Supply - Getting the Best Out of What You Sell

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The Sparkling Milk is one of those drinks that's kind
of fun and unique, kind of makes people go wow
when they taste it because it's so different. It's espresso
over sparkling water with condensed milk and maple syrup added
to it and then kind of whipped up a little
bit to get a little bit of that foam and
it's just really, really a really cool drink. Hi, my
name is Samir Benoir. I am the owner of Milka
Coffee Roasters here in Sacramento, California. We are a specialty
coffee roaster.
Our friend Samir in California makes some really delicious drinks
and some of them have pretty unique ingredients too.
The Maple Latte, Actually it's kind of buy and large
our big cellar. This is something different that's not at
other stores, and maple goes really well with coffee. The
maple lata is six dollars. So we sell donuts, cookies,
lemon bars, and a little bit healthier thing that we
call the hero bar, which is kind of like a
zucchini carrot raisin cake.
M zucchini carrot raisin cakes.
The owner of a small business, Samir, has to make
a lot of decisions, what types of coffee to make,
what snacks to sell, when to be open, how much
staff and equipment to have, and how much to charge
people for all these different products. These are the sorts
of decisions that sellers make when they're thinking of how
much of something to supply.
In Supply is the topic of this week's episode of
Think Like an Economist. I'm Betsy Stevenson.
And I'm just a Wolfers and this is the podcast
what will help you to turbo charge your decision making
and transform your life by learning to think like an economist.
As usual, NaSTA and Tabercoli far joins us.
Justin, Betsy, we've talked about demand, let's get into supply.
What exactly are we talking about?
Well, demand was all about the choices buyers make. Supply
is about the choices that sellers like Samir make.
Now, in the next episode, we're going to put supply
and demand and together because that's what determines the price
that you'll end up paying for a cup of coffee.
But for now, let's master thinking like a seller.
Samir sells coffee and a range of other snacks, so
he's a supplier. What are we trying to learn from
Samir when it comes to thinking like a seller?
We want to see how much coffee Samir is willing
to sell at different prices, and we're going to use
the call principles to see how he makes his decisions.
But does Sami really get to control how much coffee
he sells? I mean, doesn't it depend on how many
customers visit his cafe.
It does depend on how many customers visit his cafe,
But Samir gets to choose how many hours to stay
open each day. The longer he's open, the more customers
he'll get. The more customers he gets, the more cups
of coffee he sells. So the way he can control
how much coffee he sells is by choosing how many
hours to be open or how much staff to have
in his shop. I'm guessing that the higher the price
of coffee, the longer he'll stay open, so he can
make more money.
That way, A typical cup of coffee at Milk is
five dollars, but with tip and tax added, which we
actually include into our price, and we are open twelve
hours a day, seven days a week. Probably the biggest
thing that goes into the cost of coffee would be
labor and ingredients.
An economists might ask Cassimir's choices would change at different prices.
If a typical cup of coffee was to cost three dollars,
how many hours do you think Milka.
Would be open if a cup of coffee were three dollars.
I don't think we would be able to be open.
I don't think it would be sustainable. I don't even
think we could pay all of our vendors in our
rent with that sort of drink price.
What if the typical cup of coffee was four dollars?
Four dollars would probably be a stretch. There would be
no profit margin, and I would you be living out
of my van trying to yea not that I have
a ban, but you know what I mean. It would
be me taking the hit because all of the things
cost about that, and then then I also want to
take a little bit so that I can pay my rent.
So a profit margin is what's left over when you
sell something and take out the costs.
Samir told me the main cost for a cup of
coffee or the wages he pays his barristas and the
cost of the ingredients.
Right, So if the price is too low, say three
or four dollars a cup, then Samir says he won't
even be covering his marginal costs or making any profits,
and therefore it's not worth running the business at all.
So you said that a typical cup is currently about
five dollars. If a typical cup was eight dollars, how
many hours do you think you guys would.
Be open If coffee was eight dollars a cup, we
would be opened a little bit later and definitely open
a second shop in Sacramento. I would say there is
actually a late night coffee market, especially on the weekends.
We currently stay up until six pm. If coffee was
eight dollars cup, we would stay up until eleven pm.
So if we can bring that typical sale up from
eight dollars to nine dollars to ten dollars, then we
can start to put more money in our labor costs
or put more money into our expansion fund. I mean,
if I'm really lucky, we can add more money into
my profit. That would be nothing.
