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Chapter 1

ECON 1010 Chapter 1: Topics 5

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University of Manitoba
ECON 1010
Laura K.Brown

Oc78 ECON1010 The average remains constant if and only if the marginal cost is equal to the average cost. Hence, the AVC curve and the ATC curve decrease initially as the MC curve is below them. They continue to do so until the point where the MC curve touches them. From that point onward, the MC curve is above them and so they begin to increase 4. In the long run, all costs are variable. E.g. the entrepreneur can decide whether or not to start a new loan to rent the machinery; the costs varies. If the quantity produced is zero, the cost of the loan is zero. Hence, the cost of the loan is no longer a fixed cost and the AVC curve would become identical to the ATC curve as the entrepreneur moves into the long run. FACTORS SHIFTING THE SUPPLY CURVE A change in the market price determines a movement along the supply curve, whereas a change in some other factors will shift the entire supply curve. Other factors shifting the supply curve could be: 1. Technology: More advanced technologies reduce the unit cost of production. By using such technologies, firms can considerably increase the amount of goods they produce. 2. Input prices: A change in the price of inputs will affect the productive capacity of a firmindustry, which will be directly reflected in the supply. However, the price changes related to fixed inputs have no effect. 3. Expectations: Expected future price (or future demand) changes will make suppliers adjust their behaviour to take advantage of the new opportunities. 4. Changes in pricing for other products: If a seller is producing two or more goods, and one good experiences a surge in demand (and so, price), the seller will shift (as much as possible) its productive focus to the high demand good. 5. Number of suppliers: The higher the number of suppliers entering a market, the larger the right shift in the aggregate supply curve. PRICE ELASTICITY OF SUPPLY Price elasticity of supply: denotes the percentage change in the quantity supplied resulting from a very small percentage change in price. Measurement of the responsiveness of the quantity supplied of a given good to changes in its price Q Q P 1 Price elasticity of supply = =
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