James d. Gwartney

Exhibit 4: An Increase in Supply Leads to a Lower Price
S1
S2
E1
E2
Quantity (thousands of liters of ice cream)
D
P1
P2
Q1
Q2
P
ri
c
e
 (
G
E
L
 p
e
r 
u
n
it
)
5
7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5
0
1
2
3
4
5
6
7
8
9
10
Market adjustments like the ones outlined here will not take place instantaneously. It
will take time for both consumers and producers to adjust to the new conditions. In fact, in a
dynamic world, the adjustment process is continuous. The impact of changes in demand and
supply, and factors that underlie shifts in these curves, are central to the understanding of the
market process. Demand and supply analysis will be utilized again and again throughout this
book.

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37
Video:
The Economics of the Hudsucker Proxy

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38
Profits Are a Guide to Productivity
Video:
Economic Profit and Costs
Businesses purchase natural resources, labor, capital, and entrepreneurial talent. These
productive resources
(?)
are then transformed into goods and services that are sold to
consumers. In a market economy
(?)
, producers will have to bid resources away from their
alternative uses because the owners of the resources will supply them only at prices at least
equal to what they could earn elsewhere. The producer’s opportunity cost of supplying a good
or service will equal the payments required to bid the resources away from their other potential
uses.
There is an important difference between the opportunity cost of production and
standard accounting measures of cost. Accountants focus on the calculation of the firm’s net
income, which is slightly different than economic profit
(?)
. The net income calculation omits
the opportunity cost of assets owned by the firm.
While accountants omit this opportunity cost, economists do not.
(6)
As a result, the
firm’s net income will overstate profit, as measured by the economist. Economists consider the
fact that the assets owned by the firm could be used some other way. Unless these opportunity
costs are covered, the resources will eventually be used in other ways.
A firm’s profit can be determined in the following manner: