Chapter 6 Supply and Marginal Cost

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Law of Diminishing Returns

As increasing amounts of a variable factor of production are added to one or more fixed factors of production, the marginal product of the variable factor eventually declines

Law of Supply

OTE, the lower the price of a product, the smaller the quantity supplied; the higher the price of a product, the larger the quantity supplied

Marginal Cost

The addition to total cost of producing an additional unit of output; in general, the change in total cost divided by the change in output

Marginal Benefit

The additional benefit, in terms of the objectives, of the next unit of an activity

Marginal Product of Labor

The additional output produced by hiring one more unit of labor, holding all other factors of production constant

Marginal Revenue

The increase in TR from selling one more unit of output; equal to price for a competitive firm

Momentary run

The period of time during which output is set and a supply response is impossible

Market Supply Schedule

The total quantity that all firms in the market are willing and able to supply at each price, OTE; the sum of the individual firm's supply schedules

Determinants of Supply Elasticity

the characteristics of production technology Substitutability in production The amount of excess capacity in the industry Passage of time

Individual Firm's Supply Schedule

The quantity that the firm is willing and able to supply at each price, OTE

Supply rule for Maximizing Profit

A competitive firm should produce the output at which price (MR) equals MC

Marginal Cost Curve

A graphical representation of marginal cost, showing at each output the addition to total cost, of producing an additional unit of output

Individual Firm's Supply Curve

A graphical representation of the individual firm's supply schedule, showing the quantity the firm is willing and able to supply at each price, OTE

Market Supply Curve

A graphical representation of the market supply schedule, showing the total quantity that all firms in the market are willing and able to supply at each price, OTE; equal to the horizontal summation of the individual firms' supply curves; also called the industry supply curve

Price Elasticity of Supply

A measure of the responsiveness of quantity supplied to a change in price along a supply; specifically, the percentage change in quantity supplied divided by the percentage change in price

Change in Quantity Supplied

A movement along the supply curve as price changes, OTE

Long Run

A period of time long enough that the firm is able to vary all factors of production and firms can enter or leave the industry

Short Run

A period of time short enough that at least one factor of production remains fixed and long enough that at least one factor is variable

Change in Supply

A shift in the entire supply curve


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