econ notes chapter 5 - ms. zaleski's math...
TRANSCRIPT
SupplyUnderstandingEconomics,Chapter5
WhatisSupply?Chapter5,Lesson1
WhatisSupply?
! Supply–theamountofaproductaproducerorsellerwouldbewillingtoofferforsaleatallpossiblepricesatagivenpointintime! Thehigherthepriceis,themoresellerswillwant
tosell.
! LawofSupply–rulestatingthatmorewillbeofferedforsaleathigherpricesandlessatlowerprices
! Supplyschedule–listingshowingtheamountofaproductaselleriswillingtosellatallpossibleprices! Seethesupplyscheduleforasellerforburritos.
SupplyCurve
! Supplycurve–graphshowingthequantitiessuppliedateverypossibleprice! Noticethatsupplycurvesarealways
upwardsloping.! Ahigherpriceisanincentiveforsellers
tosellmore.Alowerpricemotivatesthemtosellless.
! Thesupplycurveisformedbyplottingthecombinationsofpriceandquantitysuppliedfromasupplyschedule.
! Seeasupplyscheduleforasellerofburritosatright.
! Interesting–Youareasellerwhenyoulookforajob.Yourproductisyourlabor.
MarketSupply
! Marketsupplycurve–supplycurvethatshowsthequantitiesofferedatvariouspricesbyallfirmsthatsellthesameproductinagivenmarket.! Addtheindividualsupplycurvestogetherbyaddingthequantitiesforeachateach
price.! Thereareusuallymanysellersinagivenmarket,notjusttwo.
ChangeinQuantitySupplied
! Quantitysupplied–specificamountofferedforsaleatagivenprice;apointonthesupplycurve
! Changeinquantitysupplied–movementalongthesupplycurveshowingthatadifferentquantityisofferedinresponsetoachangeinprice.! Ifthepriceofburritosgoesupfrom$5to
$7,thenthequantitysuppliedgoesupfrom24millionto36million
! Thisisaslidealongthesupplycurvefrompointatopointb.
! Ifthepricedrops,asellermaynotofferasmuchforsaleormayevenleavethemarketaltogether.
! Ifthepricegoesup,asellerwilloffermoreforsaletotakeadvantageofthehigherprices.
ChangeinSupply
! Changeinsupply–differentquantitiesofaproductareofferedforsaleateveryprice,causingthesupplycurvetoshifttotheleftortotheright.! Thisiscausedbyfactorsinthemarketotherthanprice.! Ashifttotherightisanincreaseinsupply.! Ashifttotheleftisadecreaseinsupply.
ChangeinSupply(Shift)
Factorscausingachangein
supply(shiftofcurve)
CostofResources
Productivity
Technology
TaxesonBusinesses Subsidies
GovernmentRegulations
NumberofSellers
SellerExpectations
fortheFuture
ChangeinSupply(Shift)
CostofResources
• Thecostofland,laborandcapitalimpactssupply
• Adecreaseinthecostofresourcesmeansthatsupplierscanproducemoreateveryprice.Thismeansanincreaseinsupplyandashiftright.
• Anincreaseinthecostofresourcesmeansadecreaseinsupplyandashiftleft.
Productivity
• Productivityincreaseswhenevermoreproductsareproducedwiththesameamountofresources.
• Anincreaseinproductivitymeansthesuppliercanproducemorewiththesameresources.Thisisanincreaseinsupplyorashiftright.
• Adecreaseinproductivitymeansadecreaseinsupplyandashiftleft.
Technology
• Animprovementintechnologycanlowerthecostofproduction,whichincreasesproductivity.
• Animprovementtotechnologythatreducescostsleadstoanincreaseinsupplyandashiftright.
• Inreality,newtechnologiesdonotgettakenaway,butsometimesthereisalearningcurvewithanewtechnology,whereitislessproductiveasworkersgetusedtoit.Thismeansadecreaseinsupplyandashiftleft.
ChangeinSupply(Shift)
TaxesonBusinesses
• Taxesareacostforbusinessesjustlikerawmaterialsandlabor.Lowertaxesmeanslowercostsandbusinessescanproducemoreateveryprice.
• Lowertaxesleadtoanincreaseinsupplyandashiftright.
• Highertaxesonbusinessesleadstoadecreaseinsupplyandashiftleft.
Subsidies
• Subsidy–governmentpaymenttoencourageorprotectaneconomicactivity.
