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Pol./Cons. Ed.
LMHS
Spring 2010
Montaigne
Vocabulary and Concepts for Chapter 5: Supply
Supply- The amount of a good or service all producers of that good or
service (taken together) are willing and able to sell at any given price
(Expressed as S)
Quantity supplied- The amount of a good or service all producers of that
good or service (taken together) are willing and able to sell at one particular
price (Expressed as qS)
Law of Supply- Says that when the price of a good goes up, the amount
(quantity) supplied will eventually also go up (mathematicians say the
relationship between price and quantity supplied is direct)
Supply schedule- A way of showing in the form of a T-Chart or ‘schedule’
the quantity supplied of a good or service at each particular price
Supply curve- A way of showing in a picture the quantity supplied of a good
or service at each particular price (besides helping visual people, a supply
curve also shows overall supply, the amount producers will supply at any
given price)
Please note: supply curves always slope up and to the right (i.e., down and
to the left; i.e., opposite of demand curves)!
Elastic- Type or state of supply for a particular good or service, in which a
price increase causes a large increase in quantity supplied (or a price
decrease causes a large drop in quantity supplied)
Again, think of tugging on something elastic, like a waistband or empty
balloon: a little tug makes it stretch a lot.
Inelastic- Type or state of supply for a particular good or service, in which a
price increase has little effect on quantity supplied (or a price decrease has
little effect on qS)
In the short term, most goods and services have inelastic supply; simply
put, it takes a while to gear up to produce more of a good or supply more
of a service. Sometimes, as with rare art, it’s impossible.
Changes in supply- Shown graphically as a shift in the whole supply curve,
down and to the right if S increases, up and to the left if S decreases
Changes in supply can be caused by changes in technology, changes in the
price (cost) of the various factors of production, and by taxes or subsidies.
Almost always, one factor required for a change in supply is the passage of
time.
Changes in quantity supplied- Shown graphically as a move down/left or
up/right on a supply curve: simply a response to a change in price
Taxes- A tax on the production and/or sale of a specific good or service (as
opposed to an income tax on all consumers) acts to artificially increase the
cost of production; thus, the quantity supplied at a particular price will go
down
Please note: This could produce a shortage, where the quantity demanded
at that price is greater than the quantity producers are willing to supply.
Subsidies- A government grant to encourage the production and/or sale of a
specific good or service acts to artificially decrease the cost of production;
thus, the quantity supplied at a particular price will go up
Please note: This could produce a surplus, where the quantity demanded
at that price is less than the quantity producers have supplied.
Price supports- A specific type of subsidy, usually to farmers, which
guarantees minimum prices to them
Please note: this increases qS at most particular prices, and could produce
a surplus (too much stuff).
Law of Variable Proportions- For a producer, it’s true that in the short run,
changing the amount of one of the inputs (factors) of production, such as
labor or capital, will also change the output
Please note: This may seem like common sense, but what’s less obvious is
that increasing an input can decrease, as well as increase, the output!
Production schedule- A way of showing the number of workers on a job, the
productivity (output, in units) of all the workers in a day (or some period of
time), and the increase or decrease in output each additional worker
produces
Marginal product- The amount of extra output that is produced by adding
one additional input (factor) of production (see p. 89)
Please note: As long as adding each unit of input produces a growing
quantity of output per unit of input, a producer is in Stage 1 of production
(stage is known for increasing returns or an increase in the marginal
product). Once adding each unit of input causes output to grow by a
smaller amount than the last unit, Stage 2 of production is reached (stage
is known for diminishing returns because the marginal product is
decreasing but the overall amount produced is still greater than before). A
point often comes where adding an additional unit of input actually results
in a marginal product that’s a negative number; that is, there are negative
returns because the overall amount produced has actually gone down.
This is called Stage 3 of production.
Ideal stage of production- Stage 2
Please note: As long as adding a unit of input increases output more than
adding the previous unit (Stage 1), keep adding! Once adding a unit of
input decreases the overall output (Stage 3), stop adding! As for where in
Stage 2 a good businessman stops adding inputs, that would depend on the
input’s cost. Usually, soon after Stage 2 begins, the marginal product a
unit of input produces is too small to justify its cost. That is where total
production cuts off.
Marginal cost- The additional cost of producing one more unit…
(obviously?)
A simpler way to think of the stages of production is that production will
continue to expand until (somewhere in Stage 2) the marginal cost of
producing a unit becomes greater than the marginal profit the producer
will earn by selling it.