2.2 market-supply Flashcards
supply:
supply is the quantity of a good that firms are willing and able to produce at different possible prices, over a given period of time
law of supply
the relationship between price and quantity supplied is per period is direct(positive), meaning that if the price increases, then the quantity of good supplied per period will increase (ceteris paribus)
the producer is assumed to seem to maximise profits, thus assuming that a firm has fixed productive capacity, producing increasing quantities of a good becomes more and more difficult(costly). this is the result of the law of diminishing marginal returns and increasing marginal costs.
law of diminishing marginal return
states that as more and more units of a variable factor (usually labour) are used with a fixed factor (usually capital), there is a point beyond which total product will continue to rise, but at a decreasing rate, or equivalently, that marginal produce will start to decline.
marginal cost
marginal cost is the extra(additional) costs of producing one more unit of output
relationship between diminishing return and marginal cost -> cost of production
diminishing returns may cause marginal cost to fall initially as there are increasing marginal returns but eventually, when diminishing returns set in, the cost will start to rise. if an additional unit of labour leads to less and less additional output, more and more units will be required. it follows that the additional cost(marginal cost) of additional units will be increasing.
additional cost of producing more and more units is increasing, then a firm will be willing to offer more and more units only as a higher and higher price, thus more units will be offered per period only at a higher price, which reflects the direct relationship of the law of supply.
supply curve
the supply curve is a graph that shows the relationship between the price of a good and the quantity of the good supplied over a given period of time.
vertical axis: price
horizontal axis: quantity supplied
supply curve may be an individual firm’s supply curve or market.
non-price determinants of supply (6 examples)
are the factors other than the good’s own price that can affect supply. they are the factors that are assumed to be constant under the ceteris paribus assumption.
- changes in costs of factors of production (FOP)
- prices of related goods
- indirect taxes and subsidies
- expectations of future price changes
- changes in technology
- number of firms
how does change in cost of FOP affect supply
an increase in FOP(wages, raw material prices) will lead to a decrease in supply and to leftward shift of the supply curve
examples of FOP
land, labour, capital and entrepreneurship
how does price of related goods affect supply
if goods x and y are in joint supply, increase of one lead to increase of other thus rightward shift
joint supply(product or process that leads to two or more outputs)
if x and y are in competitive supply, an increase in price of y will lead to decrease in X, thus leftward shift
Competitive Supply. Goods in competitive supply are alternative products a firm could make with its resources.
competitive supply
Competitive Supply. Goods in competitive supply are alternative products a firm could make with its resources.
farmer has piece of land, either produce carrots or potatoes
joint supply
Joint supply is an economic term referring to a product or process that can yield two or more outputs. Common examples occur within the livestock industry: cows can be utilized for milk, beef, and hide. Sheep can be utilized for meat, milk products, wool, and sheepskin.
movement along supply curve
when the price of the good changes
shift of supply curve
when any of the non price determinants of supply changes
supply schedule
a table that shows teh qty supplied of a good or service at different prices
