… But yes, this is typically what you would find in a rest stop or a McDonalds bathroom….. Perhaps it is better to focus just on accounting costs, so that I can understand if we’re on the same page on that at least, because I have trouble understanding both John’s point about demand being a cost, and Pierre’s that supply and demand are independent (since if that is the case, why would companies spend so much on marketing to increase demand?). Thus there is little incentive for firms to increase capacity because once the tp-mania wears off, there will be a significant decline in the demand for toilet paper as people use up their inventory. I think you can see this in the actual modest increases in toilet paper prices, but obviously, there isn’t enough: the proof is that there are shortages. In practice, it seems to me that very small alterations to the “perfectly efficient” market you assume could easily disturb this equilibrium. . For example, if there is an intermediary between vendor and user (big retail), with a preference for diversified suppliers – that could reduce any producer’s ability to cut into other competitors’ market shares. A whole bidet might be hard to find space for, but a bidet shower is comparatively easy to fit. There’s obviously something fundamental I’m missing here. They know that real consumption of toilet paper has not changed. It would be a matter of operating at a level where your marginal cost (and average cost) was below that price. Working with less equipment, the marginal (supplementary) worker has a lower productivity. * The demand is increasing regardless. Yes, so I don’t see why more of this isn’t going on. Likewise, even if firms are willing to eat temporarily lower profits so as not to expensively restructure production in response to lower prices (say, from a binding price ceiling), huge cuts in price are infeasible without substantially reduced supply. When the price of a good changes, consumers' demand for that good changes. They could sell the drug for the same price, and increase margins by a large amount. Price-control and “anti-gouging” laws often allow some limited price increases, and there may be much arbitrariness in their enforcement. So, what am I getting wrong when I look at her business? Companies typically try to be profit maximizing, or at least welfare maximizing for their managers. Many people already use the commercial quality stuff at work so that should not be a huge hurdle. Thus, the firm produces more until mc = p. In order for the firm to increase their production, they need to be compensated for the production. They still need a higher price in order to produce more, just like other firms. The monopoly model doesn’t apply here. That was incorrect of course. They will handle all the regulatory, distribution, and selling, all I have to do is get the product to them. The sudden surge in demand is expected to subside, and the supply will continue to grow as companies keep making toilet paper. Jon: As you pointed out to me privately, the main issue might be that Dylan assumes a monopoly (or at least much market power), while the model I have been using assumes a competitive market. Their profit is maximized where p=mc at 60 units. It’s easy to see all this with graphical analysis (or mathematical analysis for the brave); more difficult with verbal analysis. Stores replenish supply on generally stable demand signals and patterns. Thus there is little incentive for firms to increase capacity because once the tp-mania wears off, there will be a significant decline in the demand for toilet paper as people use up their inventory. (Charities can offer toilet paper below the market price, but they would have to pay a higher price to the producer.). What is the consumer surplus? The basic supply and demand model is great for learning the basics of economics and for illustrating how markets functions given some assumptions, many of which are pretty reasonable. I already stipulated that people are not pooping any more than they normally poop. Here’s what went wrong. 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. So, the equilibrium part of the model is a bit mythical, and while interesting conceptually, doesn’t really tell you where most businesses are on a production curve at any moment in time. She would obviously love to always do 10 rings at a time, but because she doesn’t know in advance when she will get the orders, what size of ring people will need, she doesn’t do that. As for your contention that a firm would never produce in the region where the MC curve is negatively sloped, that sounds like a bit of interesting original research on your part that you should publish because neither your reference nor any others I can find so far say as much. Double it again, and that’s your retail price. Back in the good old days when we had choices in these things, I walked an extra 15 minutes to go to a different store to pick up my preferred brand, when my store stopped carrying it. Machines that pulp recyclable paper. To Pierre’s point, a lot of this rests on terms that are used differently from colloquial use, so confusion often results. She can make one ring in about an hour, or she can make 10 rings in an hour and a half. 