prices

What is marginal cost in the short run and long run? Which supply curve is steeper(which will supply smaller quantity at same price)?

Short run: Planning horizon over which some inputs can't be changed. ex. Labor, raw materials can be changed, refineries and firm can't be changed. Long run: Planning horizon over which all inputs can be changed. All costs can be adjusted. Short run supply curve is steeper.

SHIFTER 1: PRICE OF INPUTS How does price of inputs shift the market supply curve?

Rise in price of variable inputs causes a rise in marginal costs, yielding a decrease in supply.

What is the rational rule for sellers?

Sell another item if the price is more than or equal to the marginal cost.

SHIFTER 4: EXPECTATIONS AND SHORT/LONG RUN SUPPLY How do they shift the market supply curve?

Short run supply: selling today is a substitute for selling tomorrow. If price is expected to be high tomorrow, decrease supply today and increase supply tomorrow. Production does not equal supply(?) Long run: production today is a complement for producing tomorrow. If price is expected to be high tomorrow, increase production capacity today. Expected price changes shifts long run supply. Production does not equal supply(?)

SHIFTER 3: PRICE OF OTHER OUTPUTS What are substitutes and complements in production? How do they shift the market supply curve?

Substitutes in production: Alternate uses of your productive capacity. When price of one product decreases, it's more profitable to produce its substitute. ex: diesel and gasoline Complements in production: Jointly produced (by-products). When price of one product increases, it is more profitable to produce its complement(and therefore produce the original product). ex: vegemite and beer

TRUE OR FALSE Supply curves are always increasing.

TRUE Even if marginal cost curves slope down for a bit, supply curve is the upward sloping portion of a marginal cost curve.

What is the law of diminishing marginal product?

The marginal product of an input declines as you use more of that input. DOES NOT MEAN EXTRA INPUT REDUCES OUTPUT, JUST MEANS THE MARGINAL PRODUCT(EXTRA OUTPUT) WONT BE AS LARGE AS THE PREVIOUS UNITS WAS.

What is the law of supply?

The quantity supplied is higher when prices are higher.

Do individual supply curves slope upward or downward?

Upward.

What is your individual supply curve equivalent to?

Your marginal supply curve. Theory of supply = theory of marginal costs.

What is the producer theory?

Your production choices reflect a trade off between inputs. (?)