ECON: Chapter 3: Supply: Think Like a Buyer
diminishing marginal product=
the marginal product of an input declines as you use more of that input
the market supply curve is the _____ _____ of the individual supply curves of all firms in that market
horizontal sum
market supply curves obey the
law of supply
as you calculate marginal cost...
make sure that it reflects only the variable costs - exclude all fixed costs
individual supply curve:
A graph plotting the quantity of an item that a business plans to sell at each price. - holds other things constant
variable cost=
costs that vary with the quantity of output you produce - ex: labor and raw materials
why a supply curve may slope upward
because of increasing marginal costs
a simple rule of thumb
- when price changes, movement along the supply curve - when other factors change, shifts in the supply curve
market supply curve=
a graph plotting the total quantities of an item supplied by the entire market, at each price
what causes a movement along a supply curve
a price change causes movement from one point on a fixed supply curve to another point on the same curve
an decrease in supply shifts the curve
to the left
an increase in supply shifts the curve
to the right
why the marginal costs of producing and extra unit rises
1. diminishing marginal production leads to rising marginal costs 2. rising input costs also lead to rising marginal costs
4 steps to estimating market supply
1. survey your sellers, find quantities supplied at each price 2. add up total quantity supplied for each price 3. scale quantities to represent entire market 4. plot total quantity supplied at each price - this gives you the market supply curve
the supply curve is upwards sloping
because of increasing marginal costs
fixed cost=
costs that don't vary when you change the quantity of output you produce - ex: equipment lease or building rent
supply shifter 5: type and number of sellers
if new businesses enter the market, supply increases - entry and exit of businesses are driven by expected future profits, so any factor that changes that decides the number of suppliers in the market
supply shifter 4: expectations
if you expect the price of your products to rise next year, you can increase your profits by storing them and selling them next year - this decreases your supply this year
perfectly competitive firms are
price takers that follow the market price
supply shifter 2: productivity and technoloy
productivity growth: growth that occurs when businesses figure out how to produce more output with fewer input - often driven by technological change - ex: invention of new machinery or new management techniques
supply shifter 3: prices of related outputs
supplier's decisions are interdependent becaue there are many lines of business you can engage in - substitutes-in-production: alternative uses of your production capacity - complementary-in-production: goods that are made together
law of supply:
the tendency for the quantity supply to be higher when the price is higher - upwards sloping, higher price means higher quantity
for market supply curves, the total quantity supplied is higher when the price is higher for 2 reasons
1. a higher price leads individual businesses to supply larger quantity 2. higher price means more businesses are supplying their goods and services
2 things that must be true for a perfectly competitive market
1. all firms in the market are selling an identical good 2. there are many buyers and sellers in the market and each firm gets a fair share of buyers
5 factors that shift supply curves
1. input prices - input is a good that is used to produce another good 2. productivity and technology 3. prices of related outputs 4. expectations 5. the type and number of sellers
price taker=
someone who decides to charge the prevailing price and whose actions do not affect the prevailing price
market supply=
sum of the quantity supplied by each seller
supply shifter 1: input prices
when suppliers change the prices of your inputs, they change your marginal costs - ex: wages paid to a worker
