Doing Well by Doing Good: The Economics of Supply
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Transcript of Doing Well by Doing Good: The Economics of Supply
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DOING WELL BY DOING GOOD: THE ECONOMICS
OF SUPPLYRANDY RUCKER
PROFESSOR
DEPARTMENT OF AGRICULTURAL ECONOMICS AND ECONOMICS
JUNE 19, 2012
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TEENAGE BABY SITTERS (AND OTHER ENTREPRENEURS): WHY DO
THEY DO WHAT THEY DO?
Help out Parents and Friends (social responsibility)
Like working with young children (personal satisfaction)
Parents have told them they have to learn responsibility by holding down a job
Earn income (make profits)
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FIRMS: WHY DO THEY DO WHAT THEY DO?
Make products they believe help people (social responsibility)
Owners and managers enjoy what they do (personal satisfaction)
Produce commodities that meet regulatory standards and legal requirements (obey laws and regulations)
Earn income (make profits)
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FIRMS: WHAT IS THE MAJORDRIVING FORCE BEHIND FIRM
BEHAVIOR?
Profits
Note: “Profits” is not a four letter word!!
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SUPPLY
What commodities will firms produce?
What quantities of those commodities will be produced?
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WHAT COMMODITIES WILL FIRMS PRODUCE?
Consumer preferences and buying behavior matter.
To sell their goods and make profits, firms will strive to produce goods that consumers want to buy.
John, a Laurel high school student, can make a “Save the Wolves” t-shirt or a “Go Locomotives” t-shirt (with the school logo) with the same amount of effort.
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WHAT COMMODITIES WILL FIRMS PRODUCE?
Suppose most of John’s potential customers are avid Locomotives fans (who don’t like wolves much).
Which of the two t-shirts will he spend the most time making?
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THE ROLE OF PROFITS IN FIRM DECISIONS
When an event occurs that increases a firm’s profits, that firm will increase the quantity of the commodity that it produces.
Examples: An increase in the price of the commodity the
firm produces
A decrease in the price of an input
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THE ROLE OF PROFITS IN FIRM DECISIONS
Alternatively, when an event occurs that decreases a firm’s profits, that firm will decrease the quantity that it produces.
Examples: A decrease in the price of the commodity the
firm produces
An increase in the price of an input
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WHAT ARE PROFITS?
Profit = Total Revenue - Total Cost (TR) (TC)
Total Revenue = Price x Quantity (P) (Q)
Total Costs = All costs incurred inproducing a product
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EVENTS THAT AFFECTPROFITS AND OUTPUT
Change in the Price of a Commodity If Price increases, then (at current output
levels) Total Revenue (P x Q) increases and profits increase. So the firm will produce more.
Similarly, if the price decreases . . .
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EVENTS THAT AFFECTPROFITS AND OUTPUT
Change in Quantity Supplied When output increases because price
has increased, economists say there has been a change in quantity supplied. Similarly if the price decreases . . .
These are represented as movements along the supply curve.
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THE CONCEPT OF SUPPLY
What is a supply curve?
This is a curve (or straight line) that shows the relationship between the price of a good and the quantity of the good that firms produce.
Along this curve other factors that affect profit are held constant.
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THE CONCEPT OF SUPPLY Based on the preceding discussion, we
expect this relationship to be positive.
That is, an increase in output price will lead to an increase in production. Similarly, for a decrease . . .
This is the “Law of Supply.”
Let’s walk through an example . . .
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THE SUPPLY SCHEDULE At different prices (holding other factors constant),
Jenny is willing to provide different amounts of lawn mowing services. (Assume she can mow one lawn per hour.)
Price per Lawn Number of Lawns Mowed (Quantity Supplied)
$ 4 0$ 8 4$12 7$15 9
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THE SUPPLY CURVE
0
2
4
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8
10
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0 1 2 3 4 5 6 7 8 9 10
Lawns Mowed per Day
Pric
e Pe
r Law
n
Jenny's Supply Curve
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CHANGES IN QUANTITY SUPPLIEDOnce again, Change in the Price of a Commodity
If Price increases, then (at current output levels) TR (P x Q) increases and profits increase. So the firm will produce more. Similarly, if Price decreases . . .
