Transcript Lecture_Ch05 - Princeton High School

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 5: Exploring Economics
- Module 13: Understanding Supply
- Module 14: Shifts of the Supply Curve
- Module 15: Production, Cost, and the Profit-Maximizing
Output Level
MODULE 13:
Understanding Supply
KEY IDEA:
Producers respond to price changes, offering more goods for
sale when prices increase and fewer goods when prices
decrease.
OBJECTIVES:
• To explain the concept of supply and the law of supply.
• To explain the relationship between a supply schedule and a
supply curve.
• To identify the factors that cause the quantity supplied to
be more or less responsive to price changes.
Supply
• This chapter is about supply—firms that sell goods
and services.
• Thinking like a buyer and thinking like a seller are
different.
• Buyers want to maximize their satisfaction; sellers
want to earn the greatest profit.
• To maximize profit, suppliers adjust the quantity of
the good or service they produce in response to
changes in either the price at which it can be sold or
the cost of producing it.
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Chapter 5-Mods 13, 14 & 15
• Imagine that you are cell phone manufacturers and
that the price consumers are willing and able to pay
for cell phones begins to rise.
• How would this affect your production of cell
phones? Would you make more or fewer cell
phones?
– 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.
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Chapter 5-Mods 13, 14 & 15
THE QUANTITY SUPPLIED
Profit is the total revenue
a firm receives from
selling its product minus
the total cost of
producing it.
The quantity supplied is
the amount of a good
that firms are willing to
supply at a particular
price over a given period
of time.
THE LAW OF SUPPLY
According to the law
of supply, an increase
in the price of a good
leads to an increase
in the quantity
supplied.
• Price increases the
QUANTITY supplied not the
supply.
• Why are firms willing to
produce more of a good
when its price increases.
• ceteris paribus.
THE SUPPLY SCHEDULE AND
THE SUPPLY CURVE
The supply schedule for a good is a table listing the
quantity of the good that will be supplied at specified
prices.
THE SUPPLY SCHEDULE AND THE
SUPPLY CURVE
A firm’s supply curve is a graphical representation of
the supply schedule, showing the quantity the firm will
supply at each price.
THE MARKET SUPPLY CURVE
THE MARKETS WITH
SUPPLY CURVES
There is perfect competition in a
market when there are many firms
selling identical goods, firms are free to
enter and exit the market, and
consumers have full information about
the price and availability of goods.
• Episode 7 of The Economic Lowdown podcast,
“Supply,” discusses the supply side of the market:
• www.stlouisfed.org/ education_resources/economiclowdown-podcast-series/supply.
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Chapter 5-Mods 13, 14 & 15
THE MARKETS WITH
SUPPLY CURVES
There is perfect competition among firms when:
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 large
enough to influence the price of the good.
3. New firms that want to supply the good are free to enter
the market, and existing firms that want to stop supplying it
are free to exit the market.
4. Consumers are aware of the price charged by the various
firms and have the opportunity to buy from whichever firm
they choose.
Perfect Competition
•Identical products like corn or wheat
•NO price control—Small firms in very large markets
with many, many sellers; they are price takers who
accept the market price.
•NO barriers to entry or exit.
•Perfect information for buyers means awareness of
the market price.
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Chapter 5-Mods 13, 14 & 15
MODULE 13 REVIEW
What is…
A. Profit?
B. Quantity supplied?
C. Supply schedule?
D. Supply curve?
E. Market supply curve?
F. Law of supply?
G. Perfect competition?
MODULE 14:
SHIFTS OF THE SUPPLY CURVE
KEY IDEA:
The supply curve can shift because of changes in the cost of
inputs, government policies, the number of firms, technology,
weather, and expectations about future prices.
OBJECTIVES:
• To differentiate between a movement along the supply
curve and a shift of the supply curve.
• To explain how changes in factors other than price cause
the supply curve to shift.
• To recognize which types of changes cause the supply curve
to shift to the left or to the right.
WHEN OTHER FACTORS
CHANGE
A shift of the supply
curve is the result of a
change in the quantity
supplied at every price,
not to be confused with a
movement along the
supply curve, which is the
result of a change in the
price.
Shifts of the Supply Curve
• The price of milk goes up 30 cents a gallon. Decrease in supply
of 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 (government
regulation).
• A hurricane wipes out the sugar crop in Hawaii. Decrease in
supply of ice cream at all prices (availability of inputs).
• New regulations from the government mandate that they use
specific cleaning tools more often in the factory. Decrease in
supply of ice cream at all prices (government regulations).