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. For a monopolist, since they can control the price by restricting output, they face a downward-sloping marginal revenue curve. But that’s just it! “”People are requesting twice as much; we are making as much as we can,” said Patty Prats, spokeswoman at Georgia-Pacific’s Port Hudson plant near Zachary. I then read it as 20% more than typical capacity, but actually reading it closer it says shipping 120% of normal capacity. All that has changed is that people have decided to invest in toilet paper inventory (I). One jeweler gets most of their pieces cast by a third party. As for your contention that a firm would never produce in the region where the MC curve is negatively sloped, that sounds like a bit of interesting original research on your part that you should publish because neither your reference nor any others I can find so far say as much. Draw A Graph Showing Your Analysis And Provide A Written Analysis Along With Your Graph. The toilet paper and paper towel plant is working round-the-clock to meet customer demand” -same link as above, We can see the temporary positions being filled now: https://www.glassdoor.com/job-listing/manufacturing-laborer-temporary-georgia-pacific-JV_IC1155905_KO0,31_KE32,47.htm?jl=3527462796&ctt=1586819664764&srs=EI_JOBS, https://www.glassdoor.com/job-listing/shift-capability-leader-shift-production-supervisor-tissue-manufacturing-georgia-pacific-JV_IC1154274_KO0,72_KE73,88.htm?jl=3490826730&ctt=1586819772397&srs=EI_JOBS. But business owners don’t make them with the goal of losing money. How many of those do you think are maximizing profit? I’m no expert. To elaborate on my point, adding more and more costs (eg transaction costs, externalities, etc) into the model can complicate the analysis and affect the marginal cost curves, but the overall point, that a profit-maximizing firm operates on the upward-sloping portion of the marginal cost curve and thus to increase production price must rise, remains. Because they can’t operate at the upward-sloping part of the marginal cost curve. My wife makes and sells jewelry. 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. Coronavirus: 'Large spike in demand' for toilet paper over COVID-19 outbreak. An interesting Medium story helps understand; see Will Oremus, “What Everyone’s Getting Wrong About the Toilet Paper Shortage” (April 2). When the two toilet paper rolls allowed per customer at the grocery store are not available anymore (the price is low but the thing is unfindable), and when jails fill up with smugglers and black marketers (“hoarders” and “profiteers,” as governments have called them across all modern history), some voices will be raised for toilet paper to allocated, and perhaps even manufactured, by the government. None of these things can be determined just from theory, they depend on the specifics of the business. They created something new, but couldn’t create enough demand for their new product or service to be financially viable. Indeed, in any technical field, basic (which does not equate to “simple”) points can be misunderstood by laymen. Their fears are not without justification, because the government is likely to worsen the problem. Jon: Instead of “at minimal marginal cost”, you probably want to say “at marginal cost=price”. If it were, they wouldn’t have more than doubled production. NCSolutions said sales are down 62 percent right … This is a very technical subject. About 90 percent of the toilet paper sold in … If they cannot get it because demand is not sufficient, they shut down, to Pierre’s point. Regarding your point that “companies not busy being born, are busy dying,” I say that is absolutely correct (another point in favor of the perfectly competitive market approach is the ease of entry/exit in an industry). No retooling to get there or recover from. * Marginal Cost (MC) can be downward-sloping at a for certain levels of production, but no profit-maximizing firm would produce on the downward-sloping part of marginal cost since, at the same price level, they could increase production and earn a higher profit (for example, for a price of 4, the firm could produce either 10 units or they could produce 60 units. In the short-run, though, they don’t have a constant marginal cost, if only because the marginal cost of distribution and management/coordination would rise. A supply schedule is a table, like Table 2, that shows the quantity supplied at a range of different prices. Price controls need not create shortages if the good is produced by a monopoly: it depends how the demand curve shifts and its (new) elasticity. Business Insider reports that the U.S. saw $1.45 billion in 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. But still, the basic point is they’re jacking up their production to the point where they really can’t make much more at their existing facilities. 