•Imagine that you are cell phone manufacturers andthat the price consumers are willing and able to payfor cell phones begins to rise.
•How would this affect your production of cellphones? Would you make more or fewer cellphones?
–You would want to make more.
•Why would you want to make more?
–To cash in on the rise in prices and make more profit.
THE QUANTITY SUPPLIED
Profit is the total revenuea firm receives fromselling its product minusthe total cost ofproducing it.
The quantity supplied isthe amount of a goodthat firms are willing tosupply at a particularprice over a given periodof time.
THE LAW OF SUPPLY
According to the lawof supply, an increasein the price of a goodleads to an increasein the quantitysupplied.
•Price increases theQUANTITY supplied not thesupply.
•Why are firms willing toproduce more of a goodwhen its price increases?
•Ceteris paribus.
THE SUPPLY SCHEDULE ANDTHE SUPPLY CURVE
The supply schedule for a good is a table listing thequantity of the good that will be supplied at specifiedprices.
THE SUPPLY SCHEDULE AND THESUPPLY CURVE
A firm’s supply curve is a graphical representation ofthe supply schedule, showing the quantity the firm willsupply at each price.
THE MARKET SUPPLY CURVE
THE MARKETS WITHSUPPLY CURVES
There is perfect competition in amarket when there are many firmsselling identical goods, firms are free toenter and exit the market, andconsumers have full information aboutthe price and availability of goods.
THE MARKETS WITHSUPPLY CURVES
1. Every unit of the good sold in the market is identical,regardless of which firm is selling it.
2. The good is produced by many firms, none of which is largeenough to influence the price of the good.
3. New firms that want to supply the good are free to enterthe market, and existing firms that want to stop supplying itare free to exit the market.
4. Consumers are aware of the price charged by the variousfirms and have the opportunity to buy from whichever firmthey choose.
There is perfect competition among firms when:
WHEN OTHER FACTORSCHANGE
A shift of the supplycurve is the result of achange in the quantitysupplied at every price,not to be confused with amovement along thesupply curve, which is theresult of a change in theprice.
Shifts of the Supply Curve
•The price of milk goes up 30 cents a gallon. Decrease in supplyof ice cream at all prices (cost of inputs).
•The government raises the minimum wage to $8 an hour.Decrease in supply of ice cream at all prices (governmentregulation).
•A hurricane wipes out the sugar crop in Hawaii. Decrease insupply of ice cream at all prices (availability of inputs).
•New regulations from the government mandate that they usespecific cleaning tools more often in the factory. Decrease insupply of ice cream at all prices (government regulations).
FACTORS THAT SHIFTTHE SUPPLY CURVE
The cost of inputs
Government policies
Taxes
Regulations
Subsidies
The number of firms
Technological change
Natural disasters andweather
Expectations about futureprices
The cost of inputs
Government policies
Taxes
Regulations
Subsidies
The number of firms
Technological change
Natural disasters andweather
Expectations about futureprices
FACTORS THAT SHIFTTHE SUPPLY CURVE
UNDERSTANDINGPRODUCTION
The short run is the period of time during whichthe quantity of at least one input is fixed.
The long run is the period of time in which thequantities of all inputs are variable.
Short Run verses Long Run
•This is important because it determines the use ofspace in the short run.
•If a restaurant wants to serve more people in theshort run, it buys more advertising, and more food toprepare. More labor is hired. In the long run, ifbusiness is good, they can build a bigger restaurant ormore locations. They can add more stoves, andtables. Long run means that capital purchases canincrease production, but short run means only labor,and materials.
Short Run versus Long Run
•Don’t be confused by the terms short run and longrun.
It boils down to this:
• in the short run, the quantity of at least one input isfixed, whereas in the long run the quantities of allinputs are variable.
•The inputs with fixed quantities in the short run arecalled fixed inputs. In the long run, even fixed inputsbecome variable inputs.
UNDERSTANDINGPRODUCTION
A production schedule indicatesthe inputs needed to producedifferent quantities of output.
Ask at what point do we stop hiring workers?
UNDERSTANDINGPRODUCTION
The marginal product of labor is the amount bywhich total output increases when one moreworker is hired.
–Increasing marginal return is usually high in thebeginning due to specialization of resources.
Diminishing marginal productivity describes thedecrease in the marginal product of a variableinput, such as labor, as more and more of it iscombined with a fixed input, such as equipment.
Diminishing Marginal Productivity
•Too many workers can actually reduce output.
– volunteers clogging up a kitchen
–each additional worker contributes less to total outputthan the worker before because additional workers haveless equipment to work with.
•visually that the point of diminishing returns is adownturn in the graph.
3/20/2016
Chapter 5-Mods 13, 14 & 15
Negative Marginal Product
•It’s easy to confuse diminishing marginal productwith a negative marginal product, but they are verydifferent.
•When marginal product is decreasing but stillpositive, hiring additional workers causes total out torise.
•But when marginal product is negative, employingmore workers actually causes total output to fall.
THE COST OF PRODUCTION
Fixed cost is the cost ofinputs that do not varywith the amount ofoutput produced.
Variable cost is the cost ofinputs that do vary withthe amount of outputproduced.
Fixed Cost versus Variable Cost
•Fixed cost: (short run) include rent paid forbuildings, the cost of equipment, and fees foroperating licenses. Does not increase as outputincreases. Ex. Stays the same regardless of thenumber of lawn that are mowed..
•Variable cost changes with the number of units ofoutput produced.
•Variable costs: payments for wages, electricity, andraw material.
Variable Cost and Total CostCalculation
•In the table 15.1, the daily wage of each worker is$60, so the variable cost is $ 60 X ( the number ofworkers hired)
•Example: to mow 21 lawns, Blade Runner hires 4workers, so the variable cost is $ 60 X 4 = $240
•Total Cost: is the entire amount the firm must spendto produce a specified amount of output.
–Add Fixed Cost + Variable Cost
THE COST OF PRODUCTION
Marginal cost is the additional cost of producing one more unitof output. Marginal cost is calculated as the change in total costdivided by the change in output.
PROFIT MAXIMIZATION ANDMARGINAL ANALYSIS
The profit maximizing outputlevel is the amount of outputthat gives a firm as muchprofit as possible.
Marginal revenue is theadditional revenue a firmreceives from selling anotherunit of output.
PROFIT MAXIMIZATION ANDMARGINAL ANALYSIS
Firms will produce where MR=MC.
That is the profit maximizing output.
