3 3 Explain the law of supply and describe the roles of higher profits and higher marginal Marginal Cost The economist's term for the additional opportunity cost of prices usually mean higher profits) and the need for a higher price to cover
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Learning Objectives
After reading this chapter, you should be able to: 3.1 explain why marginal costs are ultimately opportunity costs. 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 3.3 explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 3.4explain the difference between a change in quantity supplied and a chang�e in supply, and list six factors that change supply.
The Law of Supply
ShowMe the
Money50M03_COHE5831_02_SE_C03.indd Page 50 03/12/14 3:38 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
Money is the Market's reWarD
to individuals or businesses who give up something of value. Your boss rewards you with an hourly wage for
supplying labour services. A business producing a top-selling product is rewarded with profits (as� long as
revenues are greater than costs).What goes into decisions to sell or supply services or products to the market? What price do you need
to get to be willing to work? How much money does it take before a busin�ess is willing to supply?
This chapter focuses on choices businesses make every day in producing and selling. Economists use the term supply to summarize all of the influences on business decisions. You will learn about influences that change business supply, which include new technologies like noodle-slicing robots! Business decisions seem more "objective" than consumer decisions that seem to be based on"subjective" desires and preferences. After all, there is a bottom line in business with prices, costs, and profits.
But business supply decisions are not as straightforward or objective as� you might think.The Law of SuppLY51
ASSOCIATED PRESS
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Chapter 3 sHOW Me tHe MOneY52
How Much to Work?
Marginal Cost
e p 31Explain why marginal costs are
ultimately opportunity costs. what Does it really cost? costs are Opportunity costs your willingness to work depends on�the price offered and on the opportunity costs of alternative uses�of your time. marginal cost additional opportunity cost of increasing quantity supplied, changing with circumstancesM03_COHE5831_02_SE_C03.indd Page 52 24/11/14 9:49 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
The Law of SuppLYHow Demand and Supply Choices Are SimilarHow Demand and Supply Choices Are Different
What Do Inputs
Really
Cost? ▲ Paola's inputs include studs, polish�and labour, Like all businesspeople, Paola must pay an input owners at least the best alternative price the input owner can get.▲ there are always alternative uses of your time. You must decide how much your game time is worth to you.
Zach Weiner
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Chapter 3 sHOW Me tHe MOneY54Marginal Costs Are Ultimately Opportunity CostsNFBTVSFEJOEPMMBST
"TXFXJMMTFFJOUIFOFYUTFDUJPO1BPMBTTNBSUCVTJOFTTTVQQMZEFDJTJPOT
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Past expenses are not marginal
opportunity costs and have no influence on smart choices. My Econ LabFor answers to these Refresh
Questions, visit MyEconLab.
1. Explain why marginal costs are ultimately opportunity costs.
2. In 2013, Microsoft released a limited supply of Xbox Ones with a list price of $�500
The units immediately started selling on eBay and other online auction w�ebsites for far more than $500. What factors determined that increase in price of an Xbox One?3. During a recession, it is much harder for workers to find better-paying jobs.Explain how a recession might affect Paola's labour costs.
refresh 3.1 32Define sunk costs and explain
why they do not influence smart, forward-looking decisions.Forget it, it's History: sunk costs
Don't Matter for Future choices
sunk costs past expenses that cannot be recovered the marginal cost a business pays for an input is ultimately an opportunity cost, the value of the best alternative use of that input.M03_COHE5831_02_SE_C03.indd Page 54 24/11/14 9:49 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
The Law of SuppLY55
1. Why aren't sunk costs part of the opportunity costs of forward-lookin�g decisions?
2. If you bought a $100 textbook for a course, and then dropped out after the
tuition refund date, is that $100 a sunk cost? Explain your answer.3. Suppose you have just paid your bus fare. A friend in a car pulls up and offers you a ride. Explain how you would decide between staying on the bus or taking the ride, and the influence of the paid fare on your choice.
refresh 3.2 My Econ LabFor answers to these Refresh
Questions, visit MyEconLab.
