Chapter 6 - Perfectly competitive supply. In our discussion of supply and demand in part 1, we asked you simply to assume the law of demand, which says that demand curves are downward-sloping. In chapter 5 we will see that this law is a simple consequence of the fact that people spend their limited incomes in rational ways. | Perfectly Competitive Supply Chapter 6 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Explain how opportunity cost is related to the supply curve Discuss the relationship between the supply curve for an individual firm and the market supply curve for an industry Determine a perfectly competitive firm’s profit-maximizing output level and profit in the short run Connect the determinants of supply with the factors that affect individual firms’ costs and apply the theory of supply Define and calculate producer surplus 2 Productivity Changes Over Time Productivity can be measured by looking at the time it takes a worker to produce a good Productivity in manufacturing has increased Assembling a car Productivity in services has grown more slowly Orchestras require the same number of musicians Barbers take just as long to cut hair Manufacturing wages and service wages increase at about the same rate Principle of Opportunity Cost 3 Buyers and Sellers Cost-Benefit Principle is behind decision making Buyers: buy one more unit? Only if marginal benefit is at least as great as marginal cost Sellers: sell one more unit? Only if marginal benefit (marginal revenue) is at least as great as marginal cost Opportunity Cost also matters Buyers: hamburger or pizza? Sellers: recycle aluminum or wash dishes? 4 The Importance of Opportunity Cost Harry can divide his time between two activities: Wash dishes for $6 per hour Recycle aluminum cans and earn 2¢ per can Harry only cares about the income How much labor should Harry supply to each activity? Harry should devote an additional hour to recycling as long as he is earning at least $6 per hour 5 Recycling Services Hours per Day Total Number of Aluminum Cans Found 0 0 1 600 2 1,000 3 1,300 4 1,500 5 1,600 Additional Number of Cans Found 600 400 300 200 100 6 Recycling Services Harry earns more than $6 for each of the first two hours Third hour is a tie with washing dishes . | Perfectly Competitive Supply Chapter 6 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Explain how opportunity cost is related to the supply curve Discuss the relationship between the supply curve for an individual firm and the market supply curve for an industry Determine a perfectly competitive firm’s profit-maximizing output level and profit in the short run Connect the determinants of supply with the factors that affect individual firms’ costs and apply the theory of supply Define and calculate producer surplus 2 Productivity Changes Over Time Productivity can be measured by looking at the time it takes a worker to produce a good Productivity in manufacturing has increased Assembling a car Productivity in services has grown more slowly Orchestras require the same number of musicians Barbers take just as long to cut hair Manufacturing wages and service wages increase at about the same rate Principle of Opportunity Cost
