PPC AND CONCEPTS OF SUPPLY

PPC AND CONCEPTS OF SUPPLYSUMEETHA.MCompare 2 variables; goods or servicesTrade-offs or opportunity cost involvedAll available resources are fully employedAll available technology is fully employedProductive efficiency: Resources are employed in the least costly wayAbstractions and Assumptions of a PPC 2009 Pearson Addison-Wesley. All rights reserved. 10-3Production Possibility Curve(PPC)Production Possibility Frontier - shows the maximum combinations of two goods that can be produced from a given amount of input.The slope of the production possibility frontier is the marginal rate of transformation (MRT).The Production Possibility ScheduleA Production Possibilities Schedule (or Table) is a set of numbers in tabular form that illustrate different possible combinations of two goods thatcanbe produced if all available resources are being employed, resources are fixed, technology is fixed, and there is a fixed time period.

PPC schedule or tableChoicesCarBreadP012Q110R28S36T44Explaining the TableThe schedule depicts various combinations of resources which can be used to produce two good cars and bread. If you have to increase production of one good , you have to give up the production of the other. Hence a trade-off is involved.Why is the PPC concave? Increasing Marginal Opportunity CostThe principle of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on an activity.In order to get more of something, one must give up ever-increasing quantities of something else.Therefore the PPC is concave.What trade-offs are involved?Why is the PPC concave?What does point (E), inside the PPC illustrate? What is the significance of point (F), outside the PPC? Under what conditions can point F be reached?army truckscars246810121230ABCDEFcapital goodsconsumer goods0ABCDEFGGHHMoving from point B to point A, could eventually expand the frontier from G,G to H,HEfficiencyAny point within the production possibility curve represents inefficiency.Inefficiency getting less output from inputs which, if devoted to some other activity, would produce more output.Different Points on the PPC:Efficiency and InefficiencyGuns1086420 2 4 6 810ButterCD ABEfficientpointsInefficientpointUnattainable point, given available technology, resources and labor forceUnattainable point With the given technologyAny point outside the production possibility curve represents something unattainable, given present resources and technology.Toms Trade-offs: The Production Possibility Frontier

13Is production outside the PPC possible?Can we produce outside the production possibility curve?Can we have more?

Shifts in the Production Possibility CurveSociety can produce more output if:Technology is improved.More resources are discovered.Economic institutions get better at fulfilling our wants.

Economic Growth

Economic growth results in an outward shift of the PPF because production possibilities are expanded.The economy can now produce more of everything.

Production is initially at point A (20 fish and 25 coconuts), it can move to point E (25 fish and 30 coconuts).16Market Supply versus Individual SupplyThe quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity supplied)1815129630Starbucks121086420Jitters++++====30252015+=10+=5+=0Market Qs $0.006.005.004.003.002.001.00Price 0171717Again, the assumption of only two sellers is a clear violation of perfect competition. However, its much easier for students to learn how the market supply curve relates to individual supplies in the two-seller case. THE MARKET FORCES OF SUPPLY AND DEMAND18

PQThe Market Supply CurvePQS (Market)$0.0001.0052.00103.00154.00205.00256.003001818THE MARKET FORCES OF SUPPLY AND DEMAND19Supply Curve ShiftersThe supply curve shows how price affects quantity supplied, other things being equal. These other things are non-price determinants of supply. Changes in them shift the S curve 01919Non-price determinants of supply simply means the things other than the price of a good that determine sellers supply of the good. ELASTICITY AND ITS APPLICATION20The Variety of Supply CurvesThe slope of the supply curve is closely related to price elasticity of supply. Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.Five different classifications.02020Economists classify supply curves according to their elasticity.

The next 5 slides present the different classifications, from least to most elastic.ELASTICITY AND ITS APPLICATION21Price Elasticity of SupplyPrice elasticity of supply measures how much Qs responds to a change in P.Price elasticity of supply=Percentage change in QsPercentage change in PLoosely speaking, it measures sellers price-sensitivity. Again, use the midpoint method to compute the percentage changes. 02121Most everything in the price elasticity of supply section corresponds to analogous concepts from the price elasticity of demand section. So, it is probably safe to move through this section more quickly. ELASTICITY AND ITS APPLICATION22Q2Price Elasticity of SupplyPrice elasticity of supply equals 0PQSP2Q1P1P rises by 8%Q rises by 16%16%8%= 2.0Price elasticity of supply=Percentage change in QsPercentage change in PExample:2222CHAPTER 5 ELASTICITY AND ITS APPLICATIONPrice Elasticity of SupplyPrice elasticity of supply measures how much Qs responds to a change in P.Price elasticity of supply=Percentage change in QsPercentage change in PLoosely speaking, it measures the price-sensitivity of sellers supply. Again, use the midpoint method to compute the percentage changes. 023Most everything in the price elasticity of supply section corresponds to analogous concepts from the price elasticity of demand section. So, it is probably safe to move through this section more quickly. ELASTICITY AND ITS APPLICATION24SPerfectly inelastic (one extreme)PQQ1P1P2Q changes by 0%00%10%= 0Price elasticity of supply=% change in Q% change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:verticalnone02424ELASTICITY AND ITS APPLICATION25SInelasticPQQ1P1Q2P2Q rises less than 10%0< 10%10%< 1Price elasticity of supply=% change in Q% change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:relatively steeprelatively low< 12525CHAPTER 5 ELASTICITY AND ITS APPLICATIONSUnit elasticPQQ1P1Q2P2Q rises by 10%010%10%= 1Price elasticity of supply=% change in Q% change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:intermediate slopeintermediate= 126CHAPTER 5 ELASTICITY AND ITS APPLICATIONSElasticPQQ1P1Q2P2Q rises more than 10%0> 10%10%> 1Price elasticity of supply=% change in Q% change in P=P rises by 10%Sellers price sensitivity:S curve:Elasticity:relatively flatrelatively high> 127CHAPTER 5 ELASTICITY AND ITS APPLICATIONSPerfectly elastic (the other extreme)PQP1Q1P changes by 0%Q changes by any %0any %0%= infinityPrice elasticity of supply=% change in Q% change in P=Q2P2 =Sellers price sensitivity:S curve:Elasticity:horizontalextremeinfinity28ELASTICITY AND ITS APPLICATION29The Determinants of Supply ElasticityThe more easily sellers can change the quantity they produce, the greater the price elasticity of supply. Example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars. For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. 2929This section is not perfectly analogous to the section on the determinants of the price elasticity of demand, but its similar enough that you can probably cover it more quickly and with much less hand-holding. Chart10123456

market demand

Helen's D curveDemandgood = Latteper monthperson 1person 2marketPQdQdQd$0.0016816$1.0014714$2.0012612$3.0010510$4.00848$5.00636$6.00424

Helen's D curve0000000

market demand