101+Class+04+W2008 - Principles of Economics I Economics...

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Unformatted text preview: Principles of Economics I Economics 101 Section 400 Class 4 Readings Chapter 3 Chapter 4 Specifically p75 79: Supply side of the market Specifically p 103105 Next Class: Chapter 3 Chapter 4 Specifically p6775 Specifically p.101103 Class 4 2 1/16/2007 Announcements Pooled Office Hours Schedule Discussion Section Schedule On CTools On CTools HW Assignment 2 Quiz 1 Available on line Please spend some time on this prior to section In section this week Class 4 3 1/16/2007 Australia Coarse wool (bales) 1 m Slope = rise/run = 1/2 2 m 1/16/2007 Class 4 Fine wool (bales) 4 New Zealand Coarse wool (bales) 0.75 m Slope = rise/run = 3/2 0.5 m 1/16/2007 Class 4 Fine wool (bales) 5 Coarse wool (bales) 1.75 m Joint PPF Opportunity cost of 1 bale of fine wool is a bale of coarse wool Slope = rise/run = 1/2 Opportunity cost of 1 bale of fine wool is 3/2 bales of coarse wool Slope = rise/run = 3/2 0.75 m Fine wool (bales) 2 m 1/16/2007 Class 4 2.5 m 6 If the relative price of fine wool is... 1. Less than a bale of coarse wool (i.e. if fine wool is very cheap), then 2. More than 3/2 bales of coarse wool (i.e. fine wool is very expensive), then Wool growers in both countries will produce only coarse wool 3. Between and 3/2 bales of coarse wool Wool growers in both countries will produce only fine wool Wool growers in Aus. will produce fine wool Wool growers in NZ will produce coarse wool Class 4 1/16/2007 7 Supply Decisions Suppose that Pcoarse = $500/bale If Pfine < $250/bale, (i.e. if the relative price is lower than ), then no fine wool is supplied to the market If $250/bale < Pfine < $750/bale (i.e. relative price is between and 3/2), then Australia supplies 2m bales to the market If Pfine > $750/bale (i.e. relative price is greater than 3/2) then both countries supply fine wool, for a total supply of 2.5m bales Class 4 8 1/16/2007 The Supply Curve (when Pcoarse = $500/bale) Pfine ($/bale) $750 Supply $250 2m 1/16/2007 Class 4 2.5m Qfine (bales) 9 The Law of Supply Increasing the price of a good tends to increase the quantity of that good supplied to the market Really a result of changes in the relative price of the good 1/16/2007 Class 4 10 The Supply Curve Identifies quantity supplied to the market for any given price of the good Derived from the marginal opportunity cost Dollar value of the marginal opportunity cost Marginal opportunity cost * price of the alternative good Supply curve is drawn for: Other goods prices given Technology given Input costs given 1/16/2007 Class 4 11 Changing Technology How does the supply curve change if we increase productivity in fine wool production in Australia? Reduces the opportunity cost of production in Australia Also increases the potential fine wool output in Australia 1/16/2007 Class 4 12 Australian fine wool productivity Coarse wool improves (bales) 1.75 m Slope = rise/run = 1/2 Slope = rise/run = 3/2 0.75 m 1/16/2007 Class 4 2 m Fine wool (bales) 2.5 m 13 Australian Fine Wool Productivity Improves Pfine ($/bale) $750 Supply $250 2m 1/16/2007 Class 4 2.5m Qfine (bales) 14 Improving Technology Reduces marginal opportunity costs Shifts supply curve down/to the right "Increase in supply" Intuitive: when resources become more productive when employed producing a good, production of that good is more profitable 1/16/2007 Class 4 15 Changing Input Prices How does the supply curve change if we increase the cost of inputs into fine wool production? Increases the opportunity cost of production Also reduces the potential fine wool output 1/16/2007 Class 4 16 Fine wool input prices increase Coarse wool (bales) 1.75 m Slope = rise/run = 1/2 Slope = rise/run = 3/2 0.75 m 1/16/2007 Class 4 2 m Fine wool (bales) 2.5 m 17 Fine wool input prices increase Pfine ($/bale) $750 Supply $250 2m 1/16/2007 Class 4 2.5m Qfine (bales) 18 Increasing input prices Increase marginal opportunity costs Shift supply curve up/to the left "Reduction in supply" Intuitive: when production becomes more costly, producers will supply less at any price 1/16/2007 Class 4 19 Changing Price of the alternative good How does the supply curve change if we increase the price of the alternative good? Doesn't alter the opportunity cost of production Changes the value of the opportunity cost E.g. if P coarse increases to $600/bale 1/16/2007 Class 4 20 Increasing price of alternative good Coarse wool (bales) 1.75 m Slope = rise/run = 1/2 Slope = rise/run = 3/2 0.75 m 1/16/2007 Class 4 2 m Fine wool (bales) 2.5 m 21 Increasing price of an alternative good Pfine ($/bale) $900 $750 Supply $300 $250 2m 1/16/2007 Class 4 2.5m Qfine (bales) 22 Increasing price of an alternative good Increases the nominal value of the opportunity cost Shifts supply curve up/leftwards "Reduction in supply" Intuitive: when an alternative good becomes more valuable, producers tend to substitute productive resources toward that good Class 4 23 1/16/2007 Joint PPF The joint PPF tends to be bowed out from the origin Good 2 Good 1 Generic Supply Curve P1 Supply Q1 1/16/2007 Class 4 25 Increasing Supply: Shifting the Supply Curve Right Improvement in P1 production technology Reduction in input prices Reduction in price of alternative product Q1 1/16/2007 Class 4 26 Reducing Supply: Shifting the Supply Curve Left Deterioration in P1 production technology Increase in input prices Increase in price of alternative product Q1 1/16/2007 Class 4 27 What about changes in the price of the good itself? P1 Q1 1/16/2007 Class 4 28 Warning Do not confuse: Increase in quantity supplied as a result of an increase in the price of the good Increase in supply as a result of an improvement in production technology (for example) Identified by a movement along the supply curve The supply curve shifts Class 4 1/16/2007 29 Measuring Benefits to Producers Producers are motivated to maximize the value of their output: E.g. Australian wool growers produce fine wool when the value of the fine wool produced exceeds the value of coarse wool they could produce instead Depends on the relative productivity of resources in production of each good Also depends on the relative prices 1/16/2007 Class 4 30 Measuring Benefits to Producers Measure the value of output in dollars Compare this to the dollar value of the opportunity cost Value of the marginal unit is simply the price Marginal unit of the good confers benefit equal to the difference between these two measures Class 4 31 Read this from the supply curve 1/16/2007 Producer Surplus Pfine ($/bale) $750 P =$520 $250 Producer Surplus Supply 2m 1/16/2007 Class 4 2.5m Qfine (bales) 32 Producer Surplus P P* Producer Surplus Q* 1/16/2007 Class 4 Q 33 Changes in Producer Surplus P P1 P0 Increase in Producer Surplus Q0 1/16/2007 Class 4 Q1 Q 34 ...
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