• Manyfarmersreceivegov’tsubsidiesfortheircropstoensurethatfarmerscontinuetogrowthosecrops.
• Agov’tsubsidyreducescostsforthesupplierandleadstoanincreaseinsupplyorashiftright.
• Ifasubsidyisrepealed,thisleadstoadecreaseinsupplyorashiftleft.
GovernmentRegulations
• Itcostsbusinessesmoneytocomplywithgovernmentregulations.
• Example:Governmentregulationsonvehiclesafetymeanscarsaremoreexpensivetoproduce.
• Anincreaseinregulationsrepresentsanincreaseincostsforasupplierandadecreaseinsupplyorashiftleft.
• Adecreaseinregulationsleadstoanincreaseinsupplyandashiftright.
ChangeinSupply(Shift)
NumberofSellers
• Mostmarketsarefairlyactivewithfirmsenteringandleavingallthetime.
• Whenanindustrygrowsbecausemorefirmsareenteringthemarket,supplyfortheindustryincreases(shiftsright)
• Iftheindustryisshrinkingbecausefirmsareleavingthemarket,supplyfortheindustrydecreases(shiftsleft)
ChangeinSellers’ExpectationsfortheFuture
• Expectationsforthefutureaffectsthedecisionsbusinessesmake.Thiscanaffectcosts.
• Tobeabletomakepredictionsabouttheaffectofsellers’expectationsforthefuture,weneedmorespecificsaboutthoseexpectations.
• Forexample,manybusinesseswereuneasyabouthavingObamaasapresidentbecausetheyfearedhighertaxesandmoreregulations.Asaresult,theydidnotgrowtheirbusinessesastheydecidedtowaitouthispresidency.Thisledtoadecreaseinsupplyorashiftleft.
SupplyElasticity
! Supplyelasticity–ameasureofthedegreetowhichthequantitysuppliedchangesinresponsetoachangeinprice.! Elastic–whenthechangeinpricecausesa
proportionallylargerchangeinthequantitysupplied(flatsupplycurve)
! Inelastic–whenthechangeinpricecausesaproportionallysmallerchangeinthequantitysupplied(steepsupplycurve)
! Unitelastic–whenachangeinpricecausesaproportionalchangeinthequantitysupplied.
! Supplyelasticityisdeterminedbyhowlongittakesforthebusinesstochangeitsproduction.! Ifabusinesscanchangeproductionquicklyinresponse
toachangeinprice,supplyismoreelastic.! Ifabusinesscannotchangeitsproductionquicklyin
responsetoachangeinprice,supplyismoreinelastic.(Ex:nuclearpowerplant)
TheTheoryofProduction
Chapter5,Lesson2
TheProductionFunction
! Productionfunction–graphshowinghowachangeinasinglevariableinputaffectstotaloutput! Allothervariablesareheldconstantexceptone.! Theproductionfunctiononthenextslideshowshowoutputwillchangeasthenumberof
workersincreasesfrom0to12.
! Shortrun–productionperiodsoshortthatonlyvariableinputscanbechanged! Variableinputs–inputsintoproductionthatcanbeeasilychangedtochangetheamountof
outputproduced–likelaborandrawmaterials! Theproductionfunctiononthenextsliderepresentstheshortrun.
! Longrun–productionperiodlongenoughtochangetheamountvariableandfixedinputsusedinproduction! Fixedinputs–inputsthatdonotoftenchangetoproduceachangeinoutputproduced–like
machinery,technologyandbuildings
TheProductionFunction
TheProductionFunction
! Totalproduct–totaloutputproducedbyabusiness
! Marginalproduct–theextraoutputproducedduetotheadditionofonemoreunitofinput! Themarginalproductofthethirdworkeristhetotalproductfor3workersminus
thetotalproductfor2workers(38–20=18)! Noticethatthemarginalproductforeachworkerisdifferent.Thisisnormal.
! Stagesofproduction–phasesofproduction(ontheproductionfunction)thatconsistofincreasing,decreasingandnegativereturns.! Thisiswheremarginalproductionisincreasingwitheachworkeradded,
decreasingwitheachworkeraddedandnegativewitheachworkeradded.! Decreasingmarginalproduct–notethatyouarestillgettingmoreoutputwith
eachadditionalworker–justthemarginalproductisdecreasing.
StagesofProduction
StageI–IncreasingMarginalReturns
• Wherethemarginalproductforeachadditionalunitofoutput(worker)isincreasing
• Thishappensbecauseasworkersareadded,theycooperateorspecializetomakebetteruseoftheirequipment.
