Chapter 3: Show Me the Money (The Law of Supply)
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. Supplymarginal 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 increase quantity supplied. The law of supply: if the price of a product/service rises, quantity supplied increases. -If the price of a product/service changes, that affects quantity supply. -If anything else changes, that affects supply. -What is “anything else”? – (#B, T, PORPSP, POI, EFP) 1. Technology -An improvement in technology causes a change in supply not quantity supplied 2. Price of Inputs -A fall in the price of inputs causes an increase in supply -A rise in the price of inputs causes a decrease in supply -The affect of lower input costs on a market is the same as an improvement in technology 3. Prices of related products or services produced -A Lower price for a related product/service a business produces causes an increase in supply.
-A higher price for a related product/service will cause a decrease in supply (If Paola can make more money doing nails, she will shift her resources) 4. Expected future prices -A fall in expected future prices causes an increase in supply today (better profits today) -A rise in expected future prices will cause a decrease in supply today (better profits in future) 5. Number of Businesses -An increased number of businesses cause an increase in supply. -A decreased number of businesses cause a decrease in supply. -The two ways of reading supply stats… 1. At any given price, businesses are willing to supply a larger quantity. (Left to right) 2. At any given quantity supplied, businesses are willing to accept a lower price because there marginal opportunity costs of production are lower. -The responsiveness of quantity supplied to a change in price is related to geed and the quest for profits, but mostly it has to do with how east or costly it is to increase production. Elasticity of Supply: measures by how much quantity supplied responds o a change in price. Inelastic: For inelastic supply, small response in quantity supplied when price rises. Elastic: For elastic supply, large response in quantity supplied when price rises. Elasticity of Supply = Percentage of change in Quantity supplied ------------------------------------------------------Percentage of change in price -Supply is Inelastic when numerical value is less than one -Supply is Elastic when numerical value is greater than one
-Elasticity of supply demands on availability of additional inputs and time it takes to produce the product/service. -Availability of input (the difference in elasticity of gold mining and snow shoveling) -Time it takes to produce product or service (compare Paola business to that of a goldmining business) -Elasticity of supply allows more accurate projections of future outputs and prices, (smart choices) helping businesses avoid disappointed customers.
-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. Supplymarginal 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 increase quantity supplied. The law of supply: if the price of a product/service rises, quantity supplied increases. -If the price of a product/service changes, that affects quantity supply. -If anything else changes, that affects supply. -What is “anything else”? – (#B, T, PORPSP, POI, EFP) 1. Technology -An improvement in technology causes a change in supply not quantity supplied 2. Price of Inputs -A fall in the price of inputs causes an increase in supply -A rise in the price of inputs causes a decrease in supply -The affect of lower input costs on a market is the same as an improvement in technology 3. Prices of related products or services produced -A Lower price for a related product/service a business produces causes an increase in supply.
-A higher price for a related product/service will cause a decrease in supply (If Paola can make more money doing nails, she will shift her resources) 4. Expected future prices -A fall in expected future prices causes an increase in supply today (better profits today) -A rise in expected future prices will cause a decrease in supply today (better profits in future) 5. Number of Businesses -An increased number of businesses cause an increase in supply. -A decreased number of businesses cause a decrease in supply. -The two ways of reading supply stats… 1. At any given price, businesses are willing to supply a larger quantity. (Left to right) 2. At any given quantity supplied, businesses are willing to accept a lower price because there marginal opportunity costs of production are lower. -The responsiveness of quantity supplied to a change in price is related to geed and the quest for profits, but mostly it has to do with how east or costly it is to increase production. Elasticity of Supply: measures by how much quantity supplied responds o a change in price. Inelastic: For inelastic supply, small response in quantity supplied when price rises. Elastic: For elastic supply, large response in quantity supplied when price rises. Elasticity of Supply = Percentage of change in Quantity supplied ------------------------------------------------------Percentage of change in price -Supply is Inelastic when numerical value is less than one -Supply is Elastic when numerical value is greater than one
-Elasticity of supply demands on availability of additional inputs and time it takes to produce the product/service. -Availability of input (the difference in elasticity of gold mining and snow shoveling) -Time it takes to produce product or service (compare Paola business to that of a goldmining business) -Elasticity of supply allows more accurate projections of future outputs and prices, (smart choices) helping businesses avoid disappointed customers.
