Supply

Supply

Roadmap

  • Individual supply

  • Market supply

  • Supply shifts

Learning about Individual Supply

  • Example: Mojo Asian in Isla Vista deciding how much Boba Tea to produce.

  • Choices: Produce Boba Tea, another product, or not produce at all.

  • Pricing decision: For every price, they must evaluate, "At this price, how much should I produce?"

  • Quantities for Mojo Asian at Different Prices:

    • Price: $7 → Quantity: 215 teas/week

    • Price: $6 → Quantity: 175 teas/week

    • Price: $5 → Quantity: 125 teas/week

    • Price: $4 → Quantity: 70 teas/week

    • Price: $3 → Quantity: 35 teas/week

Mojo Asian’s Individual Supply Curve

  • Axes:

    • Price on the vertical axis

    • Quantity produced on the horizontal axis

  • Functionality: Illustrates how quantity supplied changes with price.

Analyzing the Individual Supply Curve

  • Characteristics:

    • The individual supply curve is upward-sloping.

    • Lower prices correlate with lower quantities planned for sale.

    • Cheaper Boba Tea results in a reduced willingness to supply.

  • Supply Curve Dynamics:

    • Represents a set of production plans that depend on price.

    • Plans hold constant when production costs and other factors remain unchanged.

  • Law of Supply: Quantity supplied increases as price increases.

Introducing Perfect Competition

  • Implications: In perfect competition, you sell at market price.

    • Higher prices attract no buyers; lower prices incur losses.

  • Mojo Asian's Role:

    • They decide quantity but do not set the price.

    • Definition of Price-taker: A business that accepts market prices as given.

  • Competitive Market Assumptions:

    • Identical products from all businesses.

    • Numerous small buyers and sellers within the market.

Deciding What Quantity to Supply

  • Rational Rule for Sellers in Competitive Markets: Supply an additional unit if Price ≥ Marginal Cost (MC).

  • Maximizing Economic Surplus: Ensures sales increase economic surplus or profits.

  • Decision Process for Mojo Asian:

    1. Convert the quantity question to a decision to sell one more.

    2. Use Cost-Benefit Principle: sell one more if Marginal Benefit (price) ≥ Marginal Cost.

    3. Compare Boba Tea sales to next best alternative (Opportunity Cost Principle).

    4. Consider interdependence of decisions (how this choice affects other decisions).

Supply Is All About Marginal Costs

  • Understanding the Supply Curve:

    • Reveals price related to each quantity: e.g.,

    • At $6, Mojo Asian sells 175 Boba Teas; at $4, 70 Boba Teas.

    • Following the rational rule (sell if P ≥ MC), the individual supply curve is the marginal cost curve.

    • Price = Marginal Cost relationship analogous to demand:

    • Marginal Benefit curve = individual demand curve.

  • Marginal Costs at Different Quantities:

    • 175th Boba Teas' marginal cost: $6.

    • 70th Boba Teas' marginal cost: $4.

Understanding Marginal Costs

  • Types of Costs:

    • Variable Costs: Costs that fluctuate with output (e.g., wages, materials).

    • Fixed Costs: Consistent costs regardless of output volume (e.g., rent, machinery).

  • Key Principle: Supply theory revolves around marginal costs; fixed costs are irrelevant when deciding production quantity.

Time Horizons and Costs

  • Short Run:

    • Certain inputs are fixed (e.g., size of store, equipment).

    • Variability exists in labor and materials.

  • Long Run:

    • All inputs are variable; firms can adapt size and production.

Short and Long Run Supply Curves

  • Short Run Pricing & Quantity:

    • Price at $3 correlates to 35 teas/week; at $6 corresponds to 200 teas/week.

  • Long Run Pricing & Quantity:

    • Varies as businesses adjust size and production capacity.

Why Does Supply Curve Slope Upward?

  • Reasoning Behind Upward Slope:

    • Increasing marginal costs arise when each additional unit incurs higher costs due to:

    1. Diminishing Marginal Product: Each added input leads to smaller incremental output increases.

    2. Rising Input Costs: Cost to purchase inputs increases with higher levels of procurement.

Are Marginal Costs Always Increasing?

  • **Inflation of Marginal Costs:

    • Usually increases over time but can decrease during mass production benefits.

  • Illustrative Example:

    • Diminishing marginal product due to fixed inputs.

Production Decisions

  • Short Run Decision Making:

    • If variable costs exceed revenue, do not produce; if not, supply where P = MC.

    • Focus on variable costs as fixed costs are viewed as sunk costs.

  • Long Run Decision Making:

    • All costs considered; if total costs exceed revenue, shut down.

Market Supply Curve and Construction

  • Sum of Individual Supply: Incorporate market dynamics by combining individual supplies to determine market supply.

  • Estimating Market Supply:

    1. Survey Suppliers: Assess current and potential market suppliers.

    2. Total Quantity Supplied Calculation: Add quantities at different price levels.

    3. Scale for Market Representation: Adjust results to reflect broader supplier base.

    4. Plot Market Supply Curve: Graph total supply relative to prices.

Understanding Shifts in Supply Curves

  • Key Factors in Shifting Supply Curve:

    1. Costs of inputs (raw materials, labor).

    2. Technology and productivity advancements.

    3. Pricing of other outputs.

    4. Seller expectations about future prices.

    5. Number of sellers within the market.

  • Movement vs. Shift Explanation:

    • Price changes lead to movements along the supply curve (changed quantities).

    • Changes in non-price factors result in shifts of the supply curve.

Changes Impacting Supply for Cookies

  1. Increase in Input Price: Results in supply decrease (leftward shift).

  2. Market Price Decrease: Causes movement, not a shift.

  3. Productivity Increase: Enhances supply (rightward shift).

  4. Consumer Income Increase: Affects demand, not supply directly.

Analysis of Supply Adjustments in Cattle Ranching Context

  1. Leather Price Decrease: Supply for beef shifts left (as they are complements in production).

  2. Beef Price Increase: Movement along the beef supply curve upwards.

  3. Lamb Price Increase: Shifts beef supply left as they are substitutes.

  4. Chicken Price Decrease: Demand shifts left, not affecting beef supply directly.

Key Takeaways

  • The market supply curve is the aggregation of individual supply curves.

  • Understanding factors influencing both shifts and movements along the supply curve is crucial for economic analysis in competitive markets.