• Inourexample,thefirst5workersareinstageI.
• BusinessesdonotknowinglyproduceinStageI.TheywillkeepaddingworkersuntiltheyareinStageII.
StageII–DecreasingMarginalReturns
• Totalproductionkeepsgrowingbutbysmallerandsmalleramounts.
• Eachworkerismakingadiminishing,butpositivecontributiontototaloutput.
• Diminishingreturns–stageofproductionwhereoutputincreasesatadecreasingrateasmoreunitsofavariableinputareadded
• Inourexample,StageIIgoesfromthe6thworkerthruthe10thworker.
• ThegoalofbusinessesistooperateinStageII.
StageIII–NegativeMarginalReturns
• Themarginalproductofeachworkerisnegative.
• Asmoreworkersareadded,thefirmproduceslessoutput.
• Eachworkerdecreasestotaloutputbecauseinthisstagetherearetoomanyworkersandtheyaregettingineachothers’wayorotherwiseinterferingwithproduction.
• BusinessesdonotproduceinStageIII.TheywillletworkersgountiltheyareinStageII.
Cost,RevenueandProfitMaximization
Chapter5,Lesson3
Production,Cost,RevenuesandProfits
FindingMarginalCost
! Fixedcosts–costsofproductionthatdonotchangewhenoutputchanges! Thebusinessincursthesecostsevenifthereislittletonoproduction.! Overhead–anothernameforfixedcosts! Includessalariesforexecutives,interestcostondebt,rentormortgagepayments,property
taxes,depreciation…! Depreciation–thechargeforgradualwearandtearonmachinery
! Variablecosts–productioncostthatvariesasoutputchanges! Includeslabor,rawmaterials,electricpowertorunmachines! Inourexample,thevariablecostisforlaborat$90perworkerperday.
! Totalcost–allofthecostsassociatedwithproduction(variablecostsplusfixedcosts)
! Marginalcost–theextracostofproducingoneadditionalunitofoutput! Themarginalcostforthe5thworkeristotalcostfor5workersminustotalcostfor4workers
dividedbythemarginalproductofthe5thworker:(500–410)/28=$3.21
FindingMarginalRevenue
! Averagerevenue–theaveragepricethateveryunitofoutputsellsfor
! Totalrevenue–totalamountearnedbyafirmfromthesaleofitsproducts.! Also,averagepriceofagoodtimesthequantitysold! Inourexample,eachunitsellsfor$15.Totalrevenueiscalculatedas$15timestotal
product.
! Marginalrevenue–theextrarevenuefromthesaleofoneadditionalunitofoutput.! Calculatedasthechangeintotalrevenue÷marginalproduct.! Forthe5thworker,thisis(1350–930)÷28! Noticethatsinceallofourunitsofproductinourexamplesellfor$15,ourmarginal
productisalso$15.Inreality,firmschargedifferentpricesfortheproduct,sothesewillnotbethesame.
ProfitMaximizationandBreakEven
! Totalprofit–totalrevenueminustotalcosts! Businessesseektoproducethequantitythatmaximizesprofit.! Inourexample,thefirmswouldhire8or9workersbecausethatcorresponds
tothequantitythatmaximizesprofitsat$1300.
! Profit-maximizingquantityofoutput–levelofproductionwheremarginalcost=marginalrevenue! Inourexample,thisoccursat9workers.
ProfitMaximizationandBreakEven
! Sometimesafirmmaynotbeabletosellenoughproducttomaximizeprofits,soitneedstoknowhowmuchitneedstoselltocoveritscosts(notlosemoney).! Break-evenpoint–thelevelofproductionthatgeneratesjustenoughrevenuetocoverits
operatingcosts.! Thisisthepointwheretotalcost=totalrevenue! Inourexample,withoneworker,totalrevenueis$105andtotalcostis$140andcosts
wouldnotbecovered.! Withtwoworkers,totalrevenueis$300andtotalcostis$230.Sincethisisjustenoughto
covercosts,thebreak-evenpointforthisfirmisforthemtohire2workers.
! E-commerce–electronicbusinessorbusinessconductedovertheinternet! Thishasbecomeverypopularwithbusinessesbecauseitismuchlessexpensive.Businesses
donothavethecostsofoperatingastore.! Assuch,thebreak-evenpointofsalesismuchlower.