Quantity Supplied
More for More Money:
the Law of supply 33Explain the law of supply, and
describe the roles of higher profits and higher marginal opportunity costs of production. supply businesses' willingness to produce a particular product or service because price covers all opportunity costs Price (minimum willing to accept per hour)Quantity Supplied (hours of work at that price) $1510 - 20 $3035 $4555Figure 3.1 Your supply of Hours Worked
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Chapter 3 sHOW Me tHe MOneY56
Body Piercings or Nail Sets?
ur quantity supplied the quantity you actually plan to supply at a given price Figure 3.2 Paola's Parlour Production Possibilities FrontierCombination Fingernails
(full sets)Piercings (full body) A150 B141 C122 D 93E 54
F 05
Quantity (?ngerna9il sets)
Quantity (piercing9s)
A B C D E F 912153 6 0 rising prices create two incentives for increased quantity supplied - higher profits and covering higher marginal opportunity costs of production.
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The Law of SuppLY57
9 Paola's Parlour's Production Possibilities FrontierIncreasing Marginal Opportunity Costs
ts in C (JWFVQ0QQPSUVOJUZ $PTU5 (FU 'JHVSFPOUIFOFYUQBHF TIPXTJOUIFMBTUDPMVNO
UIFNBSHJOBM
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Chapter 3 sHOW Me tHe MOneY58
marginal opportunity cost complete term for any cost relevant to a smart decisionGJOHFSOBJMTFU
QJFSDJOH5
(12 5 fOpportunity Costs Are Marginal Costs
fCombinationFingernails
(full sets)Piercings (full body)Marginal Opportunity Cost ofProducing More Piercings
(fingernail sets given up) a150 (15 2 14)1 5 1
(14 2 12)1 5 2
(12 2 9)1 5 3
(9 2 5)1 5 4
(5 2 0)1 5 5B141
C122 D93 e54 F05 Figure 3.3 Paola's Parlour's Marginal Opportunity costsM03_COHE5831_02_SE_C03.indd Page 58 03/12/14 3:39 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
The Law of SuppLY59
a) Marginal Opportunity Cost of Additional Piercings Measured in Finger�nail SetsFingernail Sets Given Up per Piercing
Quantity (piercings)
3451 2 0 12345
Figure 3.4 increasing Marginal Opportunity cost
Marginal Opportunity Cost
of Additional Piercings (fingernail sets given up)QuantitySupplied
(piercings) 11 2233
44
55
Price of a Piercing
Quantity (piercings)
6080100
20 40
012 345
Price (marginal opportunity cost or minimum willing to accept per piercing)Quantity
Supplied
(piercings) $ 201 $ 402 $ 603 $ 804 $1005 b) Marginal Opportunity Cost of Additional Piercings Measured in $M03_COHE5831_02_SE_C03.indd Page 59 03/12/14 3:39 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
Chapter 3 sHOW Me tHe MOneY60Paying for Opportunity CostsWhy Marginal Opportunity Costs Increase
increasing marginal opportunity costs arise because inputs are not equally productive in all activities.M03_COHE5831_02_SE_C03.indd Page 60 24/11/14 9:49 PM user /201/PHc00142/9780133135831_cOHen/cOHen_MicrOecOnOMics_FOr_LiFe_sMart_cH�Oices_FOr ...
The Law of SuppLY61
When Marginal Opportunity Costs Are Constant
The Law of Supply
market supply sum of supplies of all businesses willing to produce a particular product or serviceMarginal opportunity costs are
constant when inputs are equally productive in all activities.Price ($)
Quantity (piercings)
6080100
20 400 100 200 300 400 500
ABCD eSupply
Figure 3.5 Market supply of Piercings
RowPrice
(marginal opportunity cost or minimum willing to accept per piercings)QuantitySupplied
(piercings)A$ 20100
B$ 40200C$ 60300
D$ 80400
E$100500
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