And my muddlebrain didn’t help things (again, sorry for that). So if toilet paper manufacturers ramp up production by hiring idled workers because of the increased demand, who are they supplying? When we’re describing real life, and not just an economic model, we need to always remember that part. There needs to be a higher price. @Rob – yes, that example clearly has aspects of a monopolistic market. I’m no economist, but I have spent a fair amount of my professional life evaluating businesses and manufacturing facilities. I already stipulated that people are not pooping any more than they normally poop. *I wont be saying “will”, that is too homo economicus for me, I consider the possibility that the drug company could be that freakin’ stupid. The C-average child will be happy, but the A-average child will not. Meanwhile, what is the local grocer supposed to do? Right. We’re talking about perfectly competitive firms. You guys keep wanting to change the model and assume a monopoly condition. Enough people would buy it to ease the demand and insulate us from the hoarders. Supply and demand graph template to quickly visualize demand and supply curves. But business owners don’t make them with the goal of losing money. Toilet paper is an example of an elastic good. What is the consumer surplus? (In fact, if borders are open, there is a monopoly of a tradeable good only when hell freezes over.). But, because she can’t have that guarantee, she only makes them as she gets the orders for them. Post Date: April 08, 2020 - Issue Date: April 25, 2020 Even if there is constant high demand for a product (toilet paper, for example), individual producers need to keep the price down or consumers will just buy it from a competitor. Technically, the reason is that, with fixed capital (plants, machines, and equipment) in the short-run, any variable factor of production used to increase production (say, labor) will have diminishing marginal productivity. But that’s precisely the point: a firm operating on the downward-sloping portion of the marginal cost curve is exiting the market; they cannot survive if they cannot produce on the upward-sloping portion of the marginal cost curve. When demand increases, it’s a signal that customers want to consume more of a certain product. But that’s precisely the point: a firm operating on the downward-sloping portion of the marginal cost curve is exiting the market; they cannot survive if they cannot produce on the upward-sloping portion of the marginal cost curve. Here’s another example. I mean, if you want proof that firms are profit-maximizing, I suggest you explore the field of Industrial Organization, which has won several Nobel Prizes. @Dylan: You may want to scroll up this long thread. But for two people who are so very smugly sure of yourselves, you’re doing a really bad job of explaining this “very basic” point. So, I’m a brand new drug company that has been working for a decade to discover a new drug, test it, and bring it to market. Once MC > AC, then both MC and AC increases as production increases even further. All the other ones have a very low marginal cost–constant or perhaps decreasing–until the 1,000,000th. And the fact that price controls have created shortages on this market is an indication that it is. If they cannot produce at that level for whatever reason, they will have to shut down eventually. Of course, even if firms are set up to be able to ramp up production a bit in response to higher prices, huge jumps in quantity are infeasible without substantially higher prices because of jumps in the cost curve. And if they did it, they would want a special advertising campaign to make sure consumers understand that this is a cheap version (“for cost-conscious consumers in this time of economic crisis”) of their usual luxury product. Theory is of course very helpful, but as always, it is critical to keep in mind the ways that the real world differs from the model. Every single unit it would produce would have a marginal cost higher than the price at which it sells it. Why are we assuming firms are not profit-maximizers? A whole bidet might be hard to find space for, but a bidet shower is comparatively easy to fit. When you’re talking about ALL companies, you need to consider that most are not profitable at a specific point in time. He pointed out that the common understanding of the clause I was citing was X, the actual legal meaning is Y. I am pretty sure that P&G in Venezuela did not offer 4-ply, 0ne-inch-thick, pure-fiber, virgin-white toilet paper. Phil: Either you (like perhaps Dylan) assume a monopolistic market or else you are making a very basic error: confusing one firm on a competitive market and the market itself. So, what am I getting wrong when I look at her business? Jon: Instead of “at minimal marginal cost”, you probably want to say “at marginal cost=price”. Since a profit-maximizing firm must always be producing where MC is increasing, then in order to produce more, they need to see higher prices. When a competitive firm is building its plants, it is losing money during that time, and so probably on the first widget it produces when the plant starts running. I have written something similar in response to Dylan (see above). But the person in Florida said the people at the checkout counter knew him as an extremely regular customer, so the person in Florida didn’t wan to hurt his “brand.” . On average, an American can be expected to … The basic story still stays the same. Such innovations are enhancing the growth of the toilet paper market. Therefore, the price must be above $6.67 in order to make any profit. Since quantity demanded is now higher than quantity supplied at the ex ante price, producers would fill the gap only if they could increase production at the same marginal cost, that is, only if they could produce additional units at the same cost. But that’s just it! They should be happy to do so. Therefore, we can expect demand to remain high for the next several months. Now, whether one is purchasing toilet paper for consumption or to stock is wholly irrelevant. But they will not build greenfield factories because they don’t want to be saddled with a bunch of over-capacity once the tp-mania