In working on my Econ 101 of the Day and Practice Problem of the Day series, I’ve been poking around a number of different principles textbooks as opposed to only looking at my old Mankiw standby. In doing so, I’ve noticed that different texts explain things slightly differently, and there was one part that really stood out to me recently.
The Mankiw textbook lists four determinants of individual firm supply- (output) price, input prices, technology, and expectations. When discussing market supply (i.e. the supply of all firms in a market together), it adds in the number of firms as a determinant of supply. Therefore, I was very intrigued when a few other textbooks mentioned the prices of other goods that the firm could make as an additional determinant of supply. Let’s think about how this would work…
Let’s say that your business is currently making leather jackets. It’s likely the case that your business could also make leather pants with largely the same resources if it chose to do so. (This is the part where you realize that I know little about the logistics of making leather clothing, but let me tell you that I can wear the hell out of it.) If the market price of leather pants increases enough (without a corresponding increase in production cost, of course), your company is going to find it profit-maximizing to shift over and make leather pants instead of leather jackets (i.e. increase the quantity supplied of pants and decrease the supply of jackets). Or, in picture form, this:
Does this mean that there is something missing from Mankiw’s favorite textbook? Not really. It’s important to keep in mind that all of the costs of production that economists talk about are all-inclusive opportunity costs, and, as the price of leather pants increases, the opportunity cost of using resources that could make pants to make jackets instead increases- hence an increase in an input price, which, as we know, decreases supply.
Anyway, I was thinking about this because of this story:
What’s a struggling electronics giant to do when it can’t pull in enough cash from peddling said electronics? Head to pasture. Or to the strawberry fields, in the case of Sharp. It’s got a crazy (like a fox?) idea to cash in on the demand for Japanese strawberries in the Middle East by setting up a remote berry operation in Dubai.
The idea is to have strawberries growing on a factory scale in the United Arab Emirates by fiscal 2015, using a remotely controlled set-up to tinker with technology like artificially controlled light, temperature and humidity from afar. Which means no real people working in the fields.
So let me get this straight…there was a demand increase for Japanese strawberries (sidenote: SO CURIOUS as to what is special about Japanese strawberries) that pushed up the price of said strawberries. Said price increase got Sharp to realize that financial capital is pretty fungible (i.e. most goods are substitutes in production to some degree) and gets it to increase the quantity supplied in the Japanese strawberry market and (presumably) decrease supply in the consumer electronics market. Man, I love it when economic theory works. I also love examples that show that the profit motive directs resources to their highest-valued use. It’s like the example of the painter who can’t make money selling his art and uses his skills to paint houses instead, just less depressing.