Lecture Notes: Supply and Marginal Costs

Introduction

• Focus on Supply and marginal costs
• How managers think about supply decisions

Scenario: Oil Production

• Example: Striking oil in your backyard
• Decision factors for oil production:
  • Depth of drilling
  • Machinery usage
  • Hiring help
• Supply curve: Quantity produced changes as price changes
• Price is determined by the market (perfect competition)

Supply Curve

• Determines quantity to produce based on price
• In perfect competition, sell at market price
• Not responsible for setting the price

Marginal Principle

• Marginal Cost (MC): Cost to produce one more unit
  • Includes variable costs (e.g., electricity, labor)
  • Excludes fixed costs (e.g., rent, manager salaries)
• Marginal Benefit (MB): Additional revenue from selling one more unit

Cost-Benefit Principle

• Produce if MB ≥ MC
• Example: McDonald's marginal cost of a hamburger includes the cost of meat, not manager salaries

Supply Curve and Marginal Cost Curve

• Individual supply curve aligns with marginal cost curve
• Sell until MB = MC
• Supply curve reveals marginal costs

Increasing Marginal Costs

• Initially, cost benefits of mass production (economies of scale)
• Eventually, increasing marginal costs due to:
  • Decreasing returns
  • Rising input costs

Example: Twitter User Growth

• Initial user acquisition is easier and cheaper
• Later stages require more effort and cost to add users

Conclusion

• Supply curve is your marginal cost curve
• Understanding the link between supply and marginal costs is crucial for decision-making

Next Steps

• Integration of supply and demand in future sessions

Note: This lecture focuses on the fundamental principles of supply management and marginal costs, emphasizing real-world applications and theoretical underpinnings.