Chapter 9. Demand, Supply and Industry Equilibrium in the Entrepreneurless Economy

Transcription

1 March 23, 2003 Chapter 9 Demand, Supply and Industry Equilibrium in the Entrepreneurless Economy Because of the extreme complexity of coordination in the market economy, we must build our understanding of it step by step. We begin by building a model of a fully coordinated, entrepreneurless economy. The procedure begins with a single isolated industry. The model we build in this chapter and the next has been commonplace in economics for over fifty years. The unique feature of our treatment is the emphasis on the fact that coordination in the traditional model is achieved by means of assumptions about the robot behavers. 1 The model contains no entrepreneurship. This model is particularly useful in helping us to see how actions in the market economy have both beneficial and harmful effects. Moreover, since the model assumes that all benefit and harm is measured in money, it enables us to form and describe judgments about the magnitude of the effects. We shall see in later chapters that this feature helps us evaluate arguments about government intervention in everyday market-type societies. This chapter introduces the concepts of demand, supply, equilibrium, and gains from exchange for a single industry. Part 1 of the chapter describes the demand curve in an industry and shows how consumers benefit and are harmed by various changes. Part two describes the industry supply curve and shows how resource suppliers are effected by various changes. Part three shows how the demand-supply tools enable economists to divide the gains from exchange into two broad classes: consumers' surplus and suppliers gain. 1. DEMAND The industry demand curve shows the quantities of a given good that consumers would buy at each price. Consider the demand curve in figure 9-1. It has a downward slope. This means that consumers demand a larger quantity at lower prices than they do at higher prices. For example, at price p 1 the quantity demanded is q 1, while at price p 2 the quantity demanded is q 2. The demand curve is an aggregate. It is the horizontal sum of the individual demand curves of the separate consumers. Each point on the aggregate curve represents a specific consumers maximizing behavior. Let us select a point and designate the price and quantity that correspond to it as p* and q*. We can define a slightly higher price, say p*+, as one at which one less unit would be demanded. The difference between the two prices represents a specific consumer's maximizing behavior of demanding one less unit of the good. Thus we can say that the demand curve shows that the qth unit would be bought, for example, by consumer G. The q+1st unit might be bought by consumer G as well. But it also might be bought by some other consumer, say consumer H. Diminishing Marginal Utility The reason for the downward slope is diminishing marginal utility. As a consumer receives a larger quantity, the additional utility he receives from the marginal, or last unit (marginal utility) falls. Strictly speaking, diminishing marginal utility does not assure that the industry demand curve has a negative slope. To see why, we can put ourselves in the shoes of demanders. Beginning at some price, say 1 See Gunning 1990: Chapter 12.

2 2 Knowledge and Entrepreneurship (9) $3, assume that price falls to $2. Because this good is now cheaper compared with its substitutes, you would tend to buy more of it and less of those substitutes. We call this the substitution effect of a change in price. It refers to the change in quantity that consumers buy because the change in price entices the consumers to use this good in relation to its substitutes. If the price had risen, you would tend to substitute other goods for this one. The substitution effect is the reason why we are inclined to accept the assumption of a downward-sloping demand. However, this effect may be offset by the income effect of a change in price. To understand this, we take a different view of the price decrease. Before the fall, assume that you bought 5 units. Your total spending on the good was $15. After the fall in price, you can buy that same 5 units for only $10. From this point of view you are richer by $5. Your income has risen. The income effect of a change in price refers to the change in quantity that consumers buy because the change in price changed their ability to buy. In other words, the change in price changed their real income. 2 For most goods, an increase in real income would lead consumers to demand more. But for some goods, consumers would tend to buy less. When income rises, people often shift from staple foods to more exotic foods, from basic clothes to fashionable ones, or, in general, from goods that satisfy only basic or fundamental wants to goods that satisfy not only basic wants but other wants as well. Figure 9-1 DEMAND A good for which the demand falls and income rises (or rises as income falls) is called an inferior good. It is possible for an inferior good that a fall in price will cause the quantity demanded to fall. For this to happen the income effect of the fall in price must be greater than the substitution effect. Suppose that the price of an inferior good, such as a basic kind of rise, falls. The fall in the price of rice may make consumers feel wealthier and lead them to shift partly to a more highly regarded type of rice. If the quantity demanded of the less desired rise falls, it must be an inferior good. The opposite of an inferior good is a normal good. An increase in income causes the demand for a normal good to rise. 2 Real income refers to money income divided by an index of prices.

