DOING WELL BY DOING
GOOD: THE ECONOMICS
OF SUPPLY
RANDY RUCKER
PROFESSOR
DEPARTMENT OF AGRICULTURAL
ECONOMICS AND ECONOMICS
JUNE 19, 2012
TEENAGE BABY SITTERS (AND OTHER
ENTREPRENEURS): WHY DO THEY DO
WHAT THEY DO?
 Help out Parents and Friends (social
responsibility)
 Like working with young children
(personal satisfaction)
 Parents have told them they have to learn
responsibility by holding down a job
 Earn income (make profits)
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FIRMS: WHY DO THEY DO
WHAT THEY DO?
 Make products they believe help people
(social responsibility)
 Owners and managers enjoy what they
do (personal satisfaction)
 Produce commodities that meet
regulatory standards and legal
requirements (obey laws and regulations)
 Earn income (make profits)
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FIRMS: WHAT IS THE MAJOR
DRIVING FORCE BEHIND FIRM
BEHAVIOR?
Profits
Note: “Profits” is not a four letter word!!
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SUPPLY
 What commodities will firms produce?
 What quantities of those commodities will
be produced?
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WHAT COMMODITIES WILL
FIRMS PRODUCE?
 Consumer preferences and buying
behavior matter.
 To sell their goods and make profits, firms
will strive to produce goods that consumers
want to buy.
 John, a Laurel high school student, can
make a “Save the Wolves” t-shirt or a “Go
Locomotives” t-shirt (with the school logo)
with the same amount of effort.
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WHAT COMMODITIES WILL
FIRMS PRODUCE?
 Suppose most of John’s potential
customers are avid Locomotives fans (who
don’t like wolves much).
 Which of the two t-shirts will he spend the
most time making?
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THE ROLE OF PROFITS IN FIRM
DECISIONS
 When an event occurs that increases a
firm’s profits, that firm will increase the
quantity of the commodity that it produces.
 Examples:
 An increase in the price of the commodity the
firm produces
 A decrease in the price of an input
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THE ROLE OF PROFITS IN FIRM
DECISIONS
 Alternatively, when an event occurs that
decreases a firm’s profits, that firm will
decrease the quantity that it produces.
 Examples:
 A decrease in the price of the commodity the
firm produces
 An increase in the price of an input
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WHAT ARE PROFITS?
Profit = Total Revenue - Total Cost
(TR)
(TC)
Total Revenue = Price x Quantity
(P)
(Q)
Total Costs = All costs incurred in
producing a product
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EVENTS THAT AFFECT
PROFITS AND OUTPUT
 Change in the Price of a Commodity
 If Price increases, then (at current output
levels) Total Revenue (P x Q) increases
and profits increase. So the firm will
produce more.
 Similarly, if the price decreases . . .
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EVENTS THAT AFFECT
PROFITS AND OUTPUT
 Change in Quantity Supplied
 When output increases because price
has increased, economists say there
has been a change in quantity
supplied. Similarly if the price
decreases . . .
 These are represented as movements
along the supply curve.
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THE CONCEPT OF SUPPLY
 What is a supply curve?
 This is a curve (or straight line) that
shows the relationship between the price
of a good and the quantity of the good
that firms produce.
 Along this curve other factors that affect
profit are held constant.
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THE CONCEPT OF SUPPLY
 Based on the preceding discussion, we
expect this relationship to be positive.
 That is, an increase in output price will
lead to an increase in production.
Similarly, for a decrease . . .
 This is the “Law of Supply.”
 Let’s walk through an example . . .
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THE SUPPLY SCHEDULE
 At different prices (holding other factors constant),
Jenny is willing to provide different amounts of
lawn mowing services.
(Assume she can mow one lawn per hour.)
Price per Lawn Number of Lawns Mowed
(Quantity Supplied)
$4
0
$8
4
$12
7
$15
9
15
THE SUPPLY CURVE
18
16
Price Per Lawn
14
12
10
Jenny's Supply
Curve
8
6
4
2
0
0
1
2
3
4
5
6
7
8
9
10
Lawns Mowed per Day
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CHANGES IN QUANTITY SUPPLIED
Once again,
 Change in the Price of a Commodity
 If Price increases, then (at current output
levels) TR (P x Q) increases and profits
increase. So the firm will produce more.
Similarly, if Price decreases . . .
 Change in Quantity Supplied
 When output increases because price has
increased, an increase in quantity supplied
results. Similarly, if output decreases . . .
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OTHER EVENTS THAT AFFECT
PROFITS AND OUTPUT
 Change in Input Prices
 If an input price (e.g., gas) falls, then Jenny’s
costs of mowing lawns fall and her profits will
increase.
 So, at any given price she is willing to mow
more lawns.
 Similarly, if an input price increases . . .
 This is a Change in Supply.
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A CHANGE IN THE SUPPLY SCHEDULE
 At a lower price for gas, Jenny will be willing
to mow more lawns.
$4
Lawns Mowed
(Initial Situation:
High Gas Price)
0
Lawns Mowed
(New Situation:
Low Gas Price)
2
$8
4
6
$12
7
9
$16
9
11
Price
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CHANGE (OR SHIFT) IN SUPPLY
18
16
Initial Supply Curve
Price Per Lawn
14
12
10
8
New Supply Curve
6
4
2
0
0
2
4
6
8
10
12
Lawns Mowed per Day
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OTHER EVENTS THAT AFFECT
PROFITS AND OUTPUT AND
CAUSE CHANGES IN SUPPLY
 Changes in Technology:
 If new technologies enable firms to use
resources more efficiently, then

