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

Chapter Four: Supply 93 Expectations of future price changes can drive changes in supply. If you think that prices will rise in the future at a rate greater than the rate of return you could receive by selling now and investing the profits, what should you do? You should hold on to your product. Consider our earlier AirPods example. Let’s say that while the market price has exploded to $1,000 from the workers’ sabotage, you expect further worker unrest, since you read somewhere on the internet that the infamous Brotherhood of Electronics Workers has promised to fund workers double their daily pay for each day of lost production until Apple agrees to unionize all its plants and to stop further outsourcing of jobs (and you believe everything you read on the internet, right?). You expect AirPods to eventually sell for $5,000 in just a few short months! So should you sell at $1,000? No way! Your individual supply curve will decrease (or shift to the left as in Figure 4.5 ) . The inverse is also true; if you expect prices to go down in the future (perhaps you expect AirPods production to come on line earlier than the consensus forecast), you want to sell when the prices are higher. Your small contribution to supply will therefore increase, driving prices downward, as shown in Figure 4.4 . Change in prices of the factors of production can also drive changes in supply. Consider our SUBWAY example. Let’s say that due to inclement weather, the prices of bread and veggies have all risen dramatically. As SUBWAY’s input prices rise, their profits decrease. Do they want to sell as many sandwiches at the current price when their costs have risen? No; if they can they will raise their prices accordingly, which amounts to decreasing supply (see Figure 4.5 ) . Any of the factors of production (land, labor, capital, and entrepreneurship) can cause similar changes in supply. A rise in SUBWAY’s rent at the strip mall, a hike in the minimum wage, increase in financing costs, etc., all would result in a similar decrease in supply. As with demand, substitutes and complements can result in changes in supply. Just as a consumer may have the option of swapping to a substitute good (i.e., swap to chicken if the price of beef rises), a producer may substitute outputs if prices change. Let’s say that America goes on a further health kick and lean subs are the in thing to eat; fat laden cheeseburgers are in the doghouse. Now most fast food establishments could reconfigure their stores relatively easily P ($) Q (#) Q 2 Q 1 P 1 S 1 S 2 P 2 Figure 4.4, Increase in Supply. The supply curve can shift as prices of factors of production, prices of other goods produced, expectations of future prices, technology, and number of other producers change. In this graph, supply has increased, and the supply curve shifts right/down. Notice that when supply increases, at any given price, the quantity supplied increases, such as above from Q 1 to Q 2 . Alternatively, the same quantity will see a decrease in price from P 1 to P 2 . P ($) Q (#) Q 1 P 1 S 1 S 2 P 2 Figure 4.5, Decrease in Supply. In this graph, supply has decreased, and the supply curve shifts left/up. Notice that when supply decreases, at any given quantity, the price rises, such as above from P 1 to P 2 .