3 Demand and Supply (9) 3 Consumers' Surplus An important tool in representing the money benefit and harm due to market exchange is that of consumers' surplus. To help us understand this idea, it is best to use a model of demand with discrete units. Suppose in figure 9-2 that q 1, q 2, and q 3 represent discrete units. According to the demand curve, only one buyer would pay 0p 1 for the first unit q 1. No other buyer would pay so much for it. If the industry price was higher than p 1, no one would buy any units of the good. Thus p 1 is also the highest price that anyone pays for a single unit. It is the most utility, measured in terms of money, that any consumer can gain from having a unit. Suppose that one unit of the good is produced and given free to the consumer who gets the highest utility from it. Then his gain in terms of money is represented by the distance 0p 1, 0b or, what is the same distance, ch. If the unit was given to any other consumer, the other consumer s gain would be less. Figure 9-2 CONSUMERS' SURPLUS Let us do the same thing for additional units. For convenience we shall assume that each person demands only one unit. After the first unit is given to the person who gets the evaluates highest utility from it, suppose that a second unit is produced and given to the consumer who gets the highest utility from it. Then the second consumer will get dk amount of utility, measured in money terms. If, after that, the third unit is given to the next highest demander, the gain will be em. And so on. Let us choose any quantity, say q n. And let us assume that q n is very large so that the horizontal distance between the units q 1 and q 2, q 2 and q 3,...q n-1 and q n is infinitesimal. If the units are given to those who get the highest utilities from them, the total gain will be agr0. This total gain is a sum of the gains to the separate consumers. Suppose that the q units are not given to the consumers who get the highest utility from them. The producer rations them in a different way. Suppose, for example, that there are q n + g consumers and that he gives one unit each to the tallest q n consumers. The shortest consumers receive no units. Then the consumers' gain would probably be much less than agro. In this case, some of the tallest consumers would probably have an incentive to resell to their shorter counterparts who get higher utilities from them. Consumers' surplus refers to the net gain that consumers receive from buying and consuming goods. In our example, we assumed that q n units of the good are given away to the highest-demand consumers. In a market, consumers must pay for goods. Let us assume that all consumers are offered an identical price, say p in figure 9-2. Assuming that the consumers buy all goods for which marginal utility is higher than

4 4 Knowledge and Entrepreneurship (9) Figure 9-3 CONSUMERS' SURPLUS AND PRICE Figure 9-4 SUPPLY

5 Demand and Supply (9) 5 price, each consumer who gets more utility from a unit of the good than p will buy. The total amount of consumer spending would be approximately fgr0. The consumers surplus in this case is approximately agr0 - fgr0 = agf. Itis received by those who get the highest utilities from q n. Applications We now consider some variations in order to better understand the concept of consumers' surplus. The first variation is a change in the industry price offered by suppliers. In figure 9-3, suppose that the industry price is initially p 1 and that it rises to p 2. Consumers would reduce their purchases from q 1 to q 2. Their consumers' surplus would fall from aed to acb. They would lose consumers' surplus equal to bced. If price fell from p 2 to p 1, consumers would gain bced. For the second variation, suppose that each of the consumers who buys must pay the highest possible price that he is willing to pay for the unit. Then the consumers' surplus would be insignificant. Each consumer would gain a very tiny amount on each exchange -- not enough to measure. There would be no significant area of consumers' surplus. 2. SUPPLY AND COST The industry supply curve shows the quantities of a given good that all producers, taken together, would sell at each price. It is usually realistic to assume that it has an upward slope, as shown in figure 9-4. Like the demand curve, it also is an aggregate the horizontal sum of individual supply curves of the separate producers. If the industry price is p 1, all producers taken together will supply a quantity of q 1. If the industry price is p 2, they will supply a larger quantity q 2. The upward slope of the supply curve means that when we think of all producers together, the cost of producing an additional unit to the lowest-cost producer is greater than the cost to the lowest cost producer of producing the previous unit. In other words, there are increasing marginal costs. Marginal cost is the cost of producing the last or the next unit. For example, in figure 9-5, the cost to the lowest cost producer of producing q 1 is eg, the cost of producing q 2 is dh, and the cost of producing q 3 is ck. Figure 9-5 COSTS OF PRODUCING SUCCESSIVE UNITS

