The Supply Side of the Market The Supply Side of the Market in in - PDF document

Econ Dept, UMR Presents The Supply Side of the Market The Supply Side of the Market in in Three Parts: Three Parts: I. An Introduction to Supply and I. An Introduction to Supply and Producer Surplus Producer Surplus II. The Production Function II. The Production Function III. Cost Functions III. Cost Functions

Starring Starring Supply N Supply N Production O Production O Cost O Cost O Producer Surplus N Producer Surplus N

Featuring Featuring The Law of Diminishing Marginal Product N The Law of Diminishing Marginal Product N The MP/P Rule N The MP/P Rule N Economic Cost vs. Accounting Cost N Economic Cost vs. Accounting Cost N Economic Profit vs. Accounting Profit N Economic Profit vs. Accounting Profit N The Unimportance of Sunk Cost N The Unimportance of Sunk Cost N

Part I: Introduction to Supply Part I: Introduction to Supply and Producer Surplus and Producer Surplus

What is Supply? What is Supply? N It is the relationship between quantity It is the relationship between quantity N supplied and price, c. p., within a supplied and price, c. p., within a specific period. specific period. N Or, it is the relationship between Or, it is the relationship between N necessary compensation and necessary compensation and willingness to offer something of value willingness to offer something of value

Individual vs. Individual vs. Market Supply Market Supply N Market supply is the horizontal sum of Market supply is the horizontal sum of N individual supplies individual supplies N As with demand, it is market supply As with demand, it is market supply N that commands our interest that commands our interest

And we will use the supply of a firm And we will use the supply of a firm as an example of the general supply as an example of the general supply concept concept N Supply is a schedule that relates prices for a Supply is a schedule that relates prices for a N firm’s product and the quantity that the firm firm’s product and the quantity that the firm will offer for sale at each of those prices in a will offer for sale at each of those prices in a specific time. specific time.

Two Ways to View Supply Two Ways to View Supply Horizontally: At $10 the P quantity supplied is 17 units per period S 10 Vertically: The supply of the 17th unit requires a minimum compensation of $10, that is min WTA = $10 17 Q/t

And Remember And Remember N Supply is the offer of something of Supply is the offer of something of N value; anything, your time, friendship, value; anything, your time, friendship, charity at the minimum compensation charity at the minimum compensation necessary necessary N We use firms and their supply of We use firms and their supply of N products as illustrative of supply products as illustrative of supply concept, but not meaning these concept, but not meaning these concepts are limited to firms and their concepts are limited to firms and their supply supply N Another important application of Another important application of N supply is labor: the minimum supply is labor: the minimum compensation necessary to induce work compensation necessary to induce work

We use Supply to estimate We use Supply to estimate Producer Welfare Producer Welfare N Producer Surplus is an economic Producer Surplus is an economic N measure of welfare of sellers, measure of welfare of sellers, producers, suppliers producers, suppliers N Producer Surplus is the difference Producer Surplus is the difference N between the reward received and the between the reward received and the minimum compensation necessary to minimum compensation necessary to induce the effort or resource to its induce the effort or resource to its current use current use

Producer Surplus in a Market Producer Surplus in a Market At P e , Q e , the producer P surplus is the shaded area. The difference S between total revenue P e P*Q and the minimum willingness to accept to induce a supply of Q e D which is the area under the supply curve from Q e Q/t the origin to Q e

Change in Producer Surplus Change in Producer Surplus N Price controls, taxes, technological Price controls, taxes, technological N changes, demand or supply shifts lead changes, demand or supply shifts lead to welfare changes to welfare changes N To estimate the change in producer To estimate the change in producer N welfare we estimate producer surplus welfare we estimate producer surplus with and without the change with and without the change

Change in Producer Surplus Change in Producer Surplus due to an increase in taxes due to an increase in taxes P S,tx ˛ PS = PS w/o tx - PS w tx S P 1 P e - = P 1 - tx D = Q e Q/t = TR - area under Q 1 the supply curve

The End The End You are ready for Part II on the Production Function