turns into a tp-crash. P = MC only in a specific situation: a perfectly competitive market. I don’t have access to the WSJ to read the details, but it is consistent with my story of lower marginal costs until the firm reaches capacity utilization, and then increasing costs beyond that point. Without the certainty of orders, she definitely has costs associated with making the extra rings that outweigh the benefit. I understand all of that, but at the same time, the economist should always remember that it is a model, and that it’s not going to do a very good job of explaining the behavior of any particular firm at any particular time. Not yet, anyway. And I still don’t understand this, quite probably because of mixing economic costs and accounting costs, but I’m going to still try one more time. It seems to me it would depend on circumstances: as Dylan was trying to say, a producing firm may not have a choice on how much it can produce because that depends on getting orders. The monopoly model doesn’t apply here. Also, some of the work of polishing and the like needs to be redone when an order actually goes out, because metals tarnish. A pocket calculator is not just a slide rule. I think it is important to note that I’m not interested in a model of the overall market, but a model of a firm, and the firm should not be assumed to be at some kind of equilibrium. TMC: That’s a good point. Shortage Question #3: Since commercial toilet paper and retail toilet paper are substitutes in production, insert a graph that shows what happens in the market for commercial toilet paper when there is a surge in demand in the market for retail toilet paper. The allocation of production across the company’s plants might have changed. In fact, they spend huge amounts of their effort to try to increase demand for their product, so that they can get to efficient production scale. Noted your responses and have replied. Use our economic graph maker to create them and many other econ graphs and charts. So why don’t the toilet paper manufacturers just get in contact with Walmart, and suggest shipping the toilet paper that would go to schools to sell at Walmart? They probably added the “third shift”, but basically whatever those plants can produce, they’re producing. When consumers of toilet paper first became aware of the coronavirus and the possibly lengthy stay-at-home orders that seemed sure to follow, the reaction generally fell one of two ways. Besides producing her own lines, my wife has worked for multiple other small jewelry companies over the years, and is friends with lots of people in the industry. Demand for Marcal toilet paper from retail customers is up over 25%, he said. The second one I can sell for $5. For example, schools in most (all?) One must always have in mind the standard graph of a competitive and a monopolistic firm. Prev NEXT . Therefore, it would be irrational to build expensive, greenfield toilet paper factories in response to a temporary increase in demand that must inevitably be followed by a decrease in demand. COVID-19 has impacted the demand for toilet paper because many people were scared to leave their homes. (Perhaps after they first tried to have the job done by the FDA, the CDC, or Amtrack? My wife charges $100 for a ring to a retail buyer. Producing more toilet paper for consumers on its current production lines would require more workers, whose marginal productivity would decrease. But it doesn’t follow that if she did have the orders, that her marginal cost to produce the 2nd ring would be higher than the first. Moreover, the paper company knows that when people go back to their normal workplaces and the government’s price controls are (hopefully) lifted, the production-line switching will have to be done in reverse. Another thing to understand is that quantity demanded is higher than quantity supplied because government price controls don’t allow the price to fully adjust upwards. No, there is still increasing marginal cost. If your model is as complex as the real world, you have not built a model, but an alternative, side-by-side universe. On the margin, more people will use water instead of paper. If so, where do those costs show up? It has improved my understanding of simple economic models. Well the article actually says reading it closer, “The company is shipping about 120 percent of its normal capacity right now” — kind’ve a nuance, right? Let me try to address Dylan’s point in a different way: Take a look at Figure 7.8 here. As demand outstrips US toilet paper supply, imports roll in Toilet paper is often not worth the cost of importing. As production increases further, the MC curve bottoms out and begins to increase even as the AC curve continues to decrease. I was making a point on a particular interpretation of an action and whether it was constitutional or not. If you have constantly idle capacity that can produce at the same marginal cost, you would probably look at export markets or to underserved markets in the US. The sudden surge in demand is expected to subside, and the supply will continue to grow as companies keep making toilet paper. Question: Question 36 15 Pts Using Supply And Demand Analysis Explain Why There Was A Shortage Of Toilet Paper In March And April? Indeed, one powerful argument for international free trade is that a single gigafactory in one country can often supply global demand than a hundred different factories scattered all over the world (hence Krugman’s thesis that protections could be justified to ensure the home country gets the gigifactory). Will running all the time introduce a bottle-neck into the supply line that isn’t there when you are running at lower capacity? Write how Covid has impacted the demand for two separate items and write a paragraph for each. Yet, products are highly differentiated, or at least perceived to be highly differentiated. So you’re incorporating in a monopoly model. In my career, having done consulting for dozens if not hundreds of companies, the ones that were profitable numbered in the single digits. What is the consumer surplus? The answer is found in the basic economic principles of supply and demand. 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