Week 6 (Blog)

Here's this week's "bottom of the barrel." Since I did week five practically during week four (lots of good articles last week) it is now almost the end of week six and this is honestly the most interesting article I could find that I felt I could actually comment on - which isn't saying much.

Ford wants to make money, and sure it would be good if more people bought hybrids, right? Well, if one actually goes to the originating site of the post (read as "mini-rant") then one would find out that the incentive is on Escape hybrids in California and D.C.. Ahh, the Escape hybrid, sounds wonderful, a hybrid SUV... the 4WD gets 31mpg, the FWD gets 33mpg. Lexus makes an SUV that gets 30 and is not a hybrid...(fueleconomy.gov - 2006 Lexus RX 400h)

Surely we can do better in a hybrid than 1-3 miles more per gallon.

Ford providing incentives to buy hybrids

When consumption of a good is very responsive to prices (that is demand is elastic), producers will increase revenues by decreasing the price. What then should I make of Ford's decision to offer interest free loans for buying hybrids? That's easy. Demand for hybrids is price responsive, and Ford is socially responsible wants to make more money.

comments:

hmm I have always had a problem understanding a supply and demand curve and the equalibriam price becosue it would seem that the cost of production, which is not included in the curve, would effect it wildly. I mean what if the equalibriam price is below the cost of production?

Posted by: joshua corning | March 16, 2006 at 05:27 PM

Ummm...they wouldn't produce?

Posted by: Tim Haab | March 16, 2006 at 05:33 PM

Ummm...they wouldn't produce?

no they would sell at a price higher then the equalibriam price.

This is why I don't understand supply and demand curves...they don't take production costs into consideration

Posted by: joshua corning | March 16, 2006 at 05:43 PM

Josh,
I suspect the source of your confusion is that a true supply curve isn't just a continuous, upward sloping (or non - decreasing) curve in P/Q space. It usually isn't even a continuous function in the sense that the quantity supplied is zero for all prices less than a certain price, and then jumps to a minimum level of production that the firm would choose (the shut - down point). At least in the 'short run'.

Posted by: Jared | March 16, 2006 at 05:51 PM

Whoops - hit the button too early. Anyway, drawing the supply correspondence in this way helps make it clearer how production cost is taken into account, in terms of the produce/don't produce decision (as well as the choice of profit - maximizing level of output).

Posted by: Jared | March 16, 2006 at 05:54 PM

so production costs are considered in the supply curve...thanks Jarad i am begining to understand.

Posted by: joshua corning | March 16, 2006 at 06:00 PM

Joshua,

In the most basic setting, the supply curve IS the production cost curve--that is the short run marginal cost curve. I'll probably need to put up a whole post on this sometime, but here's the basics. With at least one fixed input, the cost of producing additional units of something will eventually increase. As the cost of producing goes up, the price producers charge has to go up to cover the additional costs. That's why price and quantity supplied are positively correlated.

Posted by: Tim Haab | March 17, 2006 at 08:29 AM