Download 3 2015-3 Build it and they will come

“Build it and they will come”
the basics of supply theory.
Markets only exist when supply and demand
interact.
Suppliers must have both the willingness
(incentive) and ability (technology) to offer
product to the market.
Supply Incentives
• Suppliers must have information about what
consumers want and how they want it to
perform.
• Information should be both truthful and timely.
• There must be stable market distribution
systems in place which are safe and reliable.
• There must also be fair and binding conditions
on the way in which suppliers will be paid for
their goods and or services.
• These conditions must in combination exceed
the “opportunity cost” of all alternatives.
Opportunity Costs
• These are the costs to any agent of undertaking Option I
over Option II.
• Opportunity costs include the alternative of
– “doing nothing “passing up the opportunity” and placing the
investment funds in the bank earning interest.
– attempting to purchase the product elsewhere and re-selling it
rather than trying to produce it .[Arbitrage]
– attempting to “dominate the market” and overinvesting in
production capacity in order to manipulate the market later on.
• All Options have implicit opportunity costs and in the
marginal framework imply that no supplier will supply
goods and or services unless these costs are overcome
and this will generate the market entry point and the
process of supply generates an economic surplus.
Technology and Capital
• There are many ways to skin a grape and as result there
are many different technologies that affect production.
• These technologies are only definite over specific ranges
of output and rely on capital…machinery and equipment
needed to produce a product in addition to labor.
• Capital in very contentious and can be viewed in may
different ways :
– “Disembodied Labor” Capital goods were made themselves by
other workers in order for their impact on the economy to last
indefinitely or until the capital wears out. [Marx]
– “Management Legacy” Capital goods were available because of
the set aside decision made by managers in the past who “set
aside” some resources in order to develop new products or
improve efficiency in the long run. [Schumpeter]
Summary of Supply Pressures
• Opportunity costs produce a market option for a supplier.
• Technology combines labor wages and capital rents to
generate a cost structure that determines whether or not
an agent will supply to the market.
• The suppliers generate economic surplus by accepting
an option and in the production process also allows a
subgroup of economic agents to enter the equation
[suppliers] which share in the economic surplus.
• Suppliers in turn may either supply capital or labor
directly or indirectly by producing intermediate products
that go into the manufacture of a final product which
remains in control of the final market supplier or
producer.
The Supply Curve
•
Technology A is higher cost than Technology B and generate higher economic surplus for
Producers and Suppliers.
Price
A
Return to management
By producers.
B
Market Entry Point
Quantity
Analytics of Supply
• Supply requires consumers to demand a product and
this draws entrepreneurs to consider producing to “meet
the demand”.
• Producers “meeting the demand” may manufacture or
repurchase products to meet the demand and in so
doing will employ inputs from others in the form of
workers or capital in order to meet the anticipated
demand.
• The result is economic surplus for consumers who get
something that they would not otherwise be able to
acquire, producers who are able to overcome scarcity
(as seen by consumers) and pursue a profit, and
suppliers acting as producers who in turn offer their
labor or capital to the market.
Economic Surplus and its
Participants
• Surplus only exists if a market exists!
Price
Demand
Supply
Consumer Surplus
Pe
Producer Surplus
Supplier Surplus
Qe
Quantity