Chapter 6 Supply and Marginal Cost
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