Chapter 3: Supply and Producer Choice

Individual supply curve

A graph plotting the quantity of an item that a business plans to sell at each price/shows how plans vary with price

Market supply curve

A graph plotting the total quantity of an item supplied by the entire market, at each price

Movement along the supply curve

A price change causes a movement from one point on a fixed supply curve to another point on the same curve

Substitutes in production (supply)

Alternative uses of your resources- your supply of a good will decrease if the price of a substitute in production increases (ex. You're a farmer with machinery, thinking about growing corn or wheat. Price of corn rises, so now corn is more attractive to grow. Quantity of corn supplied rises, supply of wheat decreases)

Diminishing marginal product can occur in the long run because despite being able to increase all inputs, adding them won't produce...

As much extra output (marginal costs rise)

Rational rule for sellers in competitive markets

Sell one more unit if the price is greater than (or equal to) the marginal cost (keep producing until Price=Marginal Cost)

Rising marginal costs explain why the ____ curve is ______ sloping.

Supply; upward

What is the shortcut to use if suppliers are similar (when estimating market supply)?

Suppose there are 100 other oil refineries that are making the same supply decisions as BP. Then, at any given price, the quantity supplied will be 100 times the quantity that BP supplies.

Law of Supply

Tendency for quantity supplied to be higher when the price is higher (implies that supply curve slopes upward)

Change in the quantity supplied

The change in quantity associated with movement along a fixed supply curve

Supply summarizes the ___ at which you are willing to ____ each quantity. The price you are willing to sell each unit for is informed by the _______ _____ of producing that unit. Thus, the _____ ____ and _____ curves are one and the same.

price; sell; marginal cost; marginal cost; supply

Marginal Product

the increase in output that arises from an additional unit of input, like labor

Shift versus movement along supply curve

- If the only thing changing is price of good itself; movement along supply curve (change in quantity supplied) - When other factors change, you need to think about shift in supply curve (recall the five factors-- change in supply itself)

Name the two reasons the market supply curve is upward-sloping.

1. Because the market supply curve is made from adding up individual supply curves at each price, it inherits many of the same characteristics (remember the Law of Supply) 2. A higher price means that it's more profitable to be a supplier in that industry. Current suppliers produce more units, new suppliers enter the market. Lower prices mean that it's less profitable to be a supplier.

Five factors that shift the market supply curve (IPPET)

1. Input prices 2. Productivity and technology 3. Prices of related outputs 4. Expectations 5. Type and number of sellers

You can use the same four-step process you used when estimating market demand to estimate market supply. What are the four steps?

1. Survey suppliers (and potential suppliers) 2. For each price, add up the total quantity supplied by all sellers 3. Scale up 4. Plot the total quantity supplied at each price

Shift in the supply curve

A change in the quantity supplied of a good or service at any given price-- represented by the change of the original supply curve to a new position, denoted by a new supply curve (increase in supply: shift right; decrease in supply: shift left)

Variable costs

Costs (like labor/raw material) that vary with the quantity of output you produce (e.g. buying more crude oil, paying workers overtime, etc.)-- marginal costs= additional variable costs

Fixed costs

Costs that don't vary when you change the quantity of output you produce (ex. CEO salary, land building is on, equipment used, etc.-- you pay these costs regardless of whether you expand production or not/irrelevant to marginal cost)

T or F: A change in price shifts the market supply curve.

F

Complements in production (supply)

Goods that are made together-- your supply of a good will increase if a price of a complement in production rises (ex. Donut holes are a byproduct of donuts, they're made together!)

Supply Shifter 5: Type and # of Sellers

If new sellers enter the market, total quantity supplied at each price increases (SC shift right); if sellers exit the market, total quantity supplied at each price decreases (SC shift left)

Technological change

Invention and adoption of new types of machinery, processes, or improved management techniques

If price is equal to marginal cost, then your supply curve is identical to your ______ _____ curve.

Marginal cost

Diminishing marginal product

Marginal product of an input declines as you use more of that input; can occur in the short run when some of your inputs are fixed

perfectly competitive market

Markets in which 1) all firms in an industry sell an identical good and 2) there are many buyers and sellers, each of whom is small relative to the size of the market

Productivity growth

Producing more output with fewer inputs; often driven by technological change

Supply Shifter 2: Productivity and Technology

Productivity growth reduces MC of production, such that sellers are more willing to supply at any given price (ex. supply increases)

Supply Shifter 1: Input Prices

To produce any given good or service, many inputs will be used in the production process (ex. To produce an iPhone, one needs to purchase various raw materials, as well as machinery and labor. imagine price of one of these inputs rose. Because this input costs more, it is now more costly for you to produce iPhones; your MC of production rose, meaning you're less willing to supply it at any given price)

Marginal costs include _____ costs but exclude ______ costs.

Variable; fixed

The effect of changing the price of a related output depends on:

Whether the two products are complements or substitutes in production

Supply Shifter 3: Prices of Related Outputs

Your choices as a supplier are also interdependent across different outputs as there are many different lines of business in which you could engage

Supply Shifter 4: Expectations

Your decisions are linked through time. If you expect the price of your product to rise next year, then you want to store your product to sell next year (at the high price, assuming your product is storable). Your current supply will decrease (supply shift to left) and your supply next year will increase (supply shifts to the right)

Ceteris Paribus + Individual Supply Curve

a Latin phrase that means "all other things held constant"-- each time you draw an individual supply curve, you're drawing this person's selling plans holding other things constant

Individual supply curves are the building blocks of _____ _____

market supply

A change in price causes a _____ along the ____ curve, yielding a change in the ____ supplied.

movement; supply; quantity

Rising input costs also lead to..

rising marginal costs (ex. need to offer higher wages to attract more workers)