Learn: ECON 101 Chapter 3: Supply and Producer Choice

Individual Supply Curve

A graph of the quantity that a business plans to sell at each price, holding other things constant.

Law of Supply

The general tendency for the quantity supplied to be higher when the price is higher, holding other things constant.

Why is the individual supply curve upward-sloping?

Because higher prices make selling extra units more profitable, leading businesses to supply a larger quantity.

Perfect Competition

A market where all firms sell an identical good, and there are many buyers and sellers, each small relative to the market.

Price-Taker

A buyer or seller who takes the market price as given and follows along because they cannot affect the market price.

Four Core Economic Principles

The marginal principle, the cost-benefit principle, the opportunity cost principle, and the interdependence principle.

Marginal Principle

The idea that decisions about quantities are best made incrementally by breaking them into smaller marginal choices.

Cost-Benefit Principle

Evaluate the full set of costs and benefits of a choice, only pursuing actions where benefits are at least as large as costs.

Opportunity Cost Principle

The true cost of something is the next best alternative you must give up to get it.

Interdependence Principle

Your best choice depends on your other choices, others' choices, developments in other markets, and future expectations.

Marginal Benefit for a Competitive Firm

In a perfectly competitive market, the marginal benefit of producing an additional unit is simply the market price.

Variable Costs

Costs that vary with the quantity of output produced, such as raw materials and extra labour.

Fixed Costs

Costs that do not change when you vary the quantity of output produced, such as buildings and equipment.

Are fixed costs included in marginal cost?

No. Fixed costs pose no opportunity cost when expanding production and are irrelevant to marginal cost.

Rational Rule for Sellers in Competitive Markets

Sell one more item if the price is greater than or equal to the marginal cost.

Profit Maximization Rule for Sellers

Keep expanding production until price equals marginal cost.

Relationship Between Supply Curve and Marginal Cost Curve

A firm's individual supply curve is also its marginal cost curve.

Diminishing Marginal Product

Occurs when the extra output produced by an additional unit of an input declines as you use more of it.

Why do marginal costs rise as production increases?

Due to diminishing marginal product (bottlenecks) and rising input costs (like overtime pay or search costs).

Market Supply Curve

Plots the total quantity that the entire market (all producers combined) will supply at each price.

How is the market supply curve derived?

By adding up the individual supply curves of all potential suppliers in the market.

Two reasons why market supply slopes upward

Individual businesses supply larger quantities at higher prices, and higher prices attract more businesses into the market.

Shift in the Supply Curve

A movement of the entire supply curve caused by a change in a factor other than the product's own price.

Movement Along the Supply Curve

A change in the quantity supplied caused solely by a change in the product's own price.

Five Factors Shifting Supply (I, POET)

Input prices, Productivity and technology, Prices of related outputs, Expectations, and Type and number of sellers.

Substitutes-in-Production

Alternative goods that can be produced using the same resources; a price rise in one decreases the supply of the other.

Complements-in-Production

Goods that are typically produced together; a price rise in one increases the supply of the other (e.g., gasoline and asphalt).

Effect of Expectations on Supply

Expecting higher prices in the future for storable goods leads suppliers to decrease current supply by storing goods for later.

Effect of Firm Entry and Exit on Supply

New businesses entering shift market supply to the right; businesses exiting shift market supply to the left.

Which supply shifters affect individual vs market supply?

Input prices, productivity, related output prices, and expectations shift both individual and market supply; number of sellers shifts market supply only.