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Supply and Costs
The cost of something is what must be given up in order
to get it. When costs are only monetary, they are easy to
see. If the price of an input increases, the cost of
the output will increase, and, other things held constant,
profits will decrease. The seller will then have to decide
if shifting part of his resources and effort to other
products will improve his well-being.
Production costs are determined not only by the prices of
inputs, but also by technology. Technology represents
the knowledge of how inputs (such as labor, raw materials,
energy, and machinery) can be combined to produce the
product. If this knowledge increases so that people find
cheaper ways to make the same output, then, other things
held constant, profit increases and we expect sellers to
respond by producing more.
Costs may be nonmonetary as well as monetary. For
example, a farmer takes the expected price of soybeans into
account in deciding how much corn to plant. If soybeans are
expected to sell for a high price, then the farmer may find
that shifting some of his land from corn production to
soybean production will increase profit. The decision to
plant corn means that the farmer gives up the opportunity to
plant soybeans (as well as giving up the money for seed,
fuel, equipment, and labor). Because we have defined cost as
what must be given up to get something, the prices of
other goods that sellers could otherwise produce and
sell must be part of the calculation of the cost of
production.
There are other factors that can influence the amount of
a product that sellers will sell, such as the number of
sellers, expectations about the future, and whether or not
there are by-products in production that are valuable. (An
example of a valuable by-product is cottonseed in the
production of cotton. A farmer who produces cotton also gets
cottonseed, which yields cottonseed oil, a widely used
vegetable oil.) But as in the discussion of demand, the
emphasis in the discussion of supply is on the relationship
between quantity and price. To focus on this
relationship, all other factors must be assumed to be
constant.
Copyright
Robert Schenk
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