Wrong with that.
So Samir has just shown us the law of supply.
This basically says that sellers tend to supply a larger
quantity when the price is higher. It makes sense when
coffee is priceier, it's more profitable for Samir. When it's
only three dollars a cup, Samir it doesn't open his
shop at all. As the price goes up, he opens
the shop for longer so that he can sell more
cups of coffee. If the price is high enough, He's
even ready to think about opening another store.
So we can really understand what's going on here. How
do we apply the core principles?
Well, Samir's making plans for how many cups of coffee
to sell if the price is three dollars or five
dollars or eight dollars. I hope you'll recognize that this
is a how many questions? So we should start with
the marginal principle. This leads Samir to ask whether it's
worth staying open a bit longer to sell one more
cup of coffee.
The cost benefit principle says you should only do something
if the benefit exceeds the cost. The marginal benefit from
producing one more cup is how much money Samir will
get from selling that extra coffee. At eight dollars a cup,
He's willing to open for longer hours to sell more
coffee because the marginal benefit from that high price will
easily cover his marginal costs.
So Samir set his main cost to wages and what
he pays for the ingredients. But I'm thinking there are
other costs too, things such as rent for the shop.
Samir's answer is actually pretty smart. He's focusing on his
marginal costs, the extra cost of producing one more cup
of coffee. The extra cup is going to cost him
a bit more in staff time and a bit more
in ingredients, but it won't affect the rent he pays.
Really, what he's doing is applying the opportunity cost principle.
This is that or what question he's thinking about staying
open longer to sell more coffee's or what is the
next best alternative which is not staying open longer, which
means not selling more coffee? He won't have to pay
extra wages, and he won't have to pay for extra beans.
But either way, he'll still have to pay his rent.
That's why when we're thinking about our marginal costs, we
should only factor in our variable costs. These are the
costs we incur it if we produce more paying for
an extra hour from a barista, or more ingredients for
more coffee. These are variable costs. They're the costs that
vary with how many coffee Sameir sells. If he sells
more coffee, he'll need to pay for more staff, buy
more coffee, beans, buy more cups.
So Samir's focusing on his variable costs.
But as opposed to what fixed costs, these don't change
if you supply more or less. Samir's rent will stay
the same if the shop opens for twelve hours a day,
three hours a day, or even if it doesn't open
at all.
Samir only needs to think about the fixed costs when
he decides whether it's worth opening another shop. A higher
coffee price might just lead him to open that next location,
but as he noted, what he first to do is
start saving and making sure that the higher price is
there to stay.
Okay, So we now know what Samir would do if
the price were higher. He also said that at three
dollars a cup, he doesn't think he could stay in business.
You know, for any company, there's a point where the
price is so low that your best choice is just
to minimize your losses and shut down.
At four dollars a cup, Samir sounded really hesitant. I'm
not sure he wants to live in a van, but
he does love his business. At that point, the opportunity
cost that's weighing on Samir's what else he could be
doing with his time. After all, instead of running his
own business, he could take a job with a salary.
Maybe he'd be an executive at Starbucks. So an important
opportunity cost for Samir is the salary he gives up.
And that helps explain why the love supply applies across
the entire market. It's not just that a higher price
will lead some Mere and other cafe owners to supply
more coffee. In addition, owning a cafe becomes more profitable,
so more folks will get in on the coffee selling game.
Add up all the coffee that these cafes supply and
you'll see the higher the price of coffee, the more
that they'll collectively supply.
Okay, so we've looked at the marginal principle, the cost
benefit principle, and the opportunity cost principle as they relate
to supply. How about the interdependence principle.
We'll come to that soon, but first let's see where
those three principles leaders. It's a big conclusion called the
rational rule. For sellers, you should sell more as long
as the price exceeds the marginal cost. It's actually a
really handy rule. Sellers want to make money, so Sami
will keep his shop open later if he can make
enough money to offset his marginal costs.
And that's the logic behind the love supply. The higher
the price, the more likely you are to cover the
marginal costs of selling one more cup.
So I have to say, Samir seems really organized. He's
done some really detailed calculations. Realistically, are most sellers this organized?
