Rizzo started class off by putting various graphs on the board. The one graph was a supply schedule
Supply schedule
Price Quantity Supplied
$0 0
$0.50 0
$1.00 1
$1.50 2
$2.00 3
$2.50 4
$3.00 5
This chart shows
1. marginal cost
2. 2. Total cost. Mc1 + Mc2= 1.00+1.50=2.50
3. total revenues is price x quantity= $3.00 at $1.50
4. Producer surplus (profits) total revenues-total costs= profits of burrito
The marginal vs. average costs of these burritos is
A B C D=C/A
Burritos (Q) M.C M.C Avg. cost
0 0 0 0
1 $1.00 $1.00 $1.00 (see below)
2 $1.50 $2.50 $1.25
3 $2.00 $4.50 $1.50
The marginal cost of the first burrito is technically the cost of the total amount of machinery and products that had to be bought to produce that first burrito so this cost would be very high.
Quantity supplied vs. supply is
The change in price vs. the change of other stuff
When you calculate averages, calculate sunk costs in your choices. Don’t produce third burrito if it costs $1.75. you lose 25 cents on that burrito.
Average costs matter whether you should be in the industry or not.
Price system is the way we ration goods in society. There are always more wanted than supplied. Something has to allocate who gets products.
All the relevant costs for a producer are opportunity costs. Prices are an opportunity cost of producing that particular burrito. As the price in the market increases your willing to increase your production. Supply curves slope up. It costs more to make more is shown by Lehmans supply curve. We employ the cheapest least cost way to produce things first. AS market price increases, you have more money to invest and make more units. Every point on the supply cost curve is the marginal opportunity cost of that product. Total cost of production is the marginal costs of each unit that you produce.
The law of supply states that as prices increase, producers are incentivised to produce more. Supply curves slope up because we have diminishing returns on production and higher product costs. Farming each acre is more costly than the previous one, more supplies and costs to produce more. Costs more to make more. This raises the prices by buying a lot.
When the burrito prices change, you shift up the supply curve.
The supply curve shifts in if you supply less. Anything other than the price that makes us change our behavior shifts a supply curve.
Reasons that supply curves change
1. Any change in factor (input) functions. If inputs increase, we’ll produce less.
2. Expectations- matter more for producers than consumers. Expect prices to fall, then today you will increase your supply.
3. Technology- Any improvement of technology will increase supply.
4. Changes in other markets will impact supply in this market. (if the other things price goes up, it will make the supply curve of burritos go down) anything that changes prices shifts the supply curve.
5. Price elasticity of supply- how much more will I produce when the price goes up.
The equation for the price elasticity of supply is
%change in quantity supplied/ %change price of this good. Elasticity once again is show by if it is greater than 1 than it is elastic, if it’s less than 1 its not elastic.
The longer time period that one has to make decisions, the more elastic things are since they have more time to find substitutes. The less slope that the line has, the more elastic it is. The greater of a slope it has, the less elastic it is.
In a market supply, if everyone is a potential burrito producer, you add the amount that they supply at a particular point and you get the market supply. Market supply curves are always flatter meaning that they are more elastic.
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