Supply schedule
price($) quantity
0 0
0.5 0
1 1
1.5 2
2 3
2.5 4
3 5
What does supply curve tell us?
(1)marginal cost: each of the point on the curve represents the marginal opportunity cost of producing that particular unit
(2)total cost: sum of each unit's marginal cost
(3)total revenue: price * quantity
(4)producer surplus (profit): total revenue - total cost
Why does the supply curve slope up?
(1)The law of diminishing return: It costs more to make more
For example: when you cultivate apples, you will first use the most fertile land to cultivate, when you want to produce more, you then have to cultivate some of them in less fertile land, which means you have to use fertilizer or spend more time to make sure apples can grow in the barren land. Your cost of producing rises.
(2)We spend resources to get other land, capital and labor to produce what we want.
Paradox of economic growth: When everything gets awesome, everything you currently do gets more costly. (More choices to forego, more opportunity cost to pay)
Difference between quantity supplied and supply:
The price of good itself doesn't change the supply curve but change producers' quantity supply; other factors that help shift the supply curve change the supply.
What shifts supply curve?
(1) Input price
(2) technology
(3) expectation
(4) natural conditions
(5) government policies (tax and subsidy) (That is related to externalities)
(6) price change in other markets For example, if the price of pizza rise, more people will turn to produce pizza, leaving the supply of hamburgers falls.
price elasticity of supply: a measure of how much the quantity supplied of a good responds to a change in the price of that good. Formula: percentage change in quantity supplied / percentage change in price
If the curve is flat, elastic; inelastic if the curve is steep
Marginal cost vs Average cost
quantity marginal cost total cost average cost
0 0 0 0
1 1 1 1
2 1.5 2.5 1.25
3 2 4.5 1.5
When deciding whether to produce an extra marginal unit of product, don't take sunk cost into consideration.
Example: If you sell the third product at $1.75, it seems that you earn 0.25 bucks compare with average cost($1.5) but actually you lose 0.25 dollars (the marginal cost is 2 dollars)
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