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LECTURE 3SELLING

Economics 100: Introduction toEconomics

S e e th e In visib le.H a n dU nderstand Your

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Economics 100: Introduction to Economics 2010 Kenneth J. McLaughlin

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Sellers Also Respond to Price Incentives. price of the product prices of inputs, which contribute to the

costs of production Which Costs Matter?

those of foregone opportunities

not fixed, historical, or sunk costs Dont cry over spilled milk.

Its water under the bridge.

Selling

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Supply CurvesProducer SurplusSupply Shifters

factors that shift supply curves

Supply

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What is a Supply Curve? its the amount firms would like to produce and sell

at each price. so its the relationship between sellers quantity

supplied of a good and its price. e.g., quantity supplied of ice cream cones and the

price of ice cream cones

Supply Curves Slope Up. positive relationship between price and quantity

supplied is universal.

when price rises, quantity supplied also rises. when price falls, quantity supplied also falls.

why do supply curves slope up? at a low price, a good is produced and sold only by

the lowest cost suppliers. at a high price, a good is also produced and sold by

higher cost suppliers.

Supply Curve

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Supply Curve

5 5

2 5

4 0

1 0 5 03 0

Price o fO il

( / )$ barrel

O il( .mil of

/ )b a rre ls d a y

S u p p ly

,A t e a ch p riceh o w m u c h w o u ld

se lle rs like top ro d u ce a n d sell?

Price QuantitySupplied

$55 50

$40 30

$25 10

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Supply curves can be read in two ways. how much would firms like to sell at each

price?

thats how quantity supplied varies withprice.

for each quantity, whats the lowest pricefirms would be willing to accept?

thats how much it costs to produce themarginal unit.

Measuring the Sellers Gain from Trade marginal cost v. price

producers surplus can be read from

Supply Curve and MarginalCost

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Supply Curve & MarginalCost

55

25

40

10 5030

Price ofOil

( / )$ barrel

Oil( .mil of

/ )barrels day

Supply

Oil shale wouldbe profitable

.here

Low Cost OilHigher Cost Oil

,At each quantityhow much would

sellers requirein payment?

marginal cost

( . .,i e amount sellers

would be willing to)accept for the

30thunit is/ .$40 barrel

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Producer surplus is the sellers gain fromtrade.

its the difference between the revenue

received at the market price and thesum of the marginal costs (i.e., minimalacceptable prices).

total cost (excluding fixed costs) is the

area under the supply curve from 0 up toq. ($/day)

revenue is the rectangle defined by p X q.($/day)

so producer surplus is the area below therice line and above the su l curve.

Producer Surplus

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Pro d u cer S u rp lu s a ta p rice o f $ 4 0

Producer Surplus

4 0

2 0

6 0

6 04 0

S u p p ly

2 0 8 0

Price o fO il

( / )$ barrel

O il

( .mil of/ )b a rre ls d a y

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Increase Supply quantity supplied at each price increases.

an increase in supply shifts the supply curveto the right.

Decrease Supply quantity supplied at each price decreases.

a decrease in supply shifts the supply curve

to the left.

Shifting Supply

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Increase and Decrease inSupply

3 5

8 06 0

Price o fO il

( / )$ barrel

O il( .mil of

/ )b a rre ls d a y

S u p p ly0

S u p p ly1

40

S u p p ly 1 toS u p p ly 2 is anin cre a se in

;su p p ly S u p p ly 1

to S u p p ly 0 is ad e cre a se in s

.su p p ly -th in k le ft rig h t

-rather than up.d o w n

S u p p ly2

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Technology Innovation innovation lowers cost, encouraging sellers to supply a greater

quantity at each priceincreasing supply. Prices of Inputs

decrease in the price of an input (e.g., workers wages) lowerscost, encouraging sellers to supply a greater quantity at eachpriceincreasing supply.

Prices of Other Products decrease in the price of wheat lowers the opportunity cost of

producing cornincreasing the supply of corn. wheat and corn are substitutes in production.

Expectations of Future Prices of This Product decrease the expected price of oil in the future lowers the

opportunity cost of pumping oil nowincreasing the supplyof oil now. oil now and oil in the future are substitutes in production (like

wheat and corn).

Number of Sellers

entry of firms increases supply. exit of firms decreases supply.

Supply Shifters

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Supply Curve andTechnology

3 5

8 06 0

Price o fO il

( / )$ barrel

O il(millions of

/ )b a rre ls d a y

S u p p ly1

40

A n in n o v a tio nlo w e rs th e co st

,o f e x tra ctin g o ilin cre a sin g th e

.sup p ly o f o il

S u p p ly2

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Supply Curve and Price of AnotherProduct

5

,2 8 0 0

Price o fS o y b e a n s

( / )$ bushel

S o y b e a n s(millions of

/ )b u shels yea r

S u p p ly2

,2 0 00

In cre a sin gth e p rice o f

w h e a tin cre a se s th e

o p p o rtu n ity

cost ofg ro w in g,s o y b e a n s

w h ichdecreases

th e sup p ly o f

.s o y b e a n s

S u p p ly1

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Whats the Cost of Attending Class?Should the Historical Cost of Drilling

Influence Oil Supply?

Why Do Entrepreneurs Ever Rest?

Applications: OpportunityCost

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Allocating Costs tuition for 3-credit course/28 lectures =

$/lecture

Opportunity Costs what opportunities do you forego bycoming to class? which is the best alternative?

how much do you value that alternative? plus subway fares, etc.

Punchline costs in economics are opportunity costs.

they are associated for foregoneopportunities.

Whats the Cost of AttendingClass?

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Drilling Costs Are History. drilling costs are in the past.

they cannot be avoided, so they are not

opportunity costs. so drilling costs should not affect

production. what matters is the product of the drilling;

not its cost. Sunk Costs Are Sunk.

costs that cannot be avoided (e.g., historicalcosts) are sunk.

they are irrelevant for choices.

Historical Costs and OilSupply

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Profit Is Not Their Motive. everything else about the way they run

their firms is consistent with the profit

motive. Maximize Profit With Opportunity Costs

costs are foregone opportunities.

entrepreneur foregoes personal life while

working. this carries an implicit cost: value of his

time.

entrepreneur maximizes economic profit,

subtracting the value of his time from

Why Do Entrepreneurs EverRest?

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Supply curve is the relationship between

buyers quantity demanded of a good andits price. Producer surplus is the sellers gain from

trade. its the area of the triangle below the demand curve and

above the price.

Technology, prices of inputs and otherproducts, expectations of future prices,and the number of sellers shift supplies. shifting demands means a horizontal movement.

Costs are foregone opportunities. sunk costs are not costs at all.

Take Away

03 selling

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