Assume that you are very familiar with the concept opportunity cost. Your
textbook was developed for people who have no economics background,
hence the amount of review. You should find Chapter 3 and 4 relatively
straightforward, as they are mostly review and only provided to help people
with no background in economics.
In this section we will focus on p. 51 and Figure 3 – 6 (a) that illustrates a
discrete marginal cost curve. Please note that most of the answers to the
below questions can be found in your textbook. So you can compare your
own answers to what is in your textbook in most cases.
• What does marginal cost (MC) mean? Does it just mean that it costs this
amount to produce this unit of the product or does it mean more than that?
It means more than that. If we cannot sell our good for at least this price,
we would make a loss on this unit. Therefore, marginal costs tell us the
price we need to see in the market to produce this amount of output. Note
we are price-takers.1
• How much is this producer’s marginal cost (MC) for the fifth kilogram of
organic apples?
$3
1 How do I know that? The graphs tell me this.
2
• How much is this producer’s total cost [C] for five kilograms of organic
apples?
~$11.67
In this section we will focus on p. 51 and figure 3 – 6 (b) that illustrates a
continuous marginal cost curve. Please note that most of the answers to
the below questions can be found in your textbook. So you can compare
your own answers to what is in your textbook in most cases.
• How much is this producer’s marginal cost (MC) for the fifth kilogram of
organic apples?
• How much is this consumer’s total cost [C] for five kilograms of organic
apples?
• Now compare your answers to marginal costs with the discrete function
and the continuous function? Are they the same? Why or why not?
• Now compare your answers to total costs with the discrete function and the
continuous function? Are they the same? Why or why not?
They are not the same. With the continuous function, total costs are
~$0.83 more than with the discrete function.
In this section we will focus on pp. 52 – 54 and Figure 3 – 7 (a) & (b) which
illustrate two producers’/orchards’ marginal cost curves. We are then told
that we can take this information and use it to get the market/ aggregate supply
curve Figure 3 – 7 (c). But before we go any further, I am assuming that you
really understand supply. So let’s do some review to make sure that this is the
case. If you are not sure of the answers in this review, you need to do some
review on your own, and look through your economics notes.
3
P
Qs
Question using your math knowledge, is the above graph showing that:
P = f (QS
) or Qs = f (P)?
In your economics education, you learned about the law of supply.
Question using your economics knowledge, is the law of supply telling us that
the relationship between price and quantity on the supply side is: P = f (Qs
) or
QS = f (P)?
So, given your answer here, you now realize that this is what a true supply curve
would look like.
QS
P
So what we drew earlier is actually the inverse supply curve. But we often refer
to it as the supply curve though technically it is not.
S
S
4
Now, back to the market/aggregate supply for organic apples. We are given the
supply functions and the (inverse) supply curves for Orchard 1 and Orchard 2.
To derive the market/aggregate supply curve we add our individual producers’
supply curves horizontally, making sure first that they have the same vertical
intercept. If they do, we add them horizontally. If they do not, we can only add
the portion of each curve where both are producing the good. Unlucky for us, we
cannot just add these curves horizontally. From a price of $1.33 per kilogram, we
use Orchard 1’s supply curve. Greater than a price of $2 per kilogram, we use
the market/ aggregate supply curve.
Just a heads up I prefer to use the term ‘market’ rather than ‘aggregate’. Why?
A lot of students think we are talking about macro when we use the term
aggregate. We are definitely not using macro here…..
The last section of the chapter examines how a technological change affects the
costs of producing a product. Use the letters in the Figure 3 – 8 on p. 55 to
answer the below questions.
• Prior to the technological change, it costs _____ to make q* units of the
product.
• After the technological change, it costs _____ to make q* units of the
product.
• The reduction in costs due to the technological change is _____.
Make sure you know how to calculate change. One semester all of my students
in all of my classes got it wrong.
Change = (what is true now − what was true in the past)
Change in costs = (costs now − costs in the past)
Reduction in costs = − (costs now − costs in the past)
Cost Savings = − (costs now − costs in the past)
5
The last thing I want to look at is the two ways we use supply curves.
One way is to choose a price, and then, see how much producers are willing and
able to produce at this price.
P
P0
QS
0 QS
The second way is to choose a quantity, and then, see the minimum price
producers need to produce this unit of a product. This tells us the cost of this unit
of the product.
P
P1
Qs
1 QS
If these two very different ways of using supply look the same to you, please look
closer.
Also the function you are using tells me which way you are using your supply
curve, i.e., QS = f (P) to find the first answer and MC = f (Qs
) to find the second.
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