Theory of Supply

All relevant costs for a producer are opportunity costs
--> more burritos, give up chance to make pizza

Quantity Supplied vs. Supply

 

Price	Quantity Supplied
$0	0
$0.50	0
$1.00	1
1.50	2
$2.00	3
$2.50	4

-Think of price as related to opportunity costs of producing that particular burrito
-Each pt =marginal oppor. cost (recall points on demand curve also marked margin)

So long as make each burrito 49 cents, will make a profit if sold for 50 cents
-Some prices are too low, could never earn a profit (perhaps it costs 80 cents to make 1st burrito)
NOTE: supply curve slopes up

"It costs more to make more"

How do producers change as prices change?

Do the cheapest, least costly way first

Supply: relationship of how respond to prices; marginal opportunity costs

Total Costs of Production: marginal costs of each unit produced added together

-area below to the supply curve up to that point

What can we learn from the supply curve graph?

1) Marginal

2) Total Cost

   = MC1 + MC2  ($1.00 + $1.50 = $2.50)

3) Total Revenues = P x Q

   2 x 1.50 = $3.00

4) Producer Surplus = total rev. - total costs

   -How much money is made, "profits"

Why do supply curves slope up?

"Law of Supply" 

Don't forget, violated, not always true

ex: labor supply, some usage may reduce work down the line, "backward bend"

1) Diminishing Return of Production

-harder to make more; tougher to make 5 vs make 1

ex: farmer owns 160 acres, which spot(s) to plant?

typically choose the best; imagine go from 10 acres to 20 acres

-next acres not as good, need more water, more fertilizer, more attention

  Consider, some technology doesn't matter, 10th download harder than 2nd?

2) Additional Resources

Imagine all the land is good, STILL have to buy more seeds, more machines, maybe more workers
-bid away tractors from other sources causes the price of tractors to rise

Changes in Supply

Quantity Supplied vs. Supply

Quantity Supplied: Change in Price -Move along the supply curve <--- only changes in price

Supply: changes in other stuff

-Supply curve shifts, causes a change in supply

 

<--Anything other than price that changes supply

ex: any change in factor (input) prices burritos need: land, labor capital

Rent falls: cheaper to produce

-expectations matter MORE for producers than consumers

ex:titanium on property; imagine that future prices will drop, dig up now to sell

-expect price to rise in future, wait

-->decr. production, also causes to bring up

(expect) change in technology -->supply curve based on constant

consider: improvement in technology improves production

-->shifts out

ex: changes in other markets

Pizza prices skyrocket, making big $$$

-> stop making burritos, start making some pizza!

Elasticity: changes in price to produce more

Price elasticity of Supply: how much more I will produce when price goes up

Relatively Elastic vs. Relatively Inelastic

Elastic: > 1
Inelastic: < 1
ex: longer time producers have to make decisions, more elastic (more choices)

Marginal vs. Average Costs

A	B	C	D = C / A
Burrito	MC	TC	Avg Cost
0	0	0	0
1	$1.00	$1.00	$1.00
2	$1.50	$2.50	$1.25
3	$2.00	$4.50	$1.50

ex: sell 2 burritos, market price $1.50

Sell next burrito if people willing to pay $1.75

-avg costs of production, $1.50, make a profit?

NOOOO

when producers think of unit #3, sell for $2.00, $2.01

could have lost 25 cents of 3rd

Consider: sunk costs 3rd burrito only matters when the ??? of last burrito, doesn't matter others

Avg costs matter for the long term

-firm entry/exit

marginal: incr/decr production

price system = way we ration goods in society