101+Class+04+W2009

# 101+Class+04+W2009 - Principles of Economics I Economics...

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Unformatted text preview: Principles of Economics I Economics 101 Section 400 Class 4 Readings Today: 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 Problem Set 2 Available on line Please spend some time on this prior to section Class 4 2 1/21/2009 Australia Coarse wool (bales) 1 m Slope = rise/run = 1/2 2 m 1/21/2009 Class 4 Fine wool (bales) 3 New Zealand Coarse wool (bales) 0.75 m Slope = rise/run = 3/2 0.5 m 1/21/2009 Class 4 Fine wool (bales) 4 Coarse wool (bales) 1.75 m Joint PPF Slope = rise/run = 1/2 Slope = rise/run = 3/2 0.75 m Fine wool (bales) 2 m 1/21/2009 Class 4 2.5 m 5 Relative price of fine wool (bales of coarse wool) Production Decision Producers in both locations grow only coarse wool Less than Between 1/2 and 3/2 Producers in Australia grow fine wool Producers in NZ grow coarse wool Greater than 3/2 Producers in both locations grow only fine wool Fine Wool Supply Decisions when Pcoarse = \$500/bale Relative Price of fine wool (bales of coarse wool) (\$/bale) Pfine Production in Aust. (bales) Production in NZ (bales) Total Production (bales) Less than 1/2 Between and 3/2 Less than \$250 Between \$250 and \$750 0 0 0 2 million 0 2 million Greater than Greater than 3/2 \$750 2 million 0.5 million 2.5 million The Law of Supply The quantity of a good supplied to the market will increase when the price of that good increases. The quantity of a good supplied is really responding to changes in the price of the good relative to prices of other goods When one good becomes more expensive, producers are more inclined to devote resources to producing that good rather than an alternative, relatively less expensive, good Class 4 8 1/21/2009 Fine Wool Supply Curve Pfine (\$/bale) \$850 \$750 \$500 \$250 (when Pcoarse = \$500/bale) Supply 2m 1/21/2009 Class 4 2.5m Qfine (bales) 9 The Supply Curve Identifies quantity of a good supplied to the market for any given price of that good Considers ceteris paribus impact of price changes on the quantity of the good supplied i.e. the following things are assumed unchanged: Prices of other goods Technology Costs of inputs Derived from the optimizing behavior of suppliers Suppliers direct resources to their highest valued use Compare value of resources in various uses Implies supply curve is the inverse of the marginal opportunity cost curve Class 4 10 1/21/2009 Marginal Values Much of economic analysis focuses attention on marginal values A marginal value shows how a total changes with a small (i.e. marginal) change in some activity E.g. the marginal opportunity cost of producing fine wool is the value of coarse wool forgone when one additional bale of fine wool is produced Marginal values will typically vary with the amount of the activity undertaken 1/21/2009 Class 4 11 Good 2 Convex production possibilities set Slope = MOC1 Slope = MOC2 Slope = MOC3 Slope = MOC4 Good 1 Marginal opportunity cost curve is positively sloped Supply curve is the dollar value of this marginal opportunity cost curve MOC MOC4 MOC3 MOC2 MOC1 Good 1 Supply Curve P1 (\$/unit) P2 MOC1 P1* Dollar value of MOC Q1* 1/21/2009 Class 4 Q1 13 What Determines the Shape of the Supply Curve? Shape of the PPF This dictates the shape of the MOC curve Depends upon Note: If the production possibility set is convex, the supply curve is upward sloping Technology Cost of and availability of factors of production Price of alternative products Enables us to generate a dollar value of the marginal opportunity cost (which is measured in units of alternative products) Reflects the fact that production decisions are truly a function of relative prices Class 4 14 1/21/2009 Supply is determined by Four significant factors: 1. 2. 3. 4. Price of the good Price of alternative products Technology Price or availability of factors of production When the price of the good changes, quantity supplied changes according to the "Law of Supply" Changes in the other factors will shift the supply curve Class 4 15 1/21/2009 Q2 Technology Shock: Productivity in the good 1 sector improves. MOC falls Supply curve shifts right (an increase in supply) Q1 P2.MOC' P1 (\$) P2.MOC Q1 Q2 Input Price Shock: Fall in the price of an input used in producing good 1. MOC falls Supply curve shifts right (an increase in supply) Q1 P2.MOC' P1 (\$) P2.MOC Q1 Q2 Alternative Product Price Shock: Fall in the price of an alternative product, good 2. MOC curve is unaffected Supply curve shifts right (an increase in supply) due to the reduction in the dollar value of the MOC P1 (\$) Q1 P2.MOC P2'.MOC Q1 Generic Supply Curve P1 Supply Q1 1/21/2009 Class 4 19 Increasing Supply: Shifting the Supply Curve Right Improvement in production technology Reduction in input prices or increased availability of an input Reduction in price of alternative product Q1 1/21/2009 Class 4 20 P1 Reducing Supply: Shifting the Supply Curve Left P1 Deterioration in production technology Increase in input price or reduced availability of an input Increase in price of alternative product Q1 1/21/2009 Class 4 21 What about changes in the price of the good itself? P1 Q1 1/21/2009 Class 4 22 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 1/21/2009 23 Measuring Benefits to Producers Producers are motivated to utilize their productive resources in the most valuable way: 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 Class 4 24 1/21/2009 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 Read this from the supply curve We call this the surplus conferred by the marginal unit, or simply marginal surplus 1/21/2009 Class 4 25 Marginal Producer Surplus P Supply Curve P* Value of the marginal unit of output Surplus generated on the marginal unit Value of the marginal opportunity cost Q* Q*+1 1/21/2009 Class 4 Q 26 Producer Surplus P Supply Curve P* Producer Surplus Q* 1/21/2009 Class 4 Q 27 Changes in Producer Surplus P P1 P0 Increase in Producer Surplus Q0 1/21/2009 Class 4 Q1 Q 28 ...
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## This note was uploaded on 05/16/2010 for the course ECON Section 40 taught by Professor Hogan during the Winter '09 term at University of Michigan.

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