6 6 Knowledge and Entrepreneurship (9) Consider point b. It shows that if the industry price was p, all producers taken together would supply the quantity q. It also shows that the marginal cost of q (the cost to the lowest cost producer of producing the qth unit, given that q-1 units are already being produced by the lowest cost producers) is equal to the distance bm. Why the Supply Curve Has an Upward Slope 3 Although we assume that the supply curve is upward-sloping because marginal costs increase with the quantity produced, there are cases in everyday life of decreasing marginal costs. Nevertheless, there are four strong reasons to conclude that marginal costs rise in the usual case. First, resources are limited in number. Second, resources have rising opportunity costs that derive from diminishing marginal utility of other goods that the resources could be used to produce. Third, firms tend to use the most productive resources first and then to use resources that are less productive. Fourth, there is increasing marginal disutility of work. We consider each reason in turn. Resources Limited in Number In order to show the independent effects of the limited quantity of a resource, we assume that the conditions needed for the other three reasons are absent. Specifically, to neutralize the third and fourth reason, we assume that all units of this resource are equally productive and that the use of it entails no disutility, like work does. In order to neutralize the third reason, we focus specifically on a resource that has no substitutes or alternative uses. We can call this a purely specialized resource. An example might be swamp land that is particularly suited for growing a particular kind of rice but no other good. The opposite of a purely specialized resource is a purely non-specific resource. This is a resource that is useful in producing many products. An example might be common work, which can be used in practically any enterprise. In reality, there are few purely specialized resources and no purely non-specific resources. All resources are specialized to some degree. Suppose that a producer is currently supplying some quantity, say q 1, of a particular consumers good. Now suppose that he decides to supply a larger quantity q 2. His competitors do not change the quantity that they want to produce. He could achieve his goal only by paying the suppliers of the additional purely specialized, limited-in-supply resources higher prices per unit than he paid before. The reason is that he would have to bid against the other producers for the limited quantity. On the other hand, if he wanted to reduce the quantity he produces, he could reduce his per unit pay to resources because the suppliers of the purely specialized resources would compete for the fewer employment opportunities in this industry by reducing their pay demands. To take a specific example, consider the market for rice. Assume that rice-growing land is the pure specialized resource. Suppose that after a long period of stable demand and supply, there is an increase in the demand for rice. Then competing firms would respond by increasing their demands for rice-growing land. To conform to the conditions of the example, we assume that the land has no alternative uses and it is strictly limited in amount. In other words, all rice-growing land is now being used for rice production and no other land can be used for this. To best see the effect, put yourself in the shoes of the owner of a parcel of this land. The increase in demand would cause rice producers to bid a higher price for your land. You would be quite happy with this result. On the other hand, if there was a decrease in demand for rice, producers would reduce the size of their bids for land. Your desire to earn at least some income from your land would lead you to reduce the rent that you charged. If you refused to reduce your rent, no rice producer would rent it because the costs of doing so would exceed the expected revenue. It is conceivable that the demand for rice growing land would fall so low that the rent would fall to zero. You could earn nothing for your land. At this stage the land would become a non-resource. We conclude that the first reason for the rising supply curve is that as the demand for specialized resources rises, competing producers of a good who want to increase their output must pay higher prices for specialized, limited-in-supply resources. Each producer must bid higher amounts of money per unit of 3 A classic statement of why the supply curve slopes upward was made by Joan Robinson (1941) The reasons given here are similar, except for the increasing disutility of work, which Robinson did not consider because she approached the question somewhat differently.

7 Demand and Supply (9) 7 the good produced in order to induce owners of specialized resources to accept employment with them instead of with their competitors. Competition among producers for the limited supply pushes up the price of the specialized, limited-in-supply resource as producers increase the quantity of the good they supply. 4 Diminishing Marginal Utility Equals Rising Opportunity Cost To show the independent effects of diminishing marginal utility, we focus on a non-specific resource, which we assume is abundant in supply and is used in many industries. We continue to assume that all units of this resource are equally productive and that the use of it entails no disutility. An example is common labor used to harvest the rice crop. We begin by recognizing that in order to produce a larger quantity of rice, common labor must be bid away from other industries. Like the case of the specialized resource, the labor must be paid a higher price than it was paid in the other industries. This is not so much because common labor is limited in supply, however. Indeed, we have assumed that there is so much of this resource that it is used in many industries. The reason is that as more and more of this resource is drawn away from producing other goods, the marginal utility that consumers receive from those other goods rises. The producers of the other goods observe this as a willingness to pay a higher price for the lesser quantity. This higher price makes the producers of those other goods more and more reluctant to allow the common labor to be bid away. In other words, as more and more common labor is bid away, the producers of the other goods become willing to bid higher and higher prices in order to keep additional labor from being bid away. This willingness to bid higher prices translates into an increase in the costs of common labor to the producers of rice. Figure 9-6 OPPORTUNITY COST OF SHIFTING RESOURCES Consider a good B that represents all other goods besides the good in question, good A. Assume that to produce one more unit of A, resources must be shifted from B to A such that a fixed amount of B must be 4 This deduction about increasing marginal cost is based on the Ricardian theory of land rent, which is described in Chapter Eleven. It would be worth returning to this discussion after reading that theory.

