Class Summary 11/14/11

Supply
All of the relevant costs for producers are opportunity costs. There are times when the price of something is too low to warrant the production of it because a profit cannot be made. The general gist of supply is that it costs more to make more.

Supply curves tell us:

1. Marginal cost - every point on the curve is the marginal opportunity cost of producing that particular item
2. Total cost
3. Total revenues
4. Producer surplus - total revenues minus total costs

The law of supply has exceptions, unlike the law of demand that is unchanging. A caveat is found in the theory of labor supply. There is some point of income where you would actually work less. For example, if your salary was a million dollars a minute, you would probably only work for about five minutes per day. Apart from a few exceptions, supply curves generally slope up. This is because of diminishing returns in production, and the fact that you need more resources in order to make more products.

What changes supply?

1. Price of inputs
2. Expectations (even expectations about factor prices)
3. Technological improvements
4. Changes in other markets

Price elasticity of supply: percent change in quanitity supplied
                                            percent change in price of good
This determines how much more is produced when price increases. Market supply curves are flatter than individual supply curves. Average costs determine entry and/or exit into/out of a particular market. Again, don't factor in sunk costs!