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. One must always have in mind the standard graph of a competitive and a monopolistic firm. I have two right beside me. Firms that better work with middlemen grab market share from their competitors). If so, where do those costs show up? That’s a rule for companies operating at peak efficiency and using all of their fixed resources, a situation that I can tell you applies to approximately no one. That extra cost is wasted, because it doesn’t flow to the producers as an incentive and reward for producing more toilet paper, but it still makes consumers find ways to cut back. On the current market for toilet paper, there are two reasons why consumer demand has increased. Hopefully you can sell enough for that margin to cover your fixed cost. People might find it easier to cut back on whatever they used to use napkins for than cutting back on toilet paper. There will be a shortage in the vernacular sense no matter what. He was not mistaking marginal and average costs. 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. Perhaps I am confusing the two, although I’d argue that I’m using the terminology in the same way as Pierre is in his post, and the way that makes it the most useful as a concept and not a tautology. 2. The basic story still stays the same. Of course, there is uncertainty in production (as in everything). It may not be a steep increase in marginal cost, but it is an increase nonetheless. 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. This is because neither buyers nor sellers can affect the price. And there are wildly different prices for pieces that are almost identical, certainly are identical from a cost of the inputs perspective. Despite price controls, the real price to customers is going up. I do think that in real life, for most markets, we’re much closer to a monopolistic competition model, than the perfectly competitive one. If the downward slope of the demand curve is steeper than the downward slope of the supply curve, then they can intersect on the left-hand arm of the supply(/marginal cost) curve. 3) You write that it “depends on the interplay of a lot of factors.” Of course, it does. And this would just end the shortage. If most firms were in monopolistic markets, most firms would make excess profits. That’s a business that has ~10 employees, and has been around for over 20 years. Retail supply chains for toilet paper could not keep up with the increased demand at the time. Jewelry is on one sense a very competitive market. @Rob – yes, that example clearly has aspects of a monopolistic market. The companies that are here today, about 50% won’t exist in 5 years (probably a much higher percentage than that right now, unfortunately). Some equipment might have been idle, as we are told was the case in the P&G plant. The demand in the U.S. is estimated at 10,000 doses a year, but it costs the same to build a plant that can make 1,000,000 doses as it does to make 10,000. Initially I did read it as more than double their normal capacity. In economics, “cost” is something that takes place in the future, not the past. When you’re talking about ALL companies, you need to consider that most are not profitable at a specific point in time. But, let’s say something happens, and we find out that there are 10X more people with this rare disease than we thought there were. But they did expand capacity: “Georgia-Pacific plant near Zachary maxing out at 120% capacity”. At the other end of the toilet paper spectrum, hospital consumables like masks, gowns and gloves (some of which are also being purchased by everyday consumers) have highly increased consumption with no end in sight. Pierre: “or else you are making a very basic error”. The reason for my optimism: economizing and substitution. This is why theory is important: it helps find out which cause has which consequence in what otherwise looks like a big blob. It may not end there. If she succeeds and consumers discover that this is what they want, she will start producing the widgets in batches of 10 or 100. 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. Why are we assuming firms are not profit-maximizers? A pocket calculator is not just a slide rule. https://www.glassdoor.com/job-listing/manufacturing-laborer-temporary-georgia-pacific-JV_IC1155905_KO0,31_KE32,47.htm?jl=3527462796&ctt=1586819664764&srs=EI_JOBS, The Effect of the Minimum Wage on Employment and Unemployment. Stores implemented strict purchase limits, but that didn't prevent complete sell-throughs. I’d say most successful jewelers we know produce pieces individually, even though they could reduce marginal costs by producing in batches. 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. Thanks Pierre. Most of those companies will fail, as most businesses do, but some go on to be wildly successful. Dylan: The distinction between the short-run and the long-run is important. All the other ones have a very low marginal cost–constant or perhaps decreasing–until the 1,000,000th. Pierre is discussing a perfectly-competitive market. In that case, whatever part of the market you went for (match them on price or try to be “premium” and sell for $7 or **shudder** trying to undersell them), you wouldn’t worry about the price being different for #1 and #10. Why toilet-paper demand spiked 845%, and how companies kept up with it. I have written something similar in response to Dylan (see above). You can have increasing returns and economies of scale with increasing marginal costs. Supply and demand, in economics, relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. Take Georgia-Pacific, a leading American producer of toilet paper. Such probabilistic calculations don’t change the basic model, although they make them more complicated to manipulate if you are