Essential Microeconomics: Supply, Production, and Cost Terms
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Key Supply Concepts
The following terms are fundamental to understanding how supply operates in a market.
Supply Schedule Defined
Supply Schedule: A listing of the various quantities of a particular product that a producer would supply at all possible prices in the market.
Understanding the Supply Curve
Supply Curve: A graph that shows the quantities supplied at each possible price in the market.
The main thing to remember is that all normal supply curves have a positive slope that goes up when you read the diagram from left to right.
Changes in Supply
Change in Supply: A situation where suppliers offer different amounts of a product for sale at all possible prices in the market.
Factors Influencing Supply Changes
- Cost of resources
- Productivity
- Technology
- Taxes
- Subsidies
- Government regulations
- Number of sellers
- Expectations
The elasticity of a producer's supply curve depends on the nature of its production.
Production and Cost Fundamentals
These terms explain how goods are produced and the associated expenses.
The Production Function
Production Function: A figure that shows how total output changes when the amount of a single variable input (usually labor) changes while all other inputs are held constant.
Short-Run Production
Short Run: A production period so short that only variable inputs (usually labor) can be changed.
Marginal Product Explained
Marginal Product: Extra output due to the addition of one more unit of input.
Stages of Production
Production typically progresses through three distinct stages:
- Stage I: Increasing Marginal Returns
- Stage II: Decreasing Marginal Returns
- Stage III: Negative Marginal Returns
Fixed Costs and Overhead
Fixed Costs: Costs of production that do not change when output changes.
Overhead: A broad category of fixed costs that includes interest, rent, taxes, and executive salaries.
Variable Costs
Variable Costs: Production costs that vary as output changes; examples include labor, energy, and raw materials.
Total Costs
Total Costs: The sum of variable cost plus fixed cost; all costs associated with production.
Marginal Cost
Marginal Cost: The extra cost of producing one additional unit of production.
Revenue and Profit Principles
Understanding these concepts is crucial for assessing a firm's financial performance.
Average Revenue
Average Revenue: The average price that every unit of output sells for.
Total Revenue
Total Revenue: The total amount earned by a firm from the sale of its product; calculated as the average price of a good sold times the quantity sold.
Marginal Revenue
Marginal Revenue: The extra revenue from the sale of one additional unit of output.
Profit-Maximizing Output
Profit-Maximizing Quantity of Output: The level of production where marginal cost is equal to marginal revenue.
Break-Even Point
Break-Even Point: The production level where the total cost equals total revenue; this is the production needed if the firm is to recover its costs.
Modern Business Terminology
A key term in today's digital economy.
E-commerce Definition
E-commerce: Electronic business or exchange conducted over the internet.