ECON1: Lecture 5 (10/6/16)
ECON1: Lecture 5 (10/6/16) ECON 1
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This 14 page Class Notes was uploaded by Viola You on Friday October 7, 2016. The Class Notes belongs to ECON 1 at University of California - Los Angeles taught by R. Rojas in Fall 2016. Since its upload, it has received 4 views. For similar materials see Principles of Economics in Economics at University of California - Los Angeles.
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Date Created: 10/07/16
Q: Why is the supply curve upward sloping? A: The cost of producing a good is not equal across all suppliers ● 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 higher cost suppliers Important Supply Shifters 1. Technological Innovations Technology determines how much inputs are required to produce a unit of output A costsaving technological improvement has the same effect as a fall in input prices, shifts the supply (S) curve to the right ● Ex: Consider the invention of the mechanized ice cream machine ○ Reduced the amount of labor necessary to make ice cream ○ Producers start to adopt the ice cream machine, supply increases 2. Input Prices The supply of a good is negatively related to the price of the inputs used to make the good. Examples of input prices are wages and price of raw materials. A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the supply (S) curve shifts to the right Ex: What would happen to sellers of ice cream if the price of sugar (an input in making ice cream) increases? ● Smaller profit margin. If price of sugar continues to increase, it may even drive the ice cream supply down to 0 Things that could influence input prices: ● Labor ● Property taxes ● Materials to make the product ● Goods: shortage → price of goods will go up ● As producer, would extend that cost to consumer ● Will get more money per unit, but number of customers would probably decrease 3. Taxes and Subsidies A subsidy on production makes sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price. ● Dictionary definition of subsidy: a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. Tax to producers = an increase in production costs ● A subsidy on production lowers costs and increases supply ● Tax does opposite effect Ex: When the US decreases cotton subsidies, US cotton supply decreases 4. Expectations A change in producer's’ expectations about profitability will affect supply curves Example: ● Events in middle east lead to expectations of higher oil prices ● In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price ● Buy at lower price, sell for more ● S curve shifts left In general, sellers may adjust supply* when their expectations of future prices change. *if good is not perishable 5. Entry or Exit of Producers As producers enter and exit the market, the overall supply changes. ● Entry implies more sellers in the market increasing supply. ● Exit implies fewer sellers in the market decreasing supply. *Different companies have different strengths/abilities 6. Changes in Opportunity Costs Inputs used in production have opportunity costs Sellers will choose to use those inputs where the profit is highest ● Sellers will supply less of a good if the price of an alternate good using the same inputs rises (and vice versa) ● Sellers always chase the highest profit goods Producers have the ability to produce other goods Example: An increase in the profitability of small cars will decrease the supply of SUV’s If the price keeps dropping that would put me out of business, would I still want to be in that business? Considering opportunity costs Equilibrium Define Equilibrium A situation in which the market price has reached the level at which quantity supplied equals quantity demanded (Q = Q S D ● The amount consumers would purchase at this price is matched exactly by the amount producers wish to sell. ● Ideal for market situation ● There is only one price where Q = Q S D Define Equilibrium Price The price that balances quantity supplied and quantity demanded. Define Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. Define Surplus A situation in which quantity supplied is greater than quantity demanded. ● Can solve this problem by decreasing prices natural market solution Define Shortage A situation in which quantity demanded is greater than quantity supplied. ● Can solve this problem by increasing prices natural market solution Law of Supply and Demand: The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. FOR EXAM: Take equation of S curve and D curve, and set it equal to quantities, like above There is a new equilibrium shifts Terms for Shift vs Movement Along Curve ● Change in supply: a shift in the S curve occurs when a nonprice determinant of supply changes (like technology or costs). ● Change in the quantity supplied: a movement along a fixed S curve occurs when price changes. ● Change in demand: a shift in the D curve occurs when a nonprice determinant of demand changes (like income or # of buyers). ● Change in the quantity demanded: a movement along a fixed D curve occurs when P changes. If there’s a change in price, then quantity of demand or supply changes Equilibrium and Total Surplus Equilibrium in a free market yields two important results: ● Goods must be produced at the lowest possible cost. ● Goods must satisfy the highest valued demands. These results indicate that total surplus (both of the consumer and producer) is maximized in free markets. When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. TAKEAWAY One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
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