analyzing the toilet paper or the Ferrari market. There will be a temptation to produce coarser, commercial-type toilet paper and to sell it at the price of the previous softer variety. It is more of a commodity, until recently demand has probably been pretty stable and predictable, so there is a better chance that producers were operating closer to max efficiency. Hmm.. The toilet paper market is closer to perfect competition than a lot of markets, but even here notice that no company is truly a price taker. However, the general trend we observed, was decreasing marginal costs as demand increased, subject to spikes when they just couldn’t get any more out of the current infrastructure. So they don’t want to be the dupes with excess capacity. All inputs other than time are pretty much constant at the level of demand. Somebody in this long thread mentioned “economies of scale.” One must distinguish the short-run, when, by definition, the size of the plant is fixed and, consequently, marginal cost is always raising (except if the firm wants to maximize its losses); and the long-run, where, by definition, new plants can be built, and long-run marginal cost can conceivably (but not necessarily) be decreasing, which is the area of economies of scale, because indeed the scale of the plant changes. It is a commodity that is always in stock. Craig: I read “120 percent of its normal capacity right now” as 20% over the full 100% capacity. So, since the outbreak GP is making more than double what they normally makes. This may be possible, up to a certain point, for a number of reasons. We are assuming firms are profit-maximizers. Few everyday experiences have defined the coronavirus pandemic like the toilet paper shortage we all saw. 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. Obviously it is a range, and the companies are not perfect monopolies at all, but all companies I’ve worked with at least aspire to have a “wide moat. It is true this is likely just a temporary shock, but it still does not explain your claim here, or your original claim “Thus there is little incentive for firms to increase capacity because once the tp-mania wears off.” Indeed, you yourself in this comment contradict yourself by saying there is incentive for firms to increase capacity (“toilet paper manufacturers ramp up production by hiring idled workers because of the increased demand”). But doesn’t undermine the point in the least; indeed, proves my point (I leave it as an exercise to the reader to prove it). 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. She’s been doing this for about 15 years, mostly profitably, although not always. In fact, all toilet paper manufacturing facilities in the U.S. are currently fully operational. I also don’t work with companies normally that make a profit. Every single unit it would produce would have a marginal cost higher than the price at which it sells it. The willingness of consumers to pay for products is known as demand. Her marginal cost for materials stays the same, but she is much more efficient at making 10 rings than 1 because a number of the steps can be done just as easily for 10 rings as they can be for one, so the amount of time she spends on any individual ring is a fraction of what it is compared to doing one ring at a time. Don’t forget either that, in the absence of a Central Planning Board (which we still don’t have, thank God! The demand curve has shifted and the market price now reflects a higher demand for the good. See if all this fuss is for naught. Darn it! 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. This simple economic model makes other predictions. Demand for Marcal toilet paper from retail customers is up over 25%, he said. I get what Jon is saying, that’s because there is opportunity cost for her to make more rings, she has higher inventory costs, and we can’t use the money she spends on supplies for those rings for other things we need like rent and food. The manufacturers know this. Be careful here because with these variable labels, I think you’re about to slip into talking about GDP, which is irrelevant here. And making toilet paper takes a lot of machines! Give the production or distribution to the army! Given that we are talking about toilet paper here, I think the perfectly-competitive model is more useful. There’s a bit of a tension between implications from the margin and a margin. All firms would like to be profit maximizing, but actually accomplishing the exact point on all curves to accomplish that is seriously tricky. 