LECTURE 3

SELLING
S e e th e In visib le Economics 100: Introduction to
H and.
U n d e rsta n d Yo u r Economics
 Selling
2

 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
 “Don’t cry over spilled milk.”
 “It’s water under the bridge.”

Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin

3

Supply
Ø Supply Curves
Ø Producer Surplus
Ø Supply Shifters
Ø factors that shift supply curves

Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin

 Supply Curve
4

 What is a Supply Curve?

 it’s the amount firms would like to produce and sell
at each price.
 so it’s 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
Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin
higher cost suppliers.
 Supply Curve
5

Price o f A t e a ch p rice ,
O il h o w m u ch w o u ld
( $ / barrel)
Suppl se lle rs like to
y p ro d u ce a n d se ll?
55 Price Quantity
Supplied
$55 50
$40 30
40
$25 10

25

O il
10 30 50 ( mil . of
b a rre ls/ d a y )
 Supply Curve and Marginal
6
Cost
 Supply curves can be read in two ways.
 how much would firms like to sell at each
price?
 that’s how quantity supplied varies with
price.
 for each quantity, what’s the lowest price
firms would be willing to accept?
 that’show much it costs to produce the
marginal unit.
 Measuring the Seller’s Gain from Trade
 marginal cost v. price
 producer’s
Economics surplus can be read
100: Introduction to Economics fromJ. McLaughlin
© 2010 Kenneth
 Supply Curve & Marginal
7
Cost
Price of Oil shale would At each quantity,
Oil be profitable how much would
Supply sellers require
($/barrel )
here.
in payment?
Ømarginal cost
55 (i.e., amount sellers
would be willing to
accept) for the
30th unit is
40 $40/barrel.
Higher Cost Oil
Low Cost Oil
25

Oil
10 30 50 (mil. of
barrels/day)
Producer Surplus
 Producer surplus is the seller’s gain from
trade.
 it’sthe difference between the revenue
received at the market price and the
sum of the marginal costs (i.e., minimal
acceptable prices).
 total cost (excluding fixed costs) is the
area under the supply curve from 0 up to
q. ($/day)
 revenue is the rectangle defined by p X q.
($/day)
 so producer surplus is the area below the
price line and above the supply curve.
Producer Surplus

Price o f
O il
( $ / barrel
6 0) Pro d u ce r S u rp lu s a t
a p rice o f $ 4 0 S u p p ly

40

20

20 40 60 80 O il
( mil . of
b a rre ls/ d a y )
 Shifting Supply
10

 Increase Supply
 quantity supplied at each price increases.
 an increase in supply shifts the supply curve
to the right.
 Decrease Supply
 quantity supplied at each price decreases.
a decrease in supply shifts the supply curve
to the left.


Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin

 Increase and Decrease in
11
Supply

Price o f S u p p ly S u p p ly
O il 0 1
( $ / barrel)

S u p p ly
2
S u p p ly 1 to
35 S u p p ly 2 is a n
in cre a se in
su p p ly ; S u p p ly 1
to S u p p ly 0 is a
d e cre a se in s
su p p ly.
Øth in k le ft-rig h t
4 60 80 O ra
il th e r th a n u p -
0 ( mil . of
b a rre ls/ d a yd)o w n .
 Supply Shifters
12
 Technology – Innovation
 innovation lowers cost, encouraging sellers to supply a greater
quantity at each price—increasing supply.
 Prices of Inputs
 decrease in the price of an input (e.g., workers’ wages) lowers
cost, encouraging sellers to supply a greater quantity at each
price—increasing supply.
 Prices of Other Products
 decrease in the price of wheat lowers the opportunity cost of
producing corn—increasing 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 now—increasing the supply
of oil now.
 oil now and oil in the future are substitutes in production (like
wheat and corn).
 Number of Sellers
 entry
Economics of firms to
100: Introduction increases
Economicssupply. © 2010 Kenneth J. McLaughlin
 exit of firms decreases supply.
 Supply Curve and
13
Technology
A n in n o va tio n
lo w e rs th e co st
Price o f S u p p ly o f extra ctin g o il,
O il 1 in cre a sin g th e
( $ / barrel)
su p p ly o f o il.
S u p p ly
2

35

4 60 80 O il
0 ( millions of
b a rre ls/ d a y )
 Supply Curve and Price of Another
Product
14

In cre a sin g
th e p rice o f
Price o f S u p p ly w heat
S o yb e a n s 2 in cre a se s th e
( $ / bushel )
o p p o rtu n ity
S u p p ly co st o f
1 g ro w in g
so yb e a n s,
5 w h ich
d e cre a se s
th e su p p ly o f
so yb e a n s.

S o yb e a n s
2 ,0 0 2 ,8 0 0 ( millions of
0 b u sh e ls/ ye a r)
15

Applications: Opportunity
Cost
Ø What’s the Cost of Attending Class?
Ø Should the Historical Cost of Drilling
Influence Oil Supply?
Ø Why Do Entrepreneurs Ever Rest?

Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin

 What’s the Cost of Attending
16
Class?
 Allocating Costs
 tuition for 3-credit course/28 lectures =
$/lecture
 Opportunity Costs
 what opportunities do you forego by
coming 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 foregone
Economics 100: Introduction to Economics © 2010 Kenneth J. McLaughlin
opportunities.
 Historical Costs and Oil
17
Supply
 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 it’s cost.
 Sunk Costs Are Sunk.
 costs that cannot be avoided (e.g., historical
costs) are sunk.
 they are irrelevant for choices.
Economics 100: Introduction to Economics ©2005 Kenneth J. McLaughlin
 Why Do Entrepreneurs Ever
18
Rest?
 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
 costsare 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©2005
Economics 100:Introduction to Economics
time from
Kenneth J. McLaughlin
19

Take Away
Ø Supply curve is the relationship between
buyers’ quantity demanded of a good and
its price.
Ø Producer surplus is the sellers’ gain from
trade.
Ø it’s the area of the triangle below the demand curve and
above the price.
Ø Technology, prices of inputs and other
products, expectations of future prices,
and the number of sellers shift supplies.
Ø shifting demands means a horizontal movement.
Ø Costs are foregone opportunities.
Economics 100: Introduction
Ø sunk coststo are
Economics
not costs at all. © 2010 Kenneth J. McLaughlin