8 8 Knowledge and Entrepreneurship (9) given up. The demand for good B is shown in figure 9-6. Initially suppose that the amount of B being produced is q 1. If an additional unit of A is produced, assume that an amount n of B must be foregone so that the new amount of B produced is q 1 -n. The amount of foregone utility, in money terms, is equal to the lightly shaded area in the figure. Consumers would be willing to pay up to that amount to keep the resource in the B industry. Producers would be willing to pay slightly less. Specifically, they would be willing to pay slightly higher than n x 0b to prevent the resource from shifting. Now suppose that the amount of B being produced is the smaller q 2. Assume as before that if an additional unit of A is produced, n amount of B must again be sacrificed. In this event, the amount of foregone utility in money terms is equal to the darkly shaded area. Consumers would be willing to pay considerably more than before to prevent the resources from shifting to the A industry. And competing producers would also be willing to pay more. Specifically, they would be willing to pay slightly more than n x 0a. Since n x 0a > n x 0b, we say that there are increasing costs of using non-specific resources in the A industry. To emphasize that the use of resources to produce one good implies that other goods must be foregone, economists often use the term opportunity cost. We defined this term in Chapter Two. Thus, we could say that as more of a good is produced, the marginal opportunity cost of producing it rises because individuals attach an increasing marginal utility to the goods that could have been produced with the resource in the other industries. Firms Hire the Most Productive Resources First One way to classify resources of a given type is to rank them according to their productivity, as we saw in Chapter Eight. We might use the example of rice-producing land again, only we assume that different parcels of equal area have different productivities. To isolate productivity from the first two reasons for rising marginal cost, we assume that the rice-growing land is not limited in quantity and that highly productive parcels and lowly productive parcels have the same opportunity cost. Also, with respect to the last reason, we assume that using land for rice growing does not yield disutility. Other things equal, firms bid the highest for the most productive resources and the lowest for the least productive resources. We can assume that some rice-growing land is so unproductive that no firm bids for it under current conditions. If demand for rice was higher, some of this land would be used to produce rice. But with demand for the product as it is, there is no demand for this land because the opportunity cost exceeds the revenue that can be earned from selling the product. Consider the last, or marginal, unit of the resource that was hired under the current demand for the product and other cost conditions. That unit must have been just productive enough to warrant its purchase. The resource unit that was next in ranking was not worth hiring. For each firm, the opportunity cost of the land must have been higher than its contribution to revenue minus the costs of the other resources needed to complement it. Now suppose that there is an increase in demand for rice. In order to increase its output, a firm would have to employ a resource that is less productive than those he is already using. For example, whereas one square meter of previously purchased land could be used to produce, say, 1 bucket of rice when combined with other resources; a square meter of newly purchased land could be used to produce only.9 buckets. More than a square meter of the land would have to be bought to produce an extra bucket. In spite of its lower productivity, we have assumed that its opportunity cost is the same. It follows that producers will have to bid the same price per square meter. The cost of the additional land needed to produce an additional bucket equals 1.1 times the price of the land needed to produce the last bucket. Increasing Marginal Disutility of Work Each person faces a physical limit on how much work he can perform during a given period of time. This is different for each person. Some people seem comfortable working for say 100 hours per week. Others are comfortable working only 35 hours. Under extreme conditions, perhaps people could be pushed to work for an extended period up to 130 hours. In a free market for work, individuals usually stop far short of the physical limit because they attach disutility to the work. It seems reasonable to assume that this disutility is increasing. This means that the next hour of work yields greater disutility than the hour before. If we make this assumption, the marginal cost of a work hour would rise because the supplier of the work hour would be less willing to supply the next hour than he was to supply the previous hour.

