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Chapter 3

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Department
Economics
Course
ECO105Y1
Professor
Paul Cohen
Semester
Fall

Description
Chapter 3: Show Me the Money (The Law of Supply) -Supply like demand, starts with decision makers choosing among alternative opportunities by comparing expected benefits and costs at the margin. -(With the example in the textbook) Your willingness to work depends on the price offered and on the opportunity costs of alternative use of your time. Marginal cost: Additional opportunity cost of increasing quantity supplied, and changes with circumstances -Marginal cost would have it that the higher quantity supplied, higher prices are necessary to compensate for the higher opportunity costs of more additional time (or other resources) given up. -Every buying or selling choice is a fork in the road. Buying- There are substitute products. Selling- There are alternative uses of your time. Opportunity cost of any choice is value of best alternative you give up. -Supply and demand choices reverse the composition of benefits and costs. Supply- marginal benefit is measured in dollars (wage you earn); marginal cost is opportunity cost of time. Demand-marginal benefit is satisfaction you get; marginal cost is measured in dollars (price you pay) -When businesses purchase and input, marginal cost can be stated in dollars. But marginal costs are ultimately opportunity costs, value of best alternative use of input. -To hire or purchase inputs, a business must pay a price that matches the best opportunity cost of the input owner. The real cost of any input is determined by the best alternative use of that input. -All marginal costs are ultimately opportunity costs. -Marginal costs can be stated in dollar values, but they are an opportunity cost—The value of the best alternative use for that input. -Past experiences are not part of additional opportunity costs and have no influence on smart choices. Sunk Costs: Past expenses that cannot be recovered Supply: Businesses willingness to produce a particular product/service because price covers all opportunity cost. Quantity Supplied: Quantity you actually plan to supply at a given price -Rising prices create two incentives for increased quantity supplied—higher profits and covering higher marginal opportunity costs of production. -All opportunity costs are marginal costs and all marginal costs are opportunity costs. Marginal Opportunity Cost: Complete name for any cost relevant to a smart decision. -Increasing marginal opportunity costs arise because inputs are not equally productive in all activities. -Where inputs are equally productive in all activities, marginal opportunity costs are constant. In output markets, the left side of the circular flow diagram, businesses are suppliers, and households are demanders. In input markets, the right side, individuals are suppliers and businesses are demanders. On either side, higher prices increa
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