Economics Chapter 5 Test Flashcards

Questions and Answers

What do elasticity in the short term and long term describe?

Elastic supply is very sensitive to price changes.

Elasticity does not affect production.

In short term, supply is inelastic, while in long term, supply can become more elastic. (correct)

Firms cannot change output levels.

Define supply.

The amount of goods available.

What does a supply curve show?

The quantity supplied of a good by all suppliers at different prices.

Explain diminishing marginal returns.

Occurs when marginal production levels decrease with new investment. Signup and view all the answers

Explain negative marginal returns.

Negative marginal returns occur when the marginal product of labor becomes negative. Signup and view all the answers

What two movements does the law of supply involve?

Individual firms changing their level of production and firms entering or exiting the market. Signup and view all the answers

How does a manufacturer set total output to maximize profit?

Marginal cost = marginal revenue. Signup and view all the answers

How is profit determined?

Profit = total revenue - total cost. Signup and view all the answers

How does specialization affect production?

It increases the output and the firm enjoys increasing marginal returns. Signup and view all the answers

Explain the marginal product of labor.

The change in output from hiring one additional unit of labor, or worker. Signup and view all the answers

What are variable costs? Give examples.

Costs that rise or fall depending on how much is produced, e.g., price of raw materials, some labor, electricity and heating bills. Signup and view all the answers

What is marginal revenue?

The additional income from selling one more unit of a good. Signup and view all the answers

What is excise tax?

A tax on the production or sale of a good. Signup and view all the answers

What effect do rising input costs have on the price of a good?

The price of the good will increase. Signup and view all the answers

What does a subsidy usually do to the cost of making a product?

Generally lowers cost, which allows a firm to produce more goods. Signup and view all the answers

What is the reason that the U.S. government regulates car production?

To cut down on air pollution. Signup and view all the answers

When would a factory that is losing money choose to stay open?

If the total revenue from the goods is greater than the cost of keeping the factory open. Signup and view all the answers

When an effort by the government causes the supply of a good to rise, what happens to the supply curve?

An increase in wages in one country or the increased supply of a good in another will cause the overall supply curve to shift. Signup and view all the answers

If a seller expects the price of a good to rise in the future, what will the seller do?

The seller will store the goods now in order to sell more in the future. Signup and view all the answers

What are two reasons why a government would subsidize products?

To provide aid during food shortages and to protect young industries from foreign competition. Signup and view all the answers

When is a firm likely to locate itself close to its consumers?

When inputs such as raw materials are expensive to transport. Signup and view all the answers

Explain the law of supply.

As price rises, so will the quantity supplied. Signup and view all the answers

What does a supply schedule show?

The relationship between price and quantity supplied for a particular good. Signup and view all the answers

What two factors make up total cost?

Fixed costs and variable costs. Signup and view all the answers

Explain increasing marginal returns.

When marginal production levels increase with new investment. Signup and view all the answers

What does elasticity of supply measure?

How firms will respond to changes in the price of a good. Signup and view all the answers

What is inflation?

Condition of rising prices. Signup and view all the answers

How does technology affect production?

Technology can lower production costs. Signup and view all the answers

Explain elastic and inelastic supply.

Elastic supply is very sensitive to price changes. Inelastic supply is not very responsive to price changes. Signup and view all the answers

How is total cost determined?

Fixed costs + variable costs. Signup and view all the answers

What are fixed costs? Give examples.

Costs that do not change, regardless of how much of a good is produced. Signup and view all the answers

What is marginal cost?

The cost of adding one additional unit of a product or service. Signup and view all the answers

Why does a supply curve shift?

Shifts in prices, rising costs, technology, changes in the global economy, future expectations of prices, number of suppliers. Signup and view all the answers

How would an excise tax affect supply?

Excise taxes increase production costs by adding an extra cost to each unit sold. Signup and view all the answers

What is a subsidy?

A government payment that supports a business or market. Signup and view all the answers

Study Notes

Elasticity

Short-term supply is generally inelastic; firms find it hard to alter output quickly.
Long-term supply can become elastic as suppliers have more time to respond to price changes.

Supply Definitions and Curves

Supply refers to the total quantity of goods available for sale.
A supply curve illustrates the quantity supplied at various price levels for a particular good.

Production Concepts

Diminishing marginal returns occur when additional labor leads to smaller increases in output.
Negative marginal returns arise when adding labor decreases overall production.

Law of Supply

Involves changes in production levels by individual firms and the dynamics of firms entering or leaving the market.
Describes that as prices rise, the quantity supplied also increases.

Profit Maximization

A manufacturer maximizes profit when marginal cost equals marginal revenue.
Profit is calculated as total revenue minus total cost.

Specialization Impact

Specialization boosts production efficiency, often resulting in increasing marginal returns.

Costs

Variable costs fluctuate based on production levels; examples include raw material costs and utility bills.
Marginal revenue is the added income from selling one additional unit of a good.
Fixed costs remain constant regardless of production levels.

Government Interventions

Excise taxes are imposed on the production or sale of goods, increasing overall production costs.
Subsidies typically lower production costs, enabling firms to produce more efficiently.
Regulations, such as those in the car manufacturing sector, aim to reduce environmental impact.

Decision Making for Firms

A factory may remain operational if revenue covers its operational costs, even when facing losses.
When supply increases due to government actions, the overall supply curve shifts upwards or to the right.

Future Price Expectations

If sellers anticipate a future increase in prices, they may store goods now for later sale.
Conversely, if a price drop is expected, selling immediately can prevent losses.

Market Dynamics

Supply schedules detail the relationship between goods’ prices and quantities supplied.
Total costs are derived from the sum of fixed and variable costs.

Returns and Technology

Increasing marginal returns occur when new investments enhance production levels.
Advancements in technology can significantly reduce production costs.

Supply Elasticity

Elastic supply responds swiftly to price changes, while inelastic supply changes minimally in response to price fluctuations.
Elasticity of supply measures how responsive producers are to price changes.

Inflation

Inflation is defined as a general increase in prices over time.

Factors Influencing Supply

A supply curve may shift due to price fluctuations, rising input costs, technological advancements, or changes in the number of suppliers.
An excise tax can hinder supply by escalating production costs.

Subsidy Overview

Subsidies are government payments designed to support businesses and stabilize markets.

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Test your knowledge on the concepts of elasticity and supply with these flashcards from Economics Chapter 5. Each card provides a key term along with its definition, helping you study effectively for your economics exam.