their costs will fall,

their profits will increase,

and (at any given output price) they will produce
more output.
 That is, Supply will increase.
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OTHER EVENTS THAT AFFECT
PROFITS AND OUTPUT AND
CAUSE CHANGES IN SUPPLY
 Changes in the Number of Sellers:
 If more firms enter the market, then at any
given price more output will be produced:
Supply will increase.
 “Supply will increase” means that the
supply curve shifts.
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OTHER EVENTS THAT AFFECT
PROFITS AND OUTPUT AND
CAUSE CHANGES IN SUPPLY
 Examples:
 The continuing development of farm
machinery has decreased the cost of
producing corn (and lots of other
commodities). This increases the supply of
corn.
 An import ban on U.S. beef into Japan is
lifted. More U.S. sellers now have access
to the Japanese beef market. The supply of
U.S. beef to Japan increases.
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OTHER EXAMPLES OF CHANGES
IN SUPPLY (WITH GRAPHS)
 Examples:
 What happens to the world supply of
wheat if China and Russia have extremely
favorable growing conditions for wheat?
 Graphically . . .
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Price
The World Supply of Wheat
($/Q)
S0
S1
P0
Q0
Q1
Q
(bushels/year)
An Increase in the Supply of Wheat due to
Favorable Weather in China and Russia
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Other Examples of Changes in
Supply (with Graphs)
 Examples:
 What happens to the supply of
peanuts if there is a drought in the
Southeastern United States?
 Graphically . . .
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The Supply of Peanuts
Price
($/Q)
S1
S0
P0
Q1 Q0
Q
(Pounds/year)
A Decrease in Supply Due to a Drought in Georgia
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OTHER EXAMPLES OF CHANGES IN
SUPPLY (WITH GRAPHS)
 Examples:
 What happens to the supply of peanut
butter if the price of peanuts goes up?
 Graphically . . .
 Note that a change at one level of the
production process works its way through to
other levels.
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The Supply of Peanut Butter
Price
S1
($/Q)
S0
P0
Q1
Q0
Q
(Pounds/year)
A Decrease in Supply Due to an Increase in Peanut Prices29
SUMMARY
 Key Concepts:

Firm objectives, total revenues, total costs,
profits, supply schedule, supply curve, and the
law of supply
 Key Idea:
 Firms are primarily motivated by the search
for profits. Events that cause profits from
producing a commodity to increase cause
production of the commodity to increase.
Similarly, events that cause profits to
decrease . . .
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SUMMARY
 Change in Quantity Supplied:
 A change in the price of a commodity causes
a movement along the supply curve, or a
change in quantity supplied.
 Change in Supply:

An event other than a change in the price of a
commodity causes a shift in the supply curve,
or a change in supply.
− Input prices, technology, the number of
firms, etc.
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QUESTIONS?
COMMENTS:
 Doing Well by Doing Good?
 Meaning?
 Profits is not a four letter word
 What is the nature of your relationship
with Albertsons (or Town & Country, or
Safeway, or . . .)?
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