Microeconomics Chapter 3: Supply and Consumer Choice

Individual Supply

What you sell at each price.

Individual Supply Curve

A graph plotting the quantity of an item that a business plans to sell at each price

Individual

One business

Supply

Examining selling decisions

Curve

Graphing

The Law of Supply

As the price rises, the quantity supplied rises.

How do supply curves shift?

Upwards (“supply to the sky”/”demand to the ground”)

Ceteris Paribus

Holding all factors constant.

Marginal Principle

Break down the question of “how many” into a series of smaller marginal choices.

Cost-benefit Principle

For each marginal choice, seek the additional unit if the benefit exceed the costs.

Opportunity Cost Principle

Ask “Or what?” Always make a comparison to the next best alternative.

Interdependent Principle

Everything is connected.

Rational Rule for Sellers in Competitive Markets

sell one more unit if the price is greater than (or equal to) the marginal cost.

keep producing until price = marginal cost

Marginal Product

The increase in output that arises from an additional unit of an input.

Diminishing Marginal Product

Marginal product of an input declines as you use more of that input

Market Supply Curve

A graph plotting the total quantity of an item supplied by the entire market, at each price.

What are is the four-step process when estimating market demand?

1. Survey suppliers

2. For each price, add up the total quantity supplied by all sellers

3. Scale up

4. Plot the total quantity supplied at each price

Movement Along The Supply Curve

A price change causes a movement from one point on a fixed supply curve to another point on the same curve.

Change in the Quantity Supplied

the change in quantity associated with movement along a fixed supply curve.

Increase in Supply

A shift of the supply curve to the right.

Decrease in supply

A shift of the supply curve to the left.

What are the 5 factors that shift the market supply curve?

1. input price

2. productivity and technology

3. prices of related goods

4. expectations

5. the type and number of sellers

Productivity Growth

Producing more output with fewer inputs

Complements-in-production

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises. (Donut holes are a byproduct of donuts)

Substitutes-in-production

Alternative uses of your resources. Your supply of goods will decrease if the price of a substitute-in-production rises.

Does a change in price shift supply?

No

Movement in Supply Curve

If the only thing changing is the price of the good itself, then you are thinking about a movement along the supply curve. This is a change in the quantity supplied.

Shift in Supply Curve

When other factors change you need to think about a shift in the supply curve (five factors). This is a change in supply itself.