thank you so today we are going to be continuing to learn about Supply and our Focus is going to be about Supply and marginal costs and so we want to focus in on how managers think about Supply so let's suppose you're going to be the manager here you strike oil in your backyard congratulations so now we want to think about is how much oil should you pump up today so I don't know much about oil production but I think you have some some range into how much you can pump out depending on you know how how deep you dig how much you run your Machinery are you hiring a friend to help you make sure everything's running smoothly to make sure you don't have any breakdowns well as you would imagine the amount you produce depend on the price right that's how a supply curve works quantity produced changes as the price changes and what if the change price changes tomorrow so what this really is saying is when you're when you're making these decisions you need to decide what your supply curve will be another way to think of it is let's suppose you're going on vacation and you have your assistant and you're going to leave that person in charge while you're on vacation and what you'd like to do is say to them all right your the amount you produce tomorrow is going to depend on the price of oil and here is the supply curve and so whatever the price of oil is this supply curve I'm handing you will tell you exactly how much to produce so that's the supply curve it tells you for any possible price how much will you produce important thing here to note you don't get to choose the price of oil you sell it whatever the market price is so you're not you don't have to tell your assistant oh this is how much you should charge oil is a commodity it's traded on a global market you can find the price of oil at any time when you want um and it's just the price of oil and so you have to sell at this price this is what we call perfect competition we'll more look more closely at this assumption later in the semester again for now we're just going to assume that when you dig your oil out of the ground you have to sell it at whatever the price of oil is um so I kind of switch here from talking about oil to talking about gasoline so how much gasoline should I sell at a given price right that's really what we're thinking when we're trying to make our demand curve right the demand curve we're just going to make a whole Woods just consists of a whole bunch of points that we connect and each point is answering the question how much gas should I sell at this price this is a how many questions so we're going to apply the marginal principle so what we mean is should I sell one more unit of gallon of gas well should I I'm in order to answer that I'm going to use the cost benefit principle which says that I should sell one more gallon if the benefit of one more gallon of gas is greater than or equal to the cost of one more gallon of gas okay well let's let's think about marginal benefits and marginal cost the marginal cost is the cost for me to produce one more gallon so that's going to be you know maybe I have to pay my electric bill maybe I have to pay a worker who's going to help me make it marginal benefit is the benefit of one more gallon and so I should make and sell that Ellen if the marginal benefit they benefit from one more gallon is greater than the cost of from one more gallon all right well let's think about marginal benefit and what they actually are so what is the marginal benefit of a gallon fast well if you are selling the gasoline right now we're not thinking about how much enjoyment uh Darren got from one gallon of gas because he could drive to Walmart one thing about you is the um oil driller or gasoline seller what's your marginal benefit from a gallon of gas the extra money you get from selling one more gallon the price of gasoline how about cost what's the marginal cost of producing a gallon of gas that's the extra cost of producing one more gallon so how much if I'm like doing my accounting at the end of the month how much did my costs go up because I made that one more gallon again how much more electricity did I have that I have to pay somebody more hours of Labor that is my marginal cost extra cost of producing one more unit of output important to note extra cost includes variable costs hourly labeler units the cost of the inputs what you mean by variable costs are those are costs that vary depending on how much you produce extra cost does not include fixed costs that must be paid even if you don't produce that unit so for example when you decide to produce one more gallon of gasoline that is not going to increase you know your rent if maybe you're you're renting um warehouse space or factory space or whatever whatever it is that rent is going to be the same whether or not you produce that gallon similarly if you have some managers who are paid a salary that's going you're going to have to pay them for that salary regardless of whether you produce one more gallon which is why when we're thinking about marginal cost these fixed costs are not included marginal cost only includes these extra variable costs that increase when you produce one more unit which of the following should be included when McDonald's calculates the marginal cost of producing one more hamburger the answer here is B the cost of the meat that goes on the burger right that is a cost that when you make one more Burger you have to put one more piece of meat on it so you have to your cost of beef increases the salary of the manager and the cost of security system those are fixed costs that you're going to pay whether or not you make that last burger and the price you sell the hamburger for that is a marginal benefit not a marginal cost so let's go through um this sort of flow chart here and use our cost benefit principle and use use all of use several core principles in order to come up with what a supply curve is going to look like so we start off with our question right this is how many gallons of gas should I Supply that's a how many question so you turn it into should I sell one more gallon and this is all at a given price right so the supply curve is if the price is two dollars how many should I sell the price is two dollars and up 10 cents how many should I sell some so should I sell one more gallon cost benefit principal is going to say well we're trying to figure out if we should do something here and sell one more gallon of gas that depends on price versus marginal cost so we want to think about is the opportunity cost principle which tells us that when we calculate marginal cost it should include variable cost but not fixed costs so you can almost think of the fixed cost as like it's a sump cost right whether you produce that whether McDonald's makes that extra burger or not they have to pay the manager that is a sump cost the make a burger or what it's you make one more burger and pay the manager or you don't make that one more Burger pay the manager anyway so there's no or what there you're paying the manager either way just implies the rational root for sellers you should Supply one more gallon if price is greater than or