Ch4 – Supply

Seller surplus – seller side counterpart to buyer surplus, help reduce the cost of purchasing and raise
profit.

Own-price elasticity of supply – measures the responsiveness of quantity supplied to changes in the price
of the item, tells managers how much of a price increase will be necessary to meet any desired increase
in purchases

Two-key decision of a business (Both depends on TIME horizon)

1. Scale at which to operate

2. To continue in operation

Short run – is a time horizon in which a seller cannot adjust at least one input
เปลืย่ นในระยะเวลาสัน
้ ๆไม่ได้
 Constraints are employment contracts, investment in facilities, and equipment (need to wait for
contract to expired)

Long run – is a time horizon long enough for the seller to adjust all inputs, including possibly entering or
exiting the industry

Difference between Short/Long run – depends on circumstances

เช่นสัญญาจ้างยังไม่หมดก็ยงั เลิกกิจการไม่ได้ตอ้ งรอก่อน (Short run)
หรือว่าจ้างรายวันก็สามารถเลิกจ้างได้ท ันที
SHORT RUN COSTS

Decide whether to continue in operation – a business needs to know how shutting down will affect its
total costs. In order to determine its scale or rate of production, business needs to know the cost of
delivering an additional unit of product (Fixed cost, variable cost)

Fixed Cost (FC) – cost of inputs that DO NOT change with the production rate

Variable Cost (VC) – cost of input that DO change with the production rate

Total Cost (TC) = FC + VC

Look at the FC, VC closely. Downsizing will have no effect on fixed cost and will only reduce the variable
costs. But if the business whose costs are mostly fixed, downsizing may have little effect on total costs.

Marginal Cost (MC)– The change in total cost due to the production of an additional unit.
รายรับรวมทีเ่ ปลีย่ นแปลงไปเมือ่ ปริมาณการขายสินค้าเพิม ้ อีกหนึ่งหน่ วย
่ ขึน หรือ
รายรับทีเ่ พิม ้ เนื่องจากการขายสินค้าเพิม
่ ขึน ้ หนึ่งหน่ วย (Slope of Total Cost Curve).
่ ขึน
△𝑇𝐶 △𝐹𝐶 △𝑉𝐶 △𝑉𝐶
𝑀𝐶 = △𝑄
= △𝑄
+ △𝑄
= △𝑄
… fixed cost is fixed, therefore omit.

Average Cost (AC) – คือราคาต่อหน่ วย unit cost =

𝑇𝐶
𝑄
Marginal Product (MP) – The increase in out put arising from an additional unit of input.

 Diminishing marginal product – marginal product becomes smaller with each increase in the
quantity of the variable inputs. With a diminishing marginal product from variable input, the AVC
will increase with production rate.
o มันเกินกาลังเครือ่ งจักรกับคนทางาน MP เลยออกมาเป็ นกราฟระฆังควา่
ทาให้เกิด increase in AVC.
 AC=AFC+AVC
o AFC falls with the production rate (FC/Q จานวนเยอะเลยทาให้ AFC ตก). AVC is
increasing.
o If FC is not too large AVC increase sufficiently and AC will first decline with production rate
and then increase.

Total Revenue (TR) = P*Q = AR*Q [Pg.75]

Marginal Revenue (MR) – The change in total revenue from selling additional unit (Slope of TR line)

 Can be positive and negative

 If price is fixed, then marginal revenue is equal to price (P=MR=AR)

MAXIMIZE PROFIT โดยต้องให้ MR=MC (จุด cross กันระหว่างกราฟ)

 If MR>MC, increase in production will raise the profit.
 If MR<MC, decrease in production will increase profit.

Break Even Analysis (Short run) – TR covers VC (producing at the rate where the MC=P), or Price
covers AVC

 Sunk cost- cost that has been committed and can’t be avoided
o Fixed cost, even if business shuts down, it must still pay the fixed cost, F
o Variable cost is avoidable.
Short run breakeven/shutdown or not? - ไม่ตอ ้ งคิดถึง fixed cost เพราะมันเป็ น sunk cost. In
calculating economic profit, suck costs should be ignored.

o R-V-F ≥ -F  R ≥ V  P ≥ AVC Derived มาจาก Revenue = price * quantity

If TR-FC-VC < -FC SHUT DOWN

If TR-VC < 0 SHUT DOWN
If TR-VC ≥ 0 หรือ P ≥ AVC CONTINUE

 สมมุติ Profit producing 5,000 sheets a week, its TR=35000, VC=25930… Economic profit=9070.
Ignore the sunk costs (FIXED)

Individual Supply Curve – a graph showing the quantity that a seller will supply at every possible price.

 ถ้าเปลืย่ นราคาต้องเพิม
่ production to the rate where the new price equals to the MC;
MR=MC (Production rate).

LONG RUN

In long run, all inputs can be freely adjusted, have flexibility in deciding on inputs and production.
Consider long run cost and revenue.

Production Rate – maximize profit by produce at that rate MC=MR.