9 Demand and Supply (9) 9 Suppliers' Gain We shall temporarily use the term suppliers' gain to refer to the exchange surplus received by anyone who participates in supply. Just as the demand curve shows us the consumers' gain, the supply curve contains information about the suppliers gain. In figure 9-5, suppose that the price is p. Then producers would supply a quantity of q. Their total revenue would be abm0. Their minimum cost of supplying the amount q is fbm0. Assuming that suppliers minimize their costs, they would gain abf. This suppliers' gain has sometimes been called producers' surplus in order to make the name easier to remember. However, we shall see in Chapter Eleven that robot producers cannot receive a surplus by definition. We shall see that the suppliers' gain ultimately refers to the gain to the owners of the specialized resources. The proper name for this is economic rent. 3. SURPLUSES, SHORTAGES, AND INDUSTRY EQUILIBRIUM The cornerstone of the economists model of the entrepreneurless economy is the concept of equilibrium. This is a hypothetical state of zero profit in which all of the assumed resources are being used in ways that maximize the money value of consumers utility. Equilibrium for the market economy, sometimes called general economic equilibrium, has the property that no shift of resources, either from one firm to another or from one industry to another, and no redistribution of consumers goods among consumers can make one person better off without making someone else worse off. The concept of general economic equilibrium helps us to isolate robot behavior in a single industry. In other words, it helps build a model of a single industry by allowing us to make simplifying assumptions about what is going on elsewhere in the economy. We assume that all of the industries are in equilibrium. Then we introduce a change in a single industry. By making assumptions about how robot producers, resource suppliers and consumer-savers act under the changed conditions, we are able to describe the composite behavior of all the robots at once as they take advantage of simulated gains from exchange. Figure 9-7 MARGINAL UTILITY = MARGINAL COST IN INDUSTRY EQUILIBRIUM

10 10 Knowledge and Entrepreneurship (9) The starting point for understanding general economic equilibrium is to understand the concept of equilibrium for a single industry. This understanding begins with the assumption that there is a tendency for full coordination to exist in a single industry. This tendency is due to the behavior of utility-maximizing consumers and income-maximizing resource suppliers and producers. Full coordination in a single industry refers to a situation in which (1) all of the units for which the marginal cost is less than or equal to the price charged by producers have been produced and sold and (2) all of the units for which marginal utility is greater than or equal to price have been bought by the individuals who attach the highest utility to them. Since the amount sold must be equal to the amount bought, this means that full coordination refers to a situation in which the quantity demanded equals quantity supplied. Consider figure 9-7, which combines the demand and supply curve for salt on a single graph. Full coordination is represented by the combination of price p e and quantity q e. We can see why there is full coordination at this price-quantity combination by considering the counterfactual. Suppose that all producers of salt taken together are now producing q e and selling at the price p e. Starting at this point, suppose that the lowest-cost producer decides to produce one more unit and to sell it. This is represented by the quantity q e+1 on the graph. Notice that the marginal cost to the lowest cost producer would be higher than p e. But the marginal utility in terms of money to the highest valuing consumer would be less than p e. The producer would have to pay a higher cost to produce the additional unit than any consumer is willing to pay for it. If this quantity was bought and sold, there would not be full coordination because the producer would not be maximizing his income. Now suppose that all producers together produced one unit less than q e, say q e-1 in figure 9-7. The marginal utility to a consumer of one more unit would be greater than p e while the marginal cost of the unit would be less than p e. Again there would not be full coordination because a producer would not have taken advantage of an opportunity to produce a unit for which marginal revenue is greater than marginal cost and because resources that would cause greater utility if they were used in this industry are currently being used elsewhere. We call p e the equilibrium price, q e the equilibrium quantity and point E, where the demand and supply curves intersect, the equilibrium point. Figure 9-8 INDUSTRY EQUILIBRIUM Professional economists write of a tendency for full coordination to occur due to utility-maximizing and income-maximizing. They show this tendency also by using a counterfactual argument. Suppose that all

