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Economics
Chapter 5
Supply
Directions; use the information in the text to answer the following questions (worth $
I.
Section One:
1. Supply is the amount of goods available.
2. The law of supply states that the higher the price, the larger the quantity produced.
3. Quantity supplied is how much of a good is offered for sale at a specific price.
4. True or false;
As the price of goods decreases, existing firms will produce more in order to earn the
same amount of revenue.
5. True or false;
Rise prices for goods will give new firms an incentive to enter the market in order to
earn profits.
6. True or false;
If a firm is already earning profit by selling a good, then an increase in the price –
ceteris paribus – will increase the firm’s profits.
7. The search for profit drives the supplier’s decision.
8. In the early 1990s, “grunge” music emerged from Seattle to become widely popular
among high school and college students. How did the market react?
More recording labels were given to grunge groups, and music stores devoted
more space to this style of music.
9. A supply schedule shows the relationship between price and quantity supplied for a
specific good.
10. True or false;
Like a demand schedule, a supply schedule lists supply for a very specific set of
conditions.
11. The number of units of a product offered at a specific price is called the quantity
supplied at that price.
12. True or false;
A rise or fall in the price of a good will cause the quantity supplied and the supply
schedule to both change.
13. A market supply schedule shows the relationship between prices and the total
quantity supplied by all firms in a particular market.
14. A supply graph is when data points in a supply schedule are graphed.
15. What is the key feature of the supply curve?
It always rises from the left to the right.
16. Elasticity of supply is a measure of the way suppliers respond to a change in price.
17. List the three terms for describing elasticity of supply.
elastic, inelastic, unitary.
18. What is the key factor for determining whether the supply of a good will be elastic or
inelastic?
Time
19. True or false;
In the short-run, a firm cannot easily change its output level, so supply is inelastic. In
the long-run, firms are more flexible, so supply is more elastic.
20. Is the supply of oranges elastic or inelastic?
Inelastic in the short-run
21. True or false;
If a good is highly inelastic, this means that a small increase in price will cause a
large increase in quantity supplied, even in the short-run.
II.
Section Two:
22. Marginal product of labor is the change in output from hiring one additional unit of
labor.
23. Look at figure 5.6 (on page 109). Explain why the marginal product of labor
increases for the first three workers.
Because there are three task involved in making a beanbag. Through
specialization each worker can be more productive.
24. True or false;
Specialization increases output per worker.
25. Why do business suffer from diminishing marginal returns whenever they hire too
much labor?
Because the workers have to work with a limited amount of capital.
26. Increased marginal return is the level of production in which the marginal product
of labor increases as the number of workers increases.
27. Diminishing marginal return is the level of production in which the marginal
product of labor decreases as the number of workers increases.
28. True or false;
Paying workers and purchasing capital are both costs of producing goods.
29. Look at the picture on page 110. List all the variable cost identified in the picture.
Goods, electricity, part-time salesman
30. Now list all the fixed cost identified in the picture.
Rent, Store Manager.
31. A fixed cost is a cost that does not change, no matter how much of a good is
produced.
32. A variable cost is a cost that rises or falls depending on the quantity produced.
33. Total cost is fixed cost added to variable cost.
34. True or false;
If we know the total cost at several levels of output, we can determine the marginal
cost of production at each level.
35. Profit is defined as total revenue minus total cost.
36. Look at figure 5.10 (page 112) and tell me how many beanbags an hour should this
firm make to produce at the lowest possible marginal cost?
3 beanbags per hour
37. Operating cost is the cost of operating the facility.
Use the following table below to answer questions 38-40.
Output
Fixed Cost
Variable Cost
1
$5
$10
2
$5
$27
3
$5
$55
4
$5
$91
5
$5
$145
38. What is the total cost when out is 2? $32
39. What is the marginal cost of the third unit? $28
40. How much should this firm produce if the market price is $24? 2