Cost and Choice: The concept of supply

Supply and Demand

both assume that decision makers face alternatives and choose among them, and that the choices reflect a comparison of expected benefits and costs.

The incentive to produce and supply scarce goods is shaped by opportunity costs and the market prices that reflect and inform us of the costs.

Costs are tied to actions, not things:

costs are obviously not tied to actions, not things. They are always tied to actions, decisions, choices. The economic way of thinking recognizes no objective costs.

How are costs perceived?

Things have no costs at all. only actions do.

example: the cost of a baseball its 10 dollars you might think, but in reality the cost of purchasing an official Major League Baseball at the local sporting goods store is 10 dollars, since purchasing is an action it can entail sacrificed opportunities and thereby have a cost.

• There are no objective costs. All costs are costs to someone who places value on a forgone opportunity. Only actions have costs

The irrelevance of sunk costs :

• The value of goods is always determined by the margin, meaning that what would they be willing to pay for an extra amount of the good in their actual situation. the same principal applies to costs.

• most common error on costs is confusing costs previously incurred (sunk costs) with additional or marginal costs. The proper stance is looking forward to current opportunities

• SUNK COSTS: are the prices you paid that are nonrefundable no matter what happens.

• in the economic way of thinking sunk cost is a price go history, for it represents no opportunity for future choice.

Producers costs:

• There are substitutes for everything in production as well as in consumption.

• The amount of money a producer must pay for any resource, physical or human, will depend on what the owner of that resource can obtain from someone else, and that depends of the value of what that resource can create for someone else.

Marginal opportunity costs:

• relation between marginal cost and opportunity cost:

• all opportunity costs are marginal costs and all marginal costs are opportunity costs.

• Opportunity costs and marginal costs are the same thing viewed from different angles.

• opportunity costs calls attention to the value of the opportunity forgone by an action.

• and marginal costs calls attention to the change in the existing situation that the action entails.

Costo de oportunidad:

el valor de la mejor opción alternativa que se sacrifica al tomar una decisión determinada.

Costo marginal:

costo adicional de producir una unidad adicional de un bien o servicio.

cost and supply

demand curves indicate the marginal costs or sacrifices that people are willing to incur in order to obtain particular goods, supply curves show the marginal costs that must be covered to induce potential suppliers to make particular goods available. ( cantidad de un bien que los proveedores esta dispuestos a ofrecer y el precio al que están dispuestos a venderlo) (representan los costos adicionales asociados a una unidad adicional del bien)

conclusions:

• producers consider marginal costs of production when deciding upon which outputs, and which levels of output, to produce

• relative prices further inform producers of the marginal costs, and marginal benefits, of their alternative production plans.

The supply curve:

• the supply curve illustrates the alternative amounts of a good supplied at alternative prices.

• Supply curves are the marginal opportunity cost curves of making various quantities for a good available.

Supply itself can change :

Anything that changes the marginal cost of production will tend to change or shift the overall supply curve.

Factores que pueden desplazar la curva:

1. △ en el numero de ofertantes.

2. cualquier cosa que modifique un costo de producción marginales.

   2.1 cambio en el precio de un factor de producción

   2.2 cambio tecnologico

   2.3 cambio en el precio relativo de un producto alternativo

3. cambio en el precio futuro

Marginal costs and average costs

• Marginal cost is the consequence of action; it should be therefore the guide to action.

• business people won’t commit themselves to action unless the they anticipate being able to cover their total cost.

Price elasticity of supply:

price elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in the pice.

%cambio en cantidad / % cambio en precio

Once over lightly:

• supply and demand curves reflect peoples estimates of the value of alternative opportunities.

• quantities that are supplied and demanded, depend n the choices people make.

• Costs are always the value of the opportunities that particular people sacrifice.

• sunk costs: past expenditures cannot be affected by present decisions. Are also irrelevant to present decision making.

• opportunity costs are marginal costs. additional costs that an action or a decision entails.

• supply depends on costs.

• cost of supplying is the value of the opportunities forgone by the act of supplying. (choosing one course of action instead of another)

• anything that affects the marginal cost of production would cause a shift on the curve of supplying.

• price elasticity of supply is the percentage change in the quantity supplied dived the percentage change in the price.

VOCAB:

• Expected benefit and cost