Topic06 - Thinking about supply: the importance of...

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1 6. Supply and the cost side of the market Thinking about supply: the importance of opportunity cost ± Example ² How much time should Harry spend recycling soft-drink containers? Thinking about supply: the importance of opportunity cost ± Harry is choosing between washing dishes for $6/hour and collecting containers at 2 cents each. ± Opportunity cost of collecting cans is $6/hour. Example Search time (hours/day) 00 16 0 0 2 1000 3 1300 4 1500 5 1600 Total number of containers found Additional number of containers found 600 400 300 200 100 Thinking about supply: the importance of opportunity cost ± Costs and benefits ² 1 hour collecting cans = (600)(.02) = $12 ² Benefit ($12) > Opportunity cost ($6) ² 2nd hour benefit ($8) > Opportunity cost ($6) ² 3rd hour benefit ($6) = Opportunity cost ($6) Thinking about supply: the importance of opportunity cost ± Question ² What is the lowest price that would induce Harry to recycle 1 hour/day? ± Solution ² 600 containers x 1 cent = $6 = opportunity cost of washing dishes
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2 Thinking about supply: the importance of opportunity cost ± Reservation Price () 6 $ = Δ Q p Thinking about supply: the importance of opportunity cost ± Reservation price ² 1 hour recycling: p (600) = $6 so p = 1 cent ² 2 hours recycling: p (400) = $6 so p = 1.5 cents ² 3 hours recycling: p (300) = $6 so p = 2 cents ² 4 hours recycling: p (200) = $6 so p = 3 cents ² 5 hours recycling: p (100) = $6 so p = 6 cents Individual and market supply curves ± The relationship between the individual and market supply curves for a product is analogous to the relationship between the individual and market demand curves. Harry’s individual supply curve for recycling services Recycled cans (100s of cans/day) Refund (cents/can) 0 61 0 1 3 1 6 6 3 2 1 1.5 15 Harry’s supply curve The market supply curve for recycling services Recycled cans (100s of cans/day) Recycled cans (100s of cans/day) + + 0 1 3 1 6 6 3 2 1 0 1.5 15 Harry’s supply curve 6 1 01 31 6 6 3 2 1 0 1.5 15 Barry’s supply curve Recycled cans (100s of cans/day) 12 20 26 32 6 3 2 1 0 1.5 30 = = The market supply curve for recycling services Market supply curve
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3 The market supply curve with 1000 identical sellers Recycled cans (100 000s of cans/day) Refund (cents/can) 61 0 1 3 1 6 6 3 2 1 0 1.5 15 Market supply curve Supply in perfectly competitive markets ± Profit maximisation ² Profit ³ Total revenue - All costs (explicit & implicit) ³ Profit-maximising firms Goal of the firm is to maximise the difference between total revenues and total costs, i.e. to maximise the profit it earns.
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This note was uploaded on 08/29/2011 for the course ECON 1101 taught by Professor Janegoley during the Three '08 term at Australian National University.

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Topic06 - Thinking about supply: the importance of...

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