equal to marginal cost remember price is equal price is equal to marginal benefit so keep producing as long as marginal benefit is greater than or equal to marginal cost make and sell another item if the price is greater than or equal to the marginal cost so what we can say is that your individual supply curve simply graphs your supply plans again this is I'm getting ready to go on vacation I'm going to hand my assistant a supply curve and this can show him my plans for how many units to sell based on the price why do you plan to sell at each price holding other things constant right if something happens and you know our Oil Well Springs a leak and it's becoming more expensive for us to produce or we come up with some new technology then he's going to have to call me and interrupt my vacation and say uh oh I think we need a new supply curve so following core principles we're going to keep selling until price equals marginal cost which means I'm cool here your individual supply curve is your marginal cost curve let's see why that is let me try to go back to the screen now so if we look at your supply curve here and we see that at a price of three dollars you'll Supply 20 million gallons and we know they are going to keep selling until price equals marginal cost right so the fact that you stopped producing at 20 million gallons that must mean that at that 20 million gallon 20 million gallon it is no longer the case that the price of three dollars you sell it for is greater than marginal cost right we keep going until price equals marginal cost in this region right here from 0 to 20 price is greater than marginal cost at exactly this point here price is equal to marginal cost well that tells us so if at a price of or if when we sell 20 units the marginal cost is three bucks now what we see is that the supply curve is the marginal cost curve because again 20 million gallons price is three dollars that must mean my marginal cost there is three dollars otherwise if it wasn't three dollars I would have produced either more than 20 million or less than 20 million units this implies that your individual supply curve is your marginal cost curve so your supply curve reveals your marginal costs also seen it said the theory of Supply is the theory of marginal costs so if you want to know more about Supply if you wanna if you see someone's supply curve you know that's their marginal cost curve so this brings us to uh an interesting an interesting point that we should think about if Supply slopes up and your marginal cost curve is your supply curve well that then implies that the marginal cost curve should slope up so as you supply more units your costs go up and this sometimes you know doesn't really match with what you might be thinking right because we think about economies of scale and as your company gets bigger you can buy a factory to produce things more efficiently right it's hard for you to produce one car profitably but if you're producing a million of them then you can have big factories and robots to help you get your per unit costs so your marginal costs down so how do we Square this well the what we want to think about it is when we say marginal costs are increasing we could we could say marginal costs are increasing eventually so we're going to start off we'll think about your company as you get started and initially you do see these decreasing marginal costs as you get the benefits of mass production however we think eventually we are going to see increasing marginal costs so decreasing returns Rising input costs so for you to produce at this point for you to produce one more unit becomes more expensive and let's think about why marginal costs are increased and there's why is it that marginal costs are increasing eventually why is it we don't get these economies of scale forever let's think about this graph which we saw is new Twitter users by month I even saw one or two lectures ago and one of the things you can think about what's going on here is this for Twitter Twitter is obviously trying to grow and they're thinking of their cost of adding new users and selling one more piece of advertising well when you're in this region here it's one and adding users might not be that hard right you have you don't have that many users and you can just do a little bit of advertising and say hey 12 of your friends are on Twitter and look at this funny thing your favorite celebrity said and so on once you're in this region think of it becomes much more expensive your marginal cost of adding another user is much higher just because there aren't that many people left and the few and the people who aren't on Twitter now probably have no interest in joining so it'd be very expensive for you to come up with some way to convince them so again we think that we eventually have increasing marginal costs another example I have is is if you think about like when um when Facebook first got started you know Mark Zuckerberg was presumably trying to do everything and answer the phones and reply to emails and all this and then initially when they were able to start hiring people they were able to hire um hire people in order to divide labor evenly so that Mark Zuckerberg is not trying to answer everybody's emails and so that's where you get when you become most official where everyone is doing what they do best eventually you get to the point where it's just hard you could when you you're growing and it's just hard to find people who are you know find enough workers who are really good at it and make it so that everyone can sort of focus on what they do best because the company has gotten large and unwieldy and you need more managers to oversee all these people I got a question when the price of wheat is three dollars per pound we to the best produces a hundred pounds this means that marginal cost to producing the hundred pound is three dollars marginal costs are producing the hundred pound is zero dollars marginal cost to producing the hundredth pound is greater than three dollars the answer here is a your supply curve is your marginal cost curve so it must be that the marginal cost of producing the hundred pound is three dollars because at a price of three dollars you produce a hundred pounds another way to think of it is if the marginal cost of producing the 100th pound was less than three dollars that would mean that you produce it for less than three dollars maybe two dollars and sell it for three dollars well if that was the case if you can make it for two and sell it for three you shouldn't have produced 100 pounds you should have produced 101 or 102 or more pounds than that because if you are able to sell it for more than it costs you to make it you should keep doing it similarly if the marginal cost was more than three dollars so if the marginal cost was four dollars or five dollars well then you would have lost money on that 100th unit right I paid four dollars to make it I only sold it for three I shouldn't have sold 100 units I should have sold 90 or 80 or something like that all right that's all we have for supply thank you and uh we will soon and we're gonna start putting supply and demand together