Unit 2.3 - Competitive Markets: Demand and Supply - Supply

Question 1

Supply

Answer 1

Of an individual firm, indicates the various quantities of a good/service a firm is willing and able to produce and supply to the market for sale at different possible prices during a particular time period, ceteris paribus.

Question 2

What is the supply curve’s shape?

Answer 2

Upward sloping line

Question 3

The law of supply

Answer 3

There is a positive relationshiop between the quantity of a good supplied over a particular time period and its price. As the price of a good increases, the quantity of the good supplied also increases and vice versa.

Question 4

Market supply

Answer 4

The sum of all individual firms’ supplies for a good

Question 5

What is market supply equal to?

Answer 5

Supply of firm a + supply of firm b + supplies of other firms in market = market supply

Question 6

What does the vertical supply curve tell us?

Answer 6

Even as price increases , the quantity supplied cannot increase. The quantity supplied is independent of price

Question 7

What is one reason for the vertical supply curve? Hint time

Answer 7

There is a fixed quantity of the good supplied because there is no time to produce more of it. ex theatre tickets because no matter the price the number of seats cannot be increased.

Question 8

What is another reason for the vertical supply curve? Hint rarity

Answer 8

There is a fixed quantity of the good because there is no possibility of ever producing more of it . Ex original antiques

Question 9

What happens to the supply curve with a change in non-price determinants?

Answer 9

A shift of the entire curve.

Question 10

What does a rightward shift indicate

Answer 10

More is being supplied

Question 11

What does a leftward shift indicate

Answer 11

Less is being supplied

Question 12

How do changes in costs of factors of production impact supply.

Answer 12

An increase in the cost of a factor price means there will be an increase in production costs. Production thus becomes less profitable and the firms produce. The supply curve shifts leftward.
If the price of a factor falls, there is a decrease in production costs. Production thus becomes more profitable and the firm produces more. The supply curve shifts rightward.

Question 13

Technology

Answer 13

A new improved technology lowers costs of production, thus making production more profitable. Supply increases and the supply curve shifts rightward

Question 14

What is Competitive supply?

Answer 14

Of two or more goods refers to the production of one or the other. The goods compete for the use of the same resources and producing more of one means producing less of the other.

Question 15

Prices of related goods: Competitive supply

Answer 15

A farmer who can grow wheat or corn chooses to grow wheat. If the price of corn inceases the farmer may switch to production as this is now more profitable. This results in a fall of wheat supply and a shift of the supply curve leftward.

Question 16

What is joint supply?

Answer 16

Of two or more goods refers to the production of goods that are derived from a single product , so that it is not possible to produce more of one without producing more of the other

Question 17

Prices of related goods: Joint Supply

Answer 17

An increase in the price of one leads to an increase in its quantity supplied and also to an increase in supply of the other joint product(s).

Question 18

Producer/firm price expectations

Answer 18

If firms expect the price of their product to rise, they may withold some of their current supply from the market, expecting that they would be able to sell it for a higher price in the future. Thus there is a decrease in supply and a leftward shift of the supply curve.

Question 19

Taxes

Answer 19

Firms treat taxes as if they were costs of production. Therefore an imposition of a new tax of the increase of an existing tax represents an increase in production costs, so supply will decrease and the supply curve shifts left.

Question 20

What is a subsidy

Answer 20

A payment made to the firm by the government and so has the opposite effect of a tax.

Question 21

Subsidies impact

Answer 21

The introduction of a subsidy or the increase of an existing one represents a fall in production costs thus resulting in a rightward shift of the supply curve

Question 22

The number of firms

Answer 22

An increase in the number of firms results in a rightward shift of the curve because there is an increase in the number of firms producing the good increasing supply.

Question 23

Shocks

Answer 23

Weather conditions in the case of agriculutural products, war or natural/man made disasters.

Question 24

Movement vs Shift

Answer 24

Any change in price produces a change in the quantity supplied thus a movement up or down the curve. Any change in a non-price determinant of supply produces a change in the supply and thus a shift of the entire curve right - increase- or left - decrease.

Question 25

Law of diminishing marginal returns - What is the long run?

Answer 25

A time period when all inputs are variable. The inputs can be changed. In the long run the firm has no fixed inputs, they are variable

Question 26

Law of diminishing marginal returns - What is the short run?

Answer 26

A time period during which at least one of the input is fixed and cannot be changed by the firm. Fixed means unchanging in quality and quantity. As long as one input is fixed the firm is operating in the short run.

Question 27

Total product

Answer 27

The total quantity of output produced by the firm

Question 28

Marginal product

Answer 28

extra or additional output produced by one additional unit of a variable input.

Question 29

The law of diminishing marginal returns

Answer 29

As more and more units of a variable input are added, marginal product of the varibale input at first increases, but there is a point when it begins to decrease This relationship presupposes that the fixed input(s) remain fixed and that the technology of the production is also fixed.

Question 30

Marginal costs

Answer 30

The extra or additional cost of producing one more unit of output

Question 31

Relationship between marginal costs and diminishing marginal returns

Answer 31

When marginal product increases, marginal costs decreases. When marginal product is at its maximum marginal costs is at its minimum. When marginal product falls, maginal cost increases.

Question 32

Reason for relation of marginal cost and marginal product

Answer 32

At low levels of output the marginal product of labour increases. Since workers add to the costs and and each worker prosuces more and more output, the cost of producing each additional unit falls. Conversely when the marginal product becomes less and less the marginal cost - cost of each extra unit priduced - must be increasing