Change in Quantity Supplied When output increases because price has
increased, an increase in quantity supplied results. Similarly, if output decreases . . . 17
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OTHER EVENTS THAT AFFECT PROFITS AND OUTPUT
Change in Input Prices If an input price (e.g., gas) falls, then Jenny’s
costs of mowing lawns fall and her profits will increase.
So, at any given price she is willing to mow more lawns.
Similarly, if an input price increases . . .
This is a Change in Supply.18
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A CHANGE IN THE SUPPLY SCHEDULE At a lower price for gas, Jenny will be willing
to mow more lawns.
PriceLawns Mowed
(Initial Situation: High Gas Price)
Lawns Mowed (New Situation: Low Gas Price)
$ 4 0 2
$ 8 4 6
$12 7 9
$16 9 1119
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CHANGE (OR SHIFT) IN SUPPLY
0
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4
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0 2 4 6 8 10 12
Lawns Mowed per Day
Pric
e Pe
r Law
n
Initial Supply Curve
New Supply Curve
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OTHER EVENTS THAT AFFECT PROFITS AND OUTPUT AND
CAUSE CHANGES IN SUPPLY Changes in Technology:
If new technologies enable firms to use resources more efficiently, then
their costs will fall,
their profits will increase,
and (at any given output price) they will produce more output.
That is, Supply will increase.21
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OTHER EVENTS THAT AFFECT PROFITS AND OUTPUT AND
CAUSE CHANGES IN SUPPLY Changes in the Number of Sellers:
If more firms enter the market, then at any given price more output will be produced: Supply will increase.
“Supply will increase” means that the supply curve shifts.
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OTHER EVENTS THAT AFFECTPROFITS AND OUTPUT AND CAUSE CHANGES IN SUPPLY
Examples: The continuing development of farm
machinery has decreased the cost of producing corn (and lots of other commodities). This increases the supply of corn.
An import ban on U.S. beef into Japan is lifted. More U.S. sellers now have access to the Japanese beef market. The supply of U.S. beef to Japan increases.
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OTHER EXAMPLES OF CHANGESIN SUPPLY (WITH GRAPHS)
Examples: What happens to the world supply of
wheat if China and Russia have extremely favorable growing conditions for wheat?
Graphically . . .
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The World Supply of Wheat
An Increase in the Supply of Wheat due toFavorable Weather in China and Russia
Price($/Q)
Q (bushels/year)
P0
Q0
S0
S1
Q1
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Other Examples of Changes in Supply (with Graphs)
Examples: What happens to the supply of
peanuts if there is a drought in the Southeastern United States?
Graphically . . .
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The Supply of Peanuts
A Decrease in Supply Due to a Drought in Georgia
Price($/Q)
Q
(Pounds/year)
P0
Q0
S0
Q1
S1
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OTHER EXAMPLES OF CHANGES IN SUPPLY (WITH GRAPHS)
Examples: What happens to the supply of peanut
butter if the price of peanuts goes up?
Graphically . . .
Note that a change at one level of the production process works its way through to other levels.
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The Supply of Peanut Butter
A Decrease in Supply Due to an Increase in Peanut Prices
Price($/Q)
Q
(Pounds/year)
P0
Q0
S0
Q1
S1
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SUMMARY Key Concepts:
Firm objectives, total revenues, total costs, profits, supply schedule, supply curve, and the law of supply
Key Idea: Firms are primarily motivated by the search for
profits. Events that cause profits from producing a commodity to increase cause production of the commodity to increase. Similarly, events that cause profits to decrease . . .
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SUMMARY Change in Quantity Supplied:
A change in the price of a commodity causes a movement along the supply curve, or a change in quantity supplied.
Change in Supply: An event other than a change in the price of a
commodity causes a shift in the supply curve, or a change in supply. − Input prices, technology, the number of
firms, etc.31
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QUESTIONS?
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COMMENTS:
Doing Well by Doing Good? Meaning?
Profits is not a four letter word What is the nature of your
relationship with Albertsons (or Town & Country, or Safeway, or . . .)?
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