Chapter 6: Supply and Demand

Demand curve

shows relationship between price and quantity demanded of a good during a certain period of time

Law of diminishing marginal utility

satisfaction decreases as additional units of a good is consumed within a given period

Law of demand

as the price of a good increases, the demand decreases

Supply curve

shows relationship between price and quantity supplied by a perfectly competitive firm during a certain period of time

Law of supply

as the price increases, the quantity of a good also increases

Marginal cost

additional cost of producing another unit

Market supply curve

shows total quantities of a good that suppliers are willing able able to provide at various prices during a period of time

Change in quantity supplied

change in price → sellers adjust quantity

Change in supply

change in overall supply

Long-run average cost (LRAC)

cost function that represents the average cost per unit for producing a good

Use of equipment

robots, assembly lines, etc

Diseconomies of scale

exist over range of output when LRAC increases

Increasing returns (to scale)

when output increases proportionately more than increases in all inputs

Decreasing cost firm

firm facing increasing returns to scale

Decreasing returns (to scale)

when output increases proportionately less than increases in all inputs

Increasing cost firm

firm facing decreasing returns to scale

Constant returns (to scale)

increase in output is equal to increase in input

Diminishing (marginal) returns

additional unit of input increases total input less than the previous unit of input → holds all other inputs constant

Increasing cost firm

faces decreasing returns to scale

Decreasing cost firm

faces increasing returns to scale