Ch 5 - Supply 

  • Supply: the quantity of a good or service that producers are willing and able to supply at different prices in a given time period

  • Law of supply: as the price of a product rises, the quantity supplied of the product will eventually increase   * The supply curve normally slopes upwards   * Price rises but costs don't change → profitability increases → supply more

  • Supply curve: represents the relationship between the price and the quantity supplied of a product

 

  • Non-price determinants of supply:

     1. Changes in factors of production: (supply shifts to left) →  land, labour, capital, entrepreneurship   2. Improvements in tech (supply shifts to the right)   3. Expectations: supply increases if product is expected to gain profit   4. Indirect taxes → increase costs → supply shifts left   5. Competition: if another product is produced with higher profit, supply for existing product decreases   6. Subsidies → reduce costs → supply shifts right   7. More firms → supply shifts to the right → more being supplied at each price level

  • Joint supply:

 

  • The law of diminishing marginal returns: as more variable factors are added to a given quantity fixed factors, holding tech constant, marginal product eventually drops

  • Fixed factor: employment remains constant

  • Variable factor : employment increases as output increases

  • Short run: period with fixed + variable factors   * firms can expand output by employing variable factors only

  • Long run: period when all factors are variable   * firms can expand output by increasing the use of all factors

  • Marginal Product (MP): change in total product as a result of change in input   * Formula: MP of the nth unit = TP of n units - TP of (n-1) units   * MP = △TP /△V

  • Why does this happen?

     1. Workers fully utilise fixed factors initially so MP rises   2. when more workers are added, too many workers relative to the amount of fixed factors, MP eventually drops

  • Total product: total output that a firm producers using variable and fixed factors in a given time period

  • Average product: output that is produced, an average, by each unit of the variable factors   * Formula: AP = TPV

  • Rules:   * As supply increases, price decreases, and demand increases   * As supply decreases, price increases, and demand decreases