ECON TEST #3
Change in quantity supplied
change in the amount for sale in response to a price change: movement along the supply curve
Profit-maximizing quantity of output
level of production where marginal cost is equal to marginal revenue
Law of Supply
principle that more will be offered for sale at higher prices than at lower prices
Why is it necessary to know fixed, variable, and total costs to determine marginal revenue than average revenue?
Total costs can be determined by adding up the variable and fixed costs. Marginal cost is the change in total cost brought about by adding one unit of input.
What is the difference between marginal revenue and total revenue?
Total revenue is all the revenue a company receives. Marginal revenue is the extra revenue received from selling one more unit.
Why do supply and demand curves slope in opposite directions?
They slope in opposite directions because high prices cause the supply to go up. But high prices cause the demand to go down.
Short run
production period so short that only variable inputs (usually labor) can be changed
E-commerce
electronic business or exchange conducted over the internet
Marginal Cost
extra cost of producing one additional unit of production
Marginal revenue
extra revenue from the sale of one additional unit of output
Overhead
Broad category of fixed costs that includes interests, rent, taxes, and executive.
Why don't economists consider the effects of changes to technology when focusing on the short run?
Changes in technology cannot be made quickly, so they do not affect production in the short run.
Marginal products
Extra output due to the addition of one more unit of input
Using your notes, explain the relationship between costs and revenue.
If costs exceed revenue, the company loses money. If costs and revenue are equal, the company breaks even but does not earn a profit. It's necessary to find a balance in which revenue exceeds the cost to achieve a profit.
When does marginal product equal total product?
Marginal product equals total product with the first worker.
Assume that you own a food truck specializing in hamburgers and hot dogs. The opportunity has arisen to operate at the local minor league ballpark this summer. All vendors at the park charge twice as much as you do now. How will supply elasticity affect the price you'll charge and the quantity of burgers and hot dogs you can serve? How many people will you hire to help you? Explain the basis for your decisions.
Supply elasticity affects how much food can be prepared and at what price, as well as the limits of work space and appliances for food preparation in a food truck will limit the number of employees that can be hired.
How many burritos will the producer supply at the price of $1? In your opinion, what is the reason for that quantity?
The producer would supply no burritos at $1. Either the producer would not make enough profit at that price, or sell at a loss.
Average revenue
average price that every unit of output sells for
Total revenue
total amount earned by a firm from the sale of its products; average price of a good sold times the quantity sold
Total product
total output or production by a firm
What might happen to make a producer decrease his or her supply of a product?
A decrease in supply may be caused by an increased cost in resources; low worker productivity; adjustments to new technology; high taxes; few or no subsidies; increased government regulations; a reduction in the number of sellers; fearful expectations.
What is the difference between a fixed cost and a variable cost?
A fixed cost does not change regardless of how much a business produces. A variable cost changes as the business produces more, highers more workers, or cuts back on production.
Supply Curve
A graph that shows the quantities supplied at each and every possible price in the market
How can a manager use the production function to decide whether to add an input to increase production?
A manager can use the production function to see the effect of adding or subtracting one variable input on the total output. As a result, the manager can determine if that will increase or decrease profitability, or keep it the same.
Why do most firms operate in Stage II of the stages of production?
Although adding each input produces less output than the previous input, a state of diminishing returns, the firm continues to produce more total output.
Supply
Amount of a product a producer or seller would be willing to offer for sale at all possible prices in a market at a given point in time.
What cost advantage does e-commerce offer businesses?
An e-commerce business does not require a physical store or any of the other fixed costs of a traditional store, so its fixed cost and break-even point are even lower.
Why is marginal product an important concept for business owners to understand?
As long as marginal product continues to rise, the business is operating profitably.
Imagine that a friend operates her own business performing live music at weddings. If the price she can charge for her performances increases, will she do more performances or fewer? Why?
As price increases, so does supply. Therefore, the performer will probably play at more weddings.
Producers want to get the best price for their product? Producers want to get the best price for their product. What stops them from charging the highest price possible?
As shown in the previous chapter, consumer demand tapers off at higher prices for most products.
Production function
Graphic portrayal showing how a change in the amount of a single variable input affects total output
How can the stages of production be used to determine the most profitable number of workers to hire?
In Stages I and II, each additional worker hired continues to add to production, although returns are diminishing in Stage II. At Stage III, adding employees causes negative marginal returns.
Stages of production
Phases of production that consist of increasing, decreasing, and negative returns
Use your notes to identify the costs of producing a product.
Production costs include the costs of land, labor, capital, technology, taxes, and government regulations.
Quantity Supplied
Specific amount offered for sale at a given price: point on the supply curve
Market Supply Curve
Supply curve that shows the quantities offered at various prices by all firms that sell the same product in a given market
Explain in your own words the term Law of Supply.
The Law of Supply means suppliers will normally offer more for sale at high prices and less at lower prices.
Total cost
sum of variable cost plus fixed cost; all costs associated with production
Using your notes, explain why a manager needs to know both total product and marginal product when making business decisions.
A business manager wants to maximize the total product. To do that efficiently, he or she must know how adding each extra unit of input affects marginal products and thereby how it contributes to total product.
Supply Schedule
A table showing the quantities that would be produced or offered for sale at each and every possible price in the market at a given point in time.
Imagine that several large new electric power supplies have been developed in your region, putting a greatly increased quantity of electricity on the market. Describe what happens to a supply curve for electricity.
As the quantity of a product increases, the supply curve shifts to the right.
What is the difference between average revenue and marginal revenue?
Average revenue is the average price of each unit of output. Marginal revenue is the extra revenue received from the production and sale of one additional unit of output.
Why is it more important for a manager to know marginal revenue than average revenue?
Average revenue is the average price that every unit of output sells for. Marginal revenue is the extra revenue gained by producing one additional unit of output, which tells the manager whether to increase or reduce production or to maintain current production levels.
Why does a normal supply curve always increase, from left to right, on a supply graph?
In almost every situation, a supplier will produce more goods as the price for goods increases.
How is the elasticity of supply affected by the way a product is produced?
It depends on the type of product. If a company can adjust production to new prices quickly, then there is elasticity of supply. If the company cannot make production adjustments quickly, then the supply is likely to be inelastic.
An entrepreneur has purchased rights to produce and sell an innovative new product. She has limited start-up funds for the business. Should she open an e-business or a traditional store? Explain your answer.
The cost of setting up an e-business is much lower than operating a traditional store. As a result, the break-even point will be reached sooner, allowing the entrepreneur to conserve her start-up funds.
A business manufacturer has continues producing bicycles until the marginal cost reached $200, at which marginal revenue also reached $200. What would be the effect of producing an additional bicycle? Explain.
The manufacturer would either make the same or less profit because the point where marginal cost equals marginal revenue represents the point of maximum profit.
Fixed costs
costs of production that do not change when output changes
Change in supply
different amounts offered for sale at each and every possible priced in the market; shift of the supply curve
Subsidy
government payment to encourage or protect a certain economic activity
Variable Cost
production cost that varies as output changes; labor, energy, raw materials
break-even point
production level where total cost equals total revenue; production needed if the firm is to recover its costs
Long run
production period long enough to change amount of variable and fixed input used production
Supply elasticity
responsiveness of quantity supplied to a change in price
Diminishing returns
stage of production where output increases at a decreasing rate as more units of variable input are added.