Well, some are and some aren't. Big corporations typically have
entire departments that do really detailed analytics about their costs
and profits at different prices. Smaller businesses don't really have
the time or the staff for this, but they'll experiment
and adjust accordingly. Say coffee shop may open for six
hours a day and then switch to seven hours a
day and see if it was worth it. They don't
think they're following the rational rule, but in reality they are.
In fact, market forces can help weed out bad managers.
Those who don't follow the rational rule for sellers won't
be making as much money is those who power, so
in many cases they won't be profitable enough to stay
in business. In the extreme, only those managers who follow
the rational rule will survive.
So we've looked at changes in the price for coffee
and how many hours Samir is willing to open his
shop or how much coffee he's up for supplying that.
Other factors other than the price that will impact.
Supply quite a few, and here's where the interdependence principle
becomes helpful. The choices that other businesses make will affect
Samir's supply decisions.
The first factor that impacts how much coffee Samir supplies
is the cost of inputs. You heard Samir say that
the most important marginal costs for his businesses are wages
and ingredients. If coffee beans become more expensive, then it
costs more for him to make a cup of coffee.
Those extra costs may make it unprofitable to stay open
as long.
Next, it really matters how productive a business is, which
is shaped by the technology it uses. Say Samir follows
Starbucks and replaces his manually operated espresso machines with all
automatic ones. Who'll be able to make more coffees per
hour without hiring more staff.
Oh so, because each cup now requires less staff time,
his marginal costs have fallen, and this makes it more
likely it'll be profitable for him to stay open later.
That's right. Remember, the interdependence principle is all about the
connections between different markets. We've just seen how the markets
for the input Samir uses matters. So does the market
for other things as supplier could be selling. I'm still
thinking about the hero bars he makes, which really sound delicious.
While Samir loves coffee, if the price of hero bars rises,
he may focus on making and selling more of them,
as they'll be more profitable.
Ah So the price of other things that Samir's business
could sell affects how much he'll focus on producing coffee
versus those other goods.
Yes, the price of related outputs represents an important opportunity.
Cost.
He could have his employees focus more on baking and
selling hero bars instead of making and selling cops coffee.
So when the praise of hero bars goes up, so
does the opportunity cost of selling coffee next.
The interdependence principle also reminds us that our decisions are
linked across time, which is why expectations matter. If the
price of something is low today, you could decide to
stock up on it and sell it next to you
when you expect the price may go up again. Now,
this only works with goods you can store, So me
can't hang on to a cup of coffee and sell
it tomorrow. But the coffee bean sellers he buys from
can choose to store their beans to sell later if
they think that the price will rise in the future.
And if it becomes easier to open a shop, then
I guess more people might become coffee sellers.
Perhaps yes, this takes us to our final point when
it comes to the interdependence principle, the number of sellers.
There are more people selling coffee, the total market wide
supply of coffee will be greater.
We've just explored supply.
Let's summarize supply is all about selling or production decisions.
And the law supply tells us that the higher the price,
the greater the quantity that businesses will supply.
And if you want to make smart selling decisions, follow
the rational rule for sellers, which says to sell one
more item as long as the price exceeds the marginal cost.
And remember smart sellers focus on their variable costs rather
than their fixed costs.
If you're analyzing a market, realize that price isn't the
only thing that affects the quantity of goods that sellers
will supply. It also depends on the cost of inputs,
how efficiently those inputs are used, on the price of
related goods. Sellers could focus on instead on expectations and
on how many sellers there are.
Is there anything you want us to get thinking about
over the next couple of days.
Look, a lot of people understand demand well because they
used to thinking about themselves as buyers, But today's about supply.
In reality, nearly all of us are supplies in some context.
So over the next few days, think about the different
ways that you act as a suppliers a supplier of labor,
as a supplier of attention to advertisers, or even as
a supplier of love and care to those around you,
and as.
You identify the roles you play as a supplier, check
whether your decisions are guided by your marginal costs? Are
there other factors that affect your supply decisions? And ask yourself,
could you make better choices if you thought a bit
harder about the rational rule for sellers?
You know, I don't think I've ever thought of myself
as a seller, So I'm going to give that a try. Betsy,
justin thank you for teaching us how to think like
an economist.
Well, Nas, I'm glad that you're going to start thinking
about yourself as a.
Seller, and thanks for supplying your voice to today's podcast.
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