Cassie Kaylee and Torin More about Supply And why we should care The Big Ideas Movement along the supply curve where output changes in response to price The supply curve moves when there is a change in output at the same price This is in response to changes in the costs of inputs or technology Changes in P and Q may give clues to underlying changes in supply and demand curves if we believe market are in equilibrium An increase in demand will draw out more supply along the supply curve by raising price When the Red Sox won the World Series more people wanted to go to Fenway The Sox raised ticket prices At higher prices they could afford to build more seats How do you wear your hat Changes in demand are movements along the supply curve Greater demand higher prices elicits more supply Less demand lower prices less supply Supply Curves move More or less supplied at any price Changes in the price of inputs Changes in productivity Higher cost inputs supply curve in less supplied at any price higher prices for same supply Ex 4 00 gas Cheaper inputs supply curve out more supplied at any price lower prices for same supply Ex 3rd World wages Worse technology less productive inputs supply curve in less supplied at any price higher prices for same supply Ex hand weaving Better technology more productive inputs supply curve out more supplied at any price lower prices for same supply Ex Intel Moving Supply Curves by raising and lowering wages Moving Supply Curve by changing technology These Bangladesh workers were paid low wages Now they are dead in a factory fire Different technologies New practice Old What was that doing here Or this In the long run supply of all inputs varies So there is no Remember marginal productivity fell reason for longbecause variable inputs had less to run marginal work with productivity to fall But if everything increases together then marginal productivity will remain constant Or will even increase with efficiencies of scale Economies of Scale Double all inputs and output may more than double Because of better division of labor use of better machinery etc That is why some things are produced in large settings like cars computer chips and chemicals And graduate students Producers also learn over time and with experience This is called learning by doing It lowers costs when output increases Learning by doing allowed us to defeat the Nazis We were able to build more ships than their U Boats could sink This happened with ship builders during World War II In the long run all inputs vary and costs do not rise they may fall In the long run marginal costs do not rise You can always reproduce existing facilities to maintain flat MC or MC may fall with scale economies and learning In case you missed it In the long run marginal costs do not rise You can always reproduce existing facilities to maintain flat MC or MC may fall with scale economies and learning Therefore market prices are independent of demand but depend only on cost of production For those into such things this is the model of classical political economy including Smith Ricardo Marx Also Sraffa In the long run prices depend on the cost of production not demand Greater demand might lower prices because of economies to scale and learning Putting changes in supply and demand together If we think equilibrium analysis may have some merit We can use it to draw policy from changes in P and Q Explaining moves in P and Q from A Starting at P and Q equilibrium point A Move to point B prices and quantities increased Higher P elicits greater supply P increases because of greater demand Examples Cocaine Policy implication If prices and quantities are both increasing then demand is the problem Closing the border to reduce supply is solving the wrong problem because supply is chasing rising demand Starting at P and Q equilibrium point A Move to point C prices increased but quantities reduced Supply reduced along demand curve people buy less because of higher prices due to supply shortage Examples Rising oil prices 2002 8 Policy Implication Oil prices rose because of supply problems more than rising demand from China and India US invasion of Iraq and civil strife in Nigeria reduced world oil supplies Starting at P and Q equilibrium point A Move to point D Lower prices and still no one buys No one wants this crap Examples VHS cassettes GM cars Policy Implication If you make this stuff find another way to earn a living Can anyone or anything save GM Starting at P and Q equilibrium point A Move to point E Lower prices and people buy more because prices are lower Supply has increased because of cheaper inputs or better technology Examples Common labor in Southern California Policy Implication Plenty of demand for low wage Americans Wages have been falling because of supply Take away ideas Movements along the supply curve where changes in demand elicits more or less output in response to price changes Movements of the supply curve due to changes in the costs of inputs or technology Over time prices have been falling for goods With falling goods prices the price of laborintensive activities such as socializing has been rising We can draw policy implications from changes in P and Q if we believe each is an equilibrium