Chapter 5 Assessment
Chapter Summary
A summary of major ideas in Chapter 5 appears below. See also the Guide to the Essentials of Economics, which provides additional review and test practice of key concepts in Chapter 5.
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Section 1 Understanding Supply (pp. 101–106)
The law of supply states that when the price of a good rises, the quantity supplied of that good also rises because existing firms produce more and new firms join the market. Economists list the quantity supplied of a good at each price in a supply schedule and graph this data on a supply curve that rises from left to right. Supply can be elastic or inelastic depending upon how easily a producer can change the level of output.
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Section 2 Costs of Production (pp. 108–114)
As an entrepreneur invests more in labor while keeping capital constant, the marginal product of labor first increases, then falls. A firm adds its fixed costs and variable costs to determine its total cost at each level of output. The most profitable level of output is where the marginal cost of producing the last unit is the same as the marginal revenue the firm receives when that unit is sold.
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Section 3 Changes in Supply (pp. 116–120)
Several factors can raise or lower the supply of a good at all prices. When inputs such as capital and labor become more expensive, supply falls and the supply curve shifts to the left. New technology can lower the cost of production and increase supply, shifting the supply curve to the right. Government encourages suppliers with subsidies and reduces supply with excise taxes. Other factors that affect supply are the number of suppliers in the market and competition from suppliers in other countries.
Key Terms
Match the following definitions with the terms listed below. You will not use all of the terms.
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Using Graphic Organizers
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On a separate sheet of paper, copy the multi-flow map below. Organize information on how firms determine their total costs by completing the multiflow map with examples of fixed and variable costs.
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