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FACTORS THAT SHIFT
THE SUPPLY CURVE
The cost of inputs
Government policies
Taxes
Regulations
Subsidies
The number of firms
Technological change
Natural disasters and
weather
Expectations about future
prices
FACTORS THAT SHIFT
THE SUPPLY CURVE
The cost of inputs
Government policies
Taxes
Regulations
Subsidies
The number of firms
Technological change
Natural disasters and
weather
Expectations about future
prices
MODULE 14 REVIEW
What is…
A. Change in supply?
B. Technological progress?
C. Change in the quantity supplied?
D. Inventory?
E. Subsidy?
MODULE 15:
PRODUCTION, COST & THE PROFITMAXIMIZING OUTPUT LEVEL
KEY IDEA:
Firms can maximize their profit by producing the quantity
that equates marginal revenue and marginal cost.
OBJECTIVES:
• To explain the components of total cost.
• To identify the condition for profit maximization.
• To explain how a profit-maximizing entrepreneur decides
whether to open a new firm and whether to shut down an
existing firm.
UNDERSTANDING
PRODUCTION
The short run is the period of time during which
the quantity of at least one input is fixed.
The long run is the period of time in which the
quantities of all inputs are variable.
Short Run verses Long Run
• This is important because it determines the use of
space in the short run.
• If a restaurant wants to serve more people in the
short run, it buys more advertising, and more food to
prepare. More labor is hired. In the long run, if
business is good, they can build a bigger restaurant or
more locations. They can add more stoves, and
tables. Long run means that capital purchases can
increase production, but short run means only labor,
and materials.
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Chapter 5-Mods 13, 14 & 15
Short Run versus Long Run
• Don’t be confused by the terms short run and long
run.
It boils down to this:
• in the short run, the quantity of at least one input is
fixed, whereas in the long run the quantities of all
inputs are variable.
• The inputs with fixed quantities in the short run are
called fixed inputs. In the long run, even fixed inputs
become variable inputs.
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UNDERSTANDING
PRODUCTION
A production schedule indicates
the inputs needed to produce
different quantities of output.
Ask at what point do we stop hiring workers?
UNDERSTANDING
PRODUCTION
The marginal product of labor is the amount by
which total output increases when one more
worker is hired.
– Increasing marginal return is usually high in the
beginning due to specialization of resources.
Diminishing marginal productivity describes the
decrease in the marginal product of a variable
input, such as labor, as more and more of it is
combined 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 output
than the worker before because additional workers have
less equipment to work with.
• visually that the point of diminishing returns is a
downturn in the graph.
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Chapter 5-Mods 13, 14 & 15
Negative Marginal Product
• It’s easy to confuse diminishing marginal product
with a negative marginal product, but they are very
different.
• When marginal product is decreasing but still
positive, hiring additional workers causes total out to
rise.
• But when marginal product is negative, employing
more workers actually causes total output to fall.
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THE COST OF PRODUCTION
Fixed cost is the cost of
inputs that do not vary
with the amount of
output produced.
Variable cost is the cost of
inputs that do vary with
the amount of output
produced.
Fixed Cost versus Variable Cost
• Fixed cost: (short run) include rent paid for
buildings, the cost of equipment, and fees for
operating licenses. Does not increase as output
increases. Ex. Stays the same regardless of the
number of lawn that are mowed..
• Variable cost changes with the number of units of
output produced.
• Variable costs: payments for wages, electricity, and
raw material.
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Variable Cost and Total Cost
Calculation
• In the table 15.1, the daily wage of each worker is
$60, so the variable cost is $ 60 X ( the number of
workers hired)
• Example: to mow 21 lawns, Blade Runner hires 4
workers, so the variable cost is $ 60 X 4 = $240
• Total Cost: is the entire amount the firm must spend
to produce a specified amount of output.
– Add Fixed Cost + Variable Cost
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THE COST OF PRODUCTION
Marginal cost is the additional cost of producing one more unit
of output. Marginal cost is calculated as the change in total cost
divided by the change in output.
PROFIT MAXIMIZATION AND
MARGINAL ANALYSIS
The profit maximizing output
level is the amount of output
that gives a firm as much
profit as possible.
Marginal revenue is the
additional revenue a firm
receives from selling another
unit of output.
Calculations
profit maximizing firm looks for where MR=MC.
1.how is marginal revenue calculated?
For every lawn, $20 is charged.
2. Total Revenue is Price x output
3. Total Revenue — Total cost = profit.
4.Total Cost = Fixed Cost + Variable cost
5.Marginal cost = change in total cost/change in output
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PROFIT MAXIMIZATION AND
MARGINAL ANALYSIS
Firms will produce where MR=MC.
That is the profit maximizing output.
MODULE 15 REVIEW
What is…
A. Short run?
B. Marginal product of
labor?
C. Long run?
D. Marginal revenue?
E. Law of diminishing
returns?
F. Fixed cost?
G. Variable cost?
H. Profit- maximizing
output level?
I. Total cost?
J. Output?
K. Diminishing marginal
Productivity?
L. Cost minimization?