Transcript Quantity Supplied

Chapter 3
Show Me the Money
Chapter 3 - 1 © 2010 Pearson Education Canada
© 2010 Pearson Education Canada
Show Me the Money
The Law of Supply
Chapter 3 - 2 © 2010 Pearson Education Canada
LEARNING OBJECTIVES
3.1
Explain why marginal costs are ultimately
opportunity costs
3.2
Define sunk costs and explain why they do not
influence smart, forward-looking decisions
3.3
Describe the relationship between price and
quantity supplied, and identify the roles of
higher profits and marginal opportunity costs
of production
Chapter 3 - 3 © 2010 Pearson Education Canada
LEARNING OBJECTIVES
3.4
Explain the difference between a change in
quantity supplied and a change in supply,
and list five factors that change supply
3.5
Explain elasticity of supply and how it helps
businesses avoid disappointed customers
Chapter 3 - 4 © 2010 Pearson Education Canada
WHAT DOES IT REALLY COST?
COSTS ARE OPPORTUNITY COSTS
Businesses must pay higher
prices to obtain more of an
input because opportunity
costs change with
circumstances.
Marginal costs of additional
inputs are ultimately
opportunity costs — best
alternative use of the input.
Chapter 3 - 5 © 2010 Pearson Education Canada
COSTS ARE OPPORTUNITY COSTS
• Marginal cost
additional opportunity cost of increasing
quantity supplied
–
changes with circumstances
• Marginal cost increases as you increase
quantity supplied
• To buy inputs, business must pay price
matching best opportunity cost of input owner
Chapter 3 - 6 © 2010 Pearson Education Canada
FORGET IT, IT’S HISTORY
SUNK COSTS DON’T MATTER FOR FUTURE CHOICES
Sunk costs that cannot be reversed
are not part of opportunity costs.
Sunk costs do not influence smart,
forward-looking decisions.
Chapter 3 - 7 © 2010 Pearson Education Canada
SUNK COSTS DON’T MATTER FOR FUTURE CHOICES
• Sunk costs
past expenses that cannot be recovered
–
same no matter which fork in the road you take,
so no influence on smart choices
–
not part of opportunity costs
Chapter 3 - 8 © 2010 Pearson Education Canada
MORE FOR MORE MONEY: THE LAW OF SUPPLY
If the price of a
product/service rises,
quantity supplied increases.
Businesses increase production
when higher prices either
create higher profits or cover
higher marginal opportunity
costs of production.
Chapter 3 - 9 © 2010 Pearson Education Canada
LAW OF SUPPLY
• Quantity supplied
quantity you actually plan to supply at a given price
Figure 3.1
Your Supply of Hours Worked
Price
Quantity Supplied
(minimum willing to accept)
(hours)
$ 10
10 - 20
$ 20
35
$ 30
55
Chapter 3 - 10 © 2010 Pearson Education Canada
continued…
• Supply
businesses’ willingness to produce a particular
product/service because price covers all
opportunity costs
• Increasing marginal opportunity costs arise
because inputs not equally productive in all
activities
Chapter 3 - 11 © 2010 Pearson Education Canada
continued…
Figure 3.3 PPF Parlour Maximum Combinations &
Marginal Opportunity Costs
Combination Fingernails
Piercings Marginal Opportunity Cost
(fingernails given up)
A
B
15
14
0
1
C
12
2
D
9
3
E
5
4
F
0
Chapter 3 - 12 © 2010 Pearson Education Canada
5
(15 – 14)
1
(14 – 12)
1
(12 – 9)
1
(9 – 5)
1
(5 – 0)
1
= 1
= 2
= 3
= 4
= 5
Figure 3.4 Increasing Marginal Opportunity Cost
Chapter 3 - 13 © 2010 Pearson Education Canada
Figure 3.5 PPF Parlour’s Supply of Piercings
Price
Quantity Supplied
(marginal opportunity cost or
minimum willing to accept)
$ 20
1
$ 40
2
$ 60
3
$ 80
4
$100
5
Chapter 3 - 14 © 2010 Pearson Education Canada
• Market supply
sum of supplies of all businesses willing
to produce a particular product/service
• Law of supply
if the price of a product/service rises,
quantity supplied increases
Chapter 3 - 15 © 2010 Pearson Education Canada
Figure 3.6
Market Supply of Piercings
Price
Quantity Supplied
(marginal opportunity cost or
minimum willing to accept)
$ 20
100
$ 40
200
$ 60
300
$ 80
400
$ 100
500
Chapter 3 - 16 © 2010 Pearson Education Canada
CHANGING THE BOTTOM LINE:
WHAT CAN CHANGE SUPPLY?
Quantity supplied is changed only by a change in price.
Supply is changed by all other influences on
business decisions.
Chapter 3 - 17 © 2010 Pearson Education Canada
WHAT CAN CHANGE SUPPLY?