11 Demand and Supply (9) 11 s producers together produced a quantity q 1 and that they set the price at p 1 in figure 9-8. The marginal cost of supplying that quantity would equal bg = cm. However, producers could not sell all that they produced. Utility-maximizing consumers would buy only q d 1. At this point the marginal utility of the last unit bought would also be bg. There would be a surplus condition equal to q s 1 - q d 1. A surplus refers to an industry condition in which quantity supplied is greater than quantity demanded. The producers would have units s of the product that they could not sell at all. Their total costs (p 1 x q 1 = acmo) would greatly exceed their total revenue (p 1 x q d 1 =abgo). Each producer would make a loss. Each would have been better off if he had produced a smaller quantity and charged a lower price. It follows that these producers could not have been maximizing income. Because of this, we say that a surplus is evidence of the absence of full coordination in the industry. In addition, professional economists say that there is a tendency for industry price and quantity to be lower. This is because we assume that the producers are income maximizers and that income is not maximized if producers produce more than q e. Now consider the opposite case. Suppose that the producers produced q s 2 and set the price at p 2. Once again there would not be full coordination. Consumers would want to buy q d 2. If they could buy that amount, the marginal utility of the last unit bought would be the same as the marginal cost, fk. However, suppliers only produced q s d 2. There would be a shortage which equals q 2 - q s 2. A shortage refers to an industry condition in which quantity supplied is less than quantity demanded. Assuming that the limited supply was sold to the consumers who attach the highest marginal utilities to the units, the marginal utility of the next unit after q s 2 would be slightly lower than dh. Some consumer would be willing to pay almost dh in order to buy one more unit. Figure 9-9 CONSUMERS SURPLUS AND SUPPLIERS GAIN IN INDUSTRY EQUILIBRIUM The marginal cost of producing that next unit is much lower than dh. It is slightly greater than eh. Since dh is much greater than eh, a producer could increase his income by producing a larger quantity and raising price. Because each of the producers could earn higher income if he produced more and charged a higher price than p 2, he could not have maximized income by producing the quantity and charging the price that he did. Thus, we say again that there is not full coordination in the industry. Professional economists would go on to say that there is a tendency for price and quantity to rise.

12 12 Knowledge and Entrepreneurship (9) We have pointed out that if producers set price higher than equilibrium and produce a quantity that is higher than equilibrium, there is a tendency due to income maximization for both price and quantity to fall. We have also established that if they set price lower than equilibrium and produce a quantity that is also lower than equilibrium, there is a tendency due to income maximization for both price and quantity to rise. It follows that there is a tendency due to income maximization for price and quantity to be established at the equilibrium point. Consumers Surplus and Suppliers Gain Figure 9-9 shows the consumers surplus and producer gain in the industry equilibrium. The consumers surplus is the darkly shaded area and the suppliers gain is the lightly shaded area. The consumers surplus area indicates that all of those who consume the product gain as compared with a situation where no trade occurred. The suppliers gain area indicates that all of those who participate in supply gain as compared with a situation where no trade occurred. In everyday life, we might imagine that some consumers and some of the participants in supply would make errors. They may regard themselves worse off than they would have been if they had chosen not to demand or supply. However, the model of full coordination assumes that there are no errors. Thus surpluses and shortages in the model are impossible.

13 Demand and Supply (9) 13 Questions for Chapter 9 1. Define inferior good, purely specialized resource, purely non-specific resource, marginal cost, shortage, surplus, full coordination in a single industry. 2. Draw a demand curve and pick a price p 1. Show the quantity that would be demanded. Label this quantity q 1. Now suppose that the price rises (falls). Show the change in consumers surplus. 3. For question #2, suppose that the q 1 is not purchased by the consumers willing to pay the highest prices. Suppose instead that the government buys it and rations one unit to q 1 different consumers. Assume that the government gives the units to people whose names are first in the telephone book. Would consumers surplus be greater or less than it would be if the consumers willing to pay the highest prices received the q 1? Explain. 4. For question #2, suppose that consumers must pay the highest possible price for each unit. How much consumers surplus would they receive? 5. By using an example that is different from the text, explain why the scarcity of specialized resources causes the marginal cost to increase as the quantity of a good produced increases. 6. Assume that wheat producers altogether are producing the quantity q. Now suppose that they reduce that quantity to q - n. Assuming that there is a scarcity of specialized resources, explain why the marginal cost of producing q - n is less than the marginal cost of producing q. 7. In buying specialized resources to produce a good, a producer may decide to employ a resource that has lower productivity even though he could employ one that has higher productivity. Explain why he might do this. 8. Tell four reasons why the supply curve has an upward slope. 9. According to the text, one reason why the supply curve for a product has an upward slope is diminishing marginal utility. Explain how diminishing marginal utility can cause the supply curve to have an upward slope. 10. Use a graph to show the consumers surplus and suppliers gain in a market for a single product. Gunning s Address J. Patrick Gunning Professor of Economics/ College of Business Feng Chia University 100 Wenhwa Rd, Taichung Taiwan, R.O.C. Please send feedback gunning@fcu.edu.tw Go to Pat Gunning's Pages Mirror Site of Pat Gunning's Pages