SLIDE 1 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
Econ Dept, UMR Presents
SLIDE 2
Starring Starring
N NSupply
Supply
O OProduction
Production
O OCost
Cost
N NProducer Surplus
Producer Surplus
SLIDE 3 Featuring Featuring
N NThe Law of Diminishing Marginal Product
The Law of Diminishing Marginal Product
N NThe MP/P Rule
The MP/P Rule
N NEconomic Cost vs. Accounting Cost
Economic Cost vs. Accounting Cost
N NEconomic Profit vs. Accounting Profit
Economic Profit vs. Accounting Profit
N NThe Unimportance of Sunk Cost
The Unimportance of Sunk Cost
SLIDE 4
Part I: Introduction to Supply Part I: Introduction to Supply and Producer Surplus and Producer Surplus
SLIDE 5
What is Supply? What is Supply?
N N It is the relationship between quantity
It is the relationship between quantity supplied and price, c. p., within a supplied and price, c. p., within a specific period. specific period.
N N Or, it is the relationship between
Or, it is the relationship between necessary compensation and necessary compensation and willingness to offer something of value willingness to offer something of value
SLIDE 6
Individual vs. Individual vs. Market Supply Market Supply
N N Market supply is the horizontal sum of
Market supply is the horizontal sum of individual supplies individual supplies
N N As with demand, it is market supply
As with demand, it is market supply that commands our interest that commands our interest
SLIDE 7 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 N Supply is a schedule that relates prices for a
Supply is a schedule that relates prices for a 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.
SLIDE 8
Two Ways to View Supply Two Ways to View Supply
P Q/t S 10 17 Horizontally: At $10 the quantity supplied is 17 units per period Vertically: The supply of the 17th unit requires a minimum compensation of $10, that is min WTA = $10
SLIDE 9
And Remember And Remember
N N Supply is the offer of something of
Supply is the offer of something of value; anything, your time, friendship, value; anything, your time, friendship, charity at the minimum compensation charity at the minimum compensation necessary necessary
N N We use firms and their supply of
We use firms and their supply of 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 N Another important application of
Another important application of supply is labor: the minimum supply is labor: the minimum compensation necessary to induce work compensation necessary to induce work
SLIDE 10
We use Supply to estimate We use Supply to estimate Producer Welfare Producer Welfare
N N Producer Surplus is an economic
Producer Surplus is an economic measure of welfare of sellers, measure of welfare of sellers, producers, suppliers producers, suppliers
N N Producer Surplus is the difference
Producer Surplus is the difference 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
SLIDE 11 Producer Surplus in a Market Producer Surplus in a Market
Q/t P D S Pe Qe At Pe , Qe , the producer surplus is the shaded
between total revenue P*Q and the minimum willingness to accept to induce a supply of Qe which is the area under the supply curve from the origin to Qe
SLIDE 12
Change in Producer Surplus Change in Producer Surplus
N N Price controls, taxes, technological
Price controls, taxes, technological changes, demand or supply shifts lead changes, demand or supply shifts lead to welfare changes to welfare changes
N N To estimate the change in producer
To estimate the change in producer welfare we estimate producer surplus welfare we estimate producer surplus with and without the change with and without the change
SLIDE 13 Change in Producer Surplus Change in Producer Surplus due to an increase in taxes due to an increase in taxes
Q/t P D S Pe Qe S,tx P1 P1 - tx ˛ PS = PSw/o tx - PSw tx =
Q1 = TR - area under the supply curve
SLIDE 14 The End The End
You are ready for Part II
- n the Production Function
