Chapter 5 Terms and Questions

Chapter 5: Supply

Identifications

• Supply

  • Definition: The amount of a product offered for sale at all possible prices in the market.

• Law of Supply

  • Principle: Suppliers generally offer more for sale at higher prices and less at lower prices.

• Supply Schedule

  • Description: A listing of quantities of a product offered at all possible prices.

• Supply Curve

  • Definition: A graph showing the quantities supplied at every price possible in the market.

• Market Supply Curve

  • Description: The supply curve indicating quantities offered at various prices by all firms in a given market.

• Quantity Supplied

  • Definition: The amount producers bring to market at any specific price.

• Change in Quantity Supplied

  • Explanation: The amount offered for sale changes in response to price changes.

• Change in Supply

  • Situation: Suppliers offer different amounts of products for sale at all prices in the market.

• Productivity

  • Detail: Increased motivation or efficiency of workers leads to higher productivity.

• Subsidy

  • Definition: A government payment to encourage or protect a specific economic activity.

• Supply Elasticity

  • Definition: Measures how the quantity supplied responds to changes in price.

• Theory of Production

  • Explanation: Relationship between production factors and output of goods and services.

• Short Run (Production)

  • Definition: Time period where only labor input can be changed.

• Long Run (Production)

  • Definition: Time period long enough to adjust all resource quantities, including capital.

Detailed Concepts

• Law of Variable Proportions

  • Explanation: In the short run, output changes as one input is varied while others are held constant.

• Production Function

  • Description: Relationship between output changes and varying amounts of a single input, while others are constant.

• Raw Materials

  • Definition: Unprocessed natural products utilized in production.

• Total Product

  • Definition: The total output produced by the firm.

• Marginal Product

  • Explanation: The extra output or change in total product resulting from adding one more variable input.

• Three Stages of Production

  • Stages: Increasing returns, diminishing returns, negative returns.

• Diminishing Returns

  • Explanation: Stage where output increases at a diminishing rate as more units of a variable input are added.

• Fixed Cost

  • Definition: Costs that are incurred regardless of the plant's output level.

• Variable Costs

  • Definition: Costs that change with the operation rate or output level.

• Marginal Cost

  • Definition: Extra cost incurred by producing one additional unit of a product.

• Total Revenue

  • Definition: Sum of fixed and variable costs.

• Marginal Revenue

  • Definition: Additional revenue from producing and selling one more unit of output.

• Marginal Analysis

  • Description: Cost-benefit decision-making comparing extra benefits to extra costs.

• Break-even Point

  • Definition: Total output needed to cover total costs.

• Profit-maximizing Quantity of Output

  • Description: Achieved when marginal cost equals marginal revenue.

Questions

1. Relationship Between Marginal Cost and Total Cost

   • Marginal cost indicates the cost added to the total cost when producing an additional unit. Total cost considers the marginal costs incurred.

2. Incompleteness of Overhead Definition

   • Note: The book contains an incomplete or incorrect definition.

3. Four Measures of Cost

   • Identified measures: Total cost, fixed cost, variable cost, marginal cost.

4. Effect of Lower Aluminum Prices on Bicycle Supply

   • If aluminum prices fall (given other variables constant), bicycle supply is expected to increase because manufacturers can produce more bikes at a lower cost.

5. Impact of Lower Prices on Firm's Product Supply

   • According to the Law of Supply, a decrease in price leads to a decrease in the number of products offered for sale.

6. Diminishing Returns Impact on Production Costs

   • Costs will change depending on business performance; some costs can be fixed while others vary with production.