Ricardo believed the supply line was a horizontal perfectly elastic line because all supply focused on was cost of production Marshall believed this would happen in the long run Jevons Menger and Walras believed the supply line was vertical fixed by the quantity available in the market market price is determined by the level of demand Marshall called this the market period condition The median between these is the short run Marshall found it was the interaction of supply and demand conditions that determines price Neither one determines the price it is a combination of the two both play a role Describe the relationship between Marshall s analysis and those of Ricardo and of Jevons Menger Walras Explain the point Marshall is making when he writes We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper as whether value is governed by utility demand or cost of production supply Draw a generic marginal product curve pg 88 Assuming a constant input cost explain how the marginal cost curve is derived from the marginal product curve Identify the level of productivity an input has achieved when the marginal cost of the product it is making is at its lowest level Identify the level of cost a production process has achieved when the marginal productivity of the variable input is at its highest level The marginal productivity curve increases at first If productivity increases each successive unit costs less since more are being made Once marginal productivity starts to decrease marginal cost increases because less units are being made therefore each successive unit costs more it is the marginal product curve flipped reflected upside down The marginal cost is at its lowest when marginal production is at its highest The marginal cost is at its lowest when marginal production is at its highest Demonstrate that the upward sloping section of the firm s marginal cost curve is its supply line Describe the costs that go into the cost structure represented by the marginal cost line Define normal return Describe and explain with an example Describe the condition of a firm that is just covering the costs embodied in the marginal cost curve Identify the variables that go into a firm s cost structure Explain the relationship between these variables and the shift variables of the firm s supply line Write out the functional form of a firm s supply relationship Identify each variable The firm determines its quantity supplied by identifying at what quantity the price equals the marginal cost The upward sloping part of the MC curve tracks the quantity the firm will supply as the market price rises or falls tells them when to stop producing supply so this section of the MC curve is the firm s supply line All costs that go into running a business examples phone electricity insurance What the owner of a business pays his or herself to make it worth staying in business after paying everyone else just enough to beat the opportunity cost using your resources in someone else s business instead of your own need to make this to stay in business and if you can t you should work for someone else ex you own a toy making company A normal return would be paying yourself on top of being able to cover all costs and playing all employees it is built into the marginal cost curve because it is an essential part of the firm s costs This is just enough revenue to cover all costs and stay in business this means a profit of zero 1 The price of inputs into production when this goes up cost structure goes up 2 The level of technology when this goes up cost structure goes down 3 The environment of production bad conditions cost structure goes up good conditions cost structure goes down If one of these changes it changes the level of cost structure and thus the level of the MC curve higher cost structure shifts MC up and lower cost structure shifts MC down Q1 S S1 p1 pI Tech Env PI price of inputs Tech level of technology Env environment of production Cite a case of a change in input costs for a firm and describe how the firm s cost structure and supply line would change as a consequence Cite a case of changing technology for a firm and describe how the firm s cost structure and supply line would change as a consequence Cite a case of a change in environment of production for a firm and describe how the firm s cost structure and supply line would change as a consequence Describe the relationship between the firms supplies for a given good or service and the market supply for that good or service Given several firm s supply lines construct the market supply line Comment on the following statement Market supply movements depend on the net effect of all the firms changes Identify the sources of such changes Note whether these are the only determinants of the market level of supply If not identify another source of market supply shifts Ex the price of gasoline rises for a trucking company so the whole cost structure of the firm goes up costs more to produce it causes the supply line to shift up because for any given quantity it costs more at the margin to produce it when cost goes down the cost structure decreases and the supply line would shift down Ex technology improves making production easier and the cost of production goes down this lowers the overall cost structure and shifts the supply line down if there is not an improvement in technology the opposite occurs Ex agriculture and weather is bad hurting the apple crop the output per unit of cost is down due to bad environmental conditions so there is a rise in cost of production per unit output and thus the supply line shift up because the supply is decreased and cost structure goes up opposite if the weather is good producing a good crop Market supply for a good or service is the sum of all the individual firms supplies for that good or service at any given price the market quantity supplied is the sum of the individual firms quantities supplied at that price creates the market supply line Add all individual supply lines together to get the market supply line ex when candy bars are at a 5 price and each of three firms supply 4 each the market quantity supplied for candy bars at 5 is 12 bars simply add total amount supplied by all firms at a given price Market supply is determined by the net effect of all of the firms supplying goods and services because the market supply is the sum of all the individuals The