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UMass Amherst ECON 103 - Class 17 More about Supply Fall 2014

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Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17In case you missed itSlide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Kaylee and Torin!Cassie!More about SupplyAnd why we should careThe 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 priceWhen 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 curveGreater demand, higher prices elicits more supply.Less demand, lower prices, less supply.Supply Curves moveMore, or less, supplied at any priceChanges in the price of inputsHigher 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.Changes in productivityWorse 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 wagesMoving Supply Curve by changing technologyThese Bangladesh workers were paid low wagesNow they are dead in a factory fireDifferent technologiesNew practice OldWhat was that doing here?Or this?In the long run, supply of all inputs variesSo there is no reason for long-run marginal productivity to fall.Remember, marginal productivity fell because variable inputs had less to work with.But if everything increases together, then marginal productivity will remain constant. Or will even increase with efficiencies of scale.Economies of ScaleDouble 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 experienceThis is called “learning by doing”. It lowers costs when output increases.This happened with ship builders during World War II.Learning by doing allowed us to defeat the Nazis. We were able to build more ships than their U-Boats could sink.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 learningIn case you missed itIn 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 learningTherefore: 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 demandGreater demand might lower prices because of economies to scale and learningPutting changes in supply and demand togetherIf 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 AStarting at P and Q equilibrium point AMove to point B: prices and quantities increased.Higher P elicits greater supply.P increases because of greater demand.Examples: CocainePolicy implicationIf 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 AMove 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 ImplicationOil 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 AMove to point DLower prices and still no one buys.No one wants this crap.Examples: VHS cassettes; GM cars.Policy ImplicationIf you make this stuff, find another way to earn a living.Can anyone, or anything, save GM?Starting at P and Q equilibrium point AMove to point ELower 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 ImplicationPlenty 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 labor-intensive activities, such as socializing, has been rising.•We can draw policy implications from changes in P and Q if we believe each is an


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