No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Four: Supply 91 to create the sandwich; each worker does their job and then hands the product over to the next worker. There comes a point, however, when additional inputs of one factor (say labor) provide decreasing returns: you may get additional sandwiches through the process, but less than the gain of prior workers. As can be seen in the hypothetical example of SUBWAY in Table 4.1 , adding additional workers in the production process initially leads to more total sandwiches (known in economics as the total product) as well as more sandwiches produced per each additional worker (the marginal product )—reflecting gains from specialization. You can see this as a second worker is added; the total number of sandwiches produced by both workers goes up to 25, or 15 more than with one worker (the marginal product). Eventually, adding more workers will still yield additional sandwiches, but less than the amount added by the previous worker. In Table 4.1 we see that adding a fifth worker continues to increase overall sandwich production, but the fifth worker adds less to production than the fourth worker. If we continue adding workers, there comes a point where there is simply no room behind the counter, and additional workers actually result in a loss in production, as the eighth worker does in our table. We’ll leave the implications of how many employees SUBWAY ought to use to our discussion of production in chapter 6. For now, we can see that producing additional sandwiches eventually results in increasing costs due to diminishing returns beyond the fourth worker. INDIVIDUAL VS. MARKET SUPPLY Now we need to see how the market supply curve is determined. As we saw with market demand, we simply need to add up the individual supplier’s supply curves to determine the market supply. Looking at Figure 4.2 and Table 4.2 we can see this in action. Following our example for Demand, we have Javier, Tonia, and Megan. While normally they are consumers of AirPods, if the price is right they will also become suppliers out of their existing stock. Let’s assume this is a local market for used AirPods, such as you # Workers Total Sandwiches Marginal Sandwiches 1 10 10 2 25 15 3 45 20 4 70 25 5 85 15 6 90 5 7 91 1 8 80 -9 Table 4.1, SUBWAY Production Marginal product: the additional output produced by adding an additional resource input, holding all other resource inputs fixed. Price Megan Tonia Javier Market $200 1 0 4 5 $300 2 0 5 7 $400 3 1 6 10 $500 4 2 7 11 Table 4.2, Supply of AirPods P ($) Q (#) 10 5 200 300 400 500 Javier Megan Tonia Market Figure 4.2, Market Supply Curve for AirPods. The overall market supply curve is derived by adding up the individual supply curves; in our example from Javier, Megan, and Tonia. Note that the demand curves are vertical as we move from one price to the next. This is an artifact of how we added the data increments, but reflects what happens in the real world—you only want AirPods in whole increments (i.e., you want 2 or 3 AirPods, not 2.257 as the price changes). As the market gets larger and larger (both in terms of people and the quantity of AirPods sold), the supply curve will become more smooth.