In long run, use long-run MC, MR=P

This diagram MC=MR

Break Even Analysis (Long run) – TR covers TC (producing at the rate where the MC=P), or Prices
covers AC

TR – TC < 0 EXIT
TR = TC CAN STILL RUN, STILL MAKE SALARY(OWN-
PRICE = AC SALARY), normal pro
PRICE ≥ AC CONTINUE, long run break-even

SELLER SURPLUS
Ch.5 Market Equilibrium

Demand-supply framework

 When demand falls, the market will be in excess supply, price will fall.
 When demand raises, the market will be in excess demand, price will increase.

Perfect Competition characteristic:

 Homogeneous Product (สินค้าทีซ ่ ื้อขายกันนัน้ มีลกั ษณะเหมือนกันทุกประการ)

o Ex. Gold (anywhere is the same) so the price cannot be varies.
o Not homogeneous Product is mineral water, came from a different source and also the
composition is not the same so the price can be varies but competition among mineral
water is relatively weaker than competition among gold mines.
 Many buyers and sellers (purchases/supplies a quantity that is small relative to the market
supply/demand)
o Many small buyers
 All buyers face the same price.
 If some buyers have the market power, the buyers pay different prices and the
same buyer might even pay different prices for different units of the same
product
o Many small sellers
 No seller can get a higher price than others, sell same price.
 If some sellers have market power, they receive different prices
o แต่จะสร้าง market demand-supply curve ไม่ได้ก็ตอ่ เมือ่ มี market power เพราะว่า
demand ถ้ามีตงั ก็จะสามารถซื้อราคาทีเ่ ท่าไหนก็ได้ไม่มส ี น
ิ้ สุด
 Freedom of entry or exit (ผูข
้ ายสามารถเข้าและออกจากกิจการได้อย่างเสรี)
o ถ้า P>AC คนขายก็อยากเข้ามาขาย ราคาก็ลดลง และการแข่งขันสูง
o เวลาเข้ามาขายก็ตอ ้ งมี cost ในการเข้ามาและการออกไปก็อาจจะมี เพราะว่าถ้า
cost of exit สูงก็จะน้อยคนนักทีอ ่ ยากจะเข้ามาในตลาด ex. Telecommunication
service (pay government to enter)
 All buyers and sellers have symmetric information about market conditions
o If a new supplier offers a key input at lower price, every producer will immediately get
the same lower price. No seller can enjoy privilege of secret information.
 Ex. Dry cleaning service
o On the other hand, not symmetric is DOCTOR. Doctor know more than patients and rely
on them. Therefore, it is not competitive. LAWYER
 MARKET EQUILIBRIUM

Market equilibrium- the price at which the quantity demanded equals the quantity supplied.

Excess supply- the amount by which the quantity supplied exceeds the quantity demanded. In diagram,
excess supply by 5 billion.

Excess demand- the amount by which the quantity demanded exceeds the quantity supplied. In diagram
excess demand by 5 billion.

SUPPLY SHIFT

Supply shift DOWN – wages reduction, affects seller’s marginal costs whatever the quantity supply.

Supply shirt RIGHT – at every possible price, sellers want to supply more.

However, the change in wages does not affect demand. New equilibrium price= 10.4

Generally, a shift in the supply curve will change the equilibrium price by no more than the amount of
the supply shift.

Price elasticity of demand

 Buyers are completely insentitive to the price (Extremely inelastic demand). Buyers buy same
quantity regardless fo the price.
 Extremely elastic demand – sensitive to price, when supply price shift down the quantity

Price elasticity of supply

 Extremely inelastic supply – seller is completely insensitive to the price: they provide the same
quantity regardless of the price. If their costs change, they will not change the quantity supplied.
  Extremely elastic supply – MC is constant. If the cost of an input changes, the MC changes by the
same amount at all production levels.


DEMAND SHIFT

Supply not shift, demand shifts result in a

higher price and larger quantity

ADJUSTMENT TIME
The impact of the shifts in demand and supply on the market equilibrium depends on the price
elasticities of demand and supply. The elasticity varies with the Time Horizon. The shifts in demand and
supply may have different short-run and long-run effects.

Ch 6 – Economic Efficiency
Opportunities to increase value-added and profit. Wherever the allocation of resources is not
economically efficient, there is a way to add value and make money by resolving the inefficiency

 Airport runway capacity (scare resource)

Benchmark: Condition for economic efficiency

1. For all users, the same marginal benefit

a. Allocate resources economically efficient for all the users to have the same marginal
benefit. Ex. Airlines staff tix (standby).
2. For all suppliers, the same marginal cost
a. Better management, operate at lower marginal cost
3. Marginal benefit (users) = Marginal cost (suppliers)
a. If the MB<MC, society overall could add value by reducing the #of services. MC<MB,
increase… so to allocate resource efficiency, MB=MC. MUST!!

Consumer Sovereginty (อานาจสูงสุด) – principle of taking individual users’ evaluations as given. Some
like heavy metal song, while others like opera and take that preferences a sa givein in assessing the
efficiency of resource allocation.

Technical Efficiency – provision of an item at minimum cost. Doesn’t consider how much benefit the
item provides (may be no one wants).

Invisible Hands – market price guides buyers and sellers, acting independently and selfishly, to channel
scare resources into economically efficient uses. Do it to achieve condition for economic efficiency.

Competitive Market

 Demand side, each person will buy up to the quantity such that their marginal benefits = price.
 Supply side, each supplier will expand up to the scale where marginal cost = price (Max profit).