• Supply changes with changes in
–
technology
–
prices of inputs
–
prices of related products/services produced
–
expected future prices
–
number of businesses
Chapter 3 - 18 © 2010 Pearson Education Canada
continued…
• Supply increases with
–
improvement in technology
–
fall in price of an input
–
fall in price of a related product/service
–
fall in expected future price
–
increase in number of businesses
Chapter 3 - 19 © 2010 Pearson Education Canada
Figure 3.7 Market Supply of Piercings Before & After a
Technology Improvement
Price
Quantity
Quantity
(marginal opportunity
cost or minimum
Supplied
Supplied
(before improvement)
(after improvement)
willing to accept)
$ 20
100
200
$ 40
200
400
$ 60
300
600
$ 80
400
800
$ 100
500
1,000
Chapter 3 - 20 © 2010 Pearson Education Canada
Figure 3.8
Market Supply of Piercings with More Businesses
Price
Quantity
Quantity
(marginal opportunity
cost or minimum
Supplied
Supplied
(100 businesses)
(200 businesses)
willing to accept)
$
20
100
200
$
40
200
400
$
60
300
600
$
80
400
800
$ 100
500
1,000
Chapter 3 - 21 © 2010 Pearson Education Canada
HOW FAR WILL YOU JUMP FOR THE MONEY?
PRICE ELASTICITY OF SUPPLY
Elasticity of supply measures
how responsive quantity supplied
is to a change in price,
and depends on the difficulty,
expense, and time involved in
increasing production.
Chapter 3 - 22 © 2010 Pearson Education Canada
PRICE ELASTICITY OF SUPPLY
• Elasticity of supply measures how much quantity
supplied responds to a change in price
• Elasticity of supply =
Chapter 3 - 23 © 2010 Pearson Education Canada
% change in quantity supplied
% change in price
continued…
• Inelastic supply
small response in quantity supplied when price rises
–
example — supply of mined gold
–
elasticity of supply < 1
• Elastic supply
large response in quantity supplied when price rises
–
example — snow shovelling services
–
elasticity of supply > 1
Chapter 3 - 24 © 2010 Pearson Education Canada
continued…
• Elasticity of supply influenced by
–
availability of additional inputs —
more available inputs, more elastic supply
–
time production takes —
less time, more elastic supply
• Elasticity of supply allows accurate projections
of future outputs and prices, helping businesses
avoid disappointed customers
Chapter 3 - 25 © 2010 Pearson Education Canada
Chapter 3
Refresh Slides
Chapter 3 - 26 © 2010 Pearson Education Canada
COSTS ARE OPPORTUNITY COSTS
1. What is the real cost to a business of hiring or
purchasing any input?
2. Microsoft released a limited supply of Xbox 360s
in 2005 with a list price — or “real” price — of
$400.
The units immediately started selling on eBay
and other auction websites for far more than
$400. What do you think determined the “real”
price of an Xbox?
Chapter 3 - 27 © 2010 Pearson Education Canada
continued…
3. If a recession makes it much harder for workers
to find better-paying jobs, what might happen
to Paola’s labour costs?
Chapter 3 - 28 © 2010 Pearson Education Canada
SUNK COSTS DON’T MATTER FOR FUTURE CHOICES
1. Why aren’t sunk costs part of the opportunity
costs of forward-looking decisions?
2. Suppose you have just paid your bus fare.
A friend in a car pulls up offers you a ride.
Explain how you would decide between staying
on the bus or taking the ride, and the influence
of the paid fare.
3. If you bought a $100 textbook for a course, and
then dropped out after the tuition refund date,
is that $100 a sunk cost? Explain your answer.
Chapter 3 - 29 © 2010 Pearson Education Canada
LAW OF SUPPLY
1. Why does Paola need a higher price to be willing
to supply more body piercings?
2. If you could spend the next hour studying
economics or working at your part-time job,
which pays $10 an hour, what is your personal
opportunity cost, in dollars, of studying?
Chapter 3 - 30 © 2010 Pearson Education Canada
continued…
3. Suppose the PPF Parlour was producing only
piercings and no fingernail sets. If Paola wanted
to start producing some fingernail sets, which
staff person would she switch to fingernails first?
Who would she switch last? Explain your
answers.
Chapter 3 - 31 © 2010 Pearson Education Canada
WHAT CAN CHANGE SUPPLY?
1. Explain the difference between a change in
quantity supplied and a change in supply, and
distinguish the five factors that can change supply.
2. Suppose you are working at two part-time jobs,
babysitting and pizza delivery. After many younger
babysitters start offering to work for less, your
babysitting clients will now pay only $6 per hour
instead of $8 per hour. What will happen to your
supply of hours for delivering pizzas? Explain.
Chapter 3 - 32 © 2010 Pearson Education Canada
continued…
3. When the price of nail sets falls, none of Paola’s
hard dollar costs (like wages, rent, or stud costs)
change. Is there an effect on the quantity of
piercings Paola chooses to supply.
Chapter 3 - 33 © 2010 Pearson Education Canada
PRICE ELASTICITY OF SUPPLY
1. Explain the relationship between price & quantity
supplied for inelastic supply and for elastic supply.
2. If your boss offers you a 20% raise, and in response
you work 10% more hours, how would you describe
your price elasticity of labour supply?
3. Your business is about to launch an advertising
campaign, boasting about your current low prices.
You are hoping the ads will bring in many more
customers. Explain why you need to be concerned
about your elasticity of supply.
Chapter 3 - 34 © 2010 Pearson Education Canada