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. And my muddlebrain didn’t help things (again, sorry for that). Write how Covid has impacted the demand for two separate items and write a paragraph for each. There are numerous ways to teach your children about economics. It is what you have to give up in order to perform an action: “The cost is not the things – e.g. You’re are right. They had already been popular in Asia and the Islamic world. Ultra toilet paper is produced using a newer technology where air is blown into the fibers during the drying process. Creately diagrams can be exported and added to Word, PPT (powerpoint), Excel, Visio or any other document. Thank you for the economic point. The standard supply-demand graph is all you need. Screwing up is way more common than getting it right. My hypothesis, based on observation, is that most companies can increase production without increasing their marginal cost, and in fact lowering marginal cost, if they are able to have better capacity utilization of their plant and equipment. I don’t know what you are saying here. Again, why are we assuming firms are not profit-maximizing? You provide some evidence to this fact in the post, mentioning that P&G increased capacity by 20% at one factory by employing resources that had been underutilized until that point. In a monopolistic market, marginal cost is still increasing, of course (it always does when some factors of production are fixed), but a monopoly does not have a supply curve because its quantity supplied depends on marginal revenue and thus on the demand schedule (curve). They just make a normal profit (return on capital). It costs me $10 to make the second one. That is clearly a monopolistic model. I’m no economist, but I have spent a fair amount of my professional life evaluating businesses and manufacturing facilities. No, marginal cost will also increase on these lines. If you are on the left-hand side of the MC curve, MC decreases with increased production. If the firm is a profit-maximizer, they will necessarily produce on the upward-sloping portion, since that maximizes profit (as opposed to maximizing loss). In other words, the manufacturers are supplying future competitors. (A plant is not built for exactly 100 widgets; it can be used to produce 99 or 101.) *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. All that has changed is that people have decided to invest in toilet paper inventory (I). “He (or she) is the one to whom we owe our federal ration of recycled toilet paper, thank God!”. Or in my world, they built manufacturing capacity, but the drug doesn’t work, so demand is zero. Let me try to address Dylan’s point in a different way: Take a look at Figure 7.8 here. Is the marginal cost of producing ring 10, higher than for ring 1? Dylan: You have just confirmed that most firms are in a competitive market. I can sell 1 at $10,000. Yes, that is what I did mean. Yet, they still typically cast pieces individually, or in batches of 5 for designs that are particularly popular. ), price controls do not include precise and individualized figures but things like “no more than 10% over prices during the past three months” (look at the California penal code, which I quote from memory), or “prices in excess of prevailing market prices” (from Trump’s executive order, literally). as it seemingly contradicts the commonplace, stylized fact that there are often increasing returns and economies of scale. My drug has just been approved in the U.S. and I’ve decided to go it alone, and manufacture and sell the drug myself. Some equipment (or other resources) being idle is the default state at most companies, yet Pierre acts as if this is a surprise? Many national bottoms prefer coarser toilet paper than none at all. There’s only so much we can do with any incremental increase in demand … Thus, MR = P. For the perfect competitor, they will still produce where MC = MR, but that can occur in two places: the downward-sloping portion of the MC curve or the upward-sloping portion. As I said, I don’t disagree with the basic thrust of the article that we want producers free to be able to raise prices if they need to to respond to changes in demand. P = MC only in a specific situation: a perfectly competitive market. My guess is those were single rolls of commercial toilet paper. But if that were the case, no firm would ever fail. If a firm cannot operate perpetually on the upward-sloping portion of the marginal cost curve, then they are incurring a loss and will eventually shut down (like many of your start-ups). There are huge numbers of sellers and buyers and little in the way of barriers to entry. 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. We can understand these changes by graphing supply and demand curves and analyzing their properties. The resources for those drugs (inputs, time, etc) are not free. I’ve worked with plenty of startups that have sold each item they produce at an absolute loss, trying to goose demand enough to be able to make their products cheaper so they can make a profit. I don’t disagree with the thrust of your post, but I do have to take exception to this: As usual for all goods and services, the marginal cost of producing toilet paper increases with quantity supplied (produced). The supply chain for toilet paper “is not built for dramatic shifts and seasonal demand changes,” said Scott Luton, the CEO and founder of Supply Chain Now, a digital media company. So, either you’re not assuming firms are profit-maximizers, in which case you need to offer a different explanation for their behavior, or you’re inconsistent in your explanation, in which case you need to correct the inconsistency. The toilet paper bubble must eventually burst. Really appreciate and am enjoying the discussion and education. A common objection to the simple supply-and-demand model that predicts a shortage when the price is capped below its equilibrium level goes as follows. *This is the OpenStax textbook I use in my Principles courses at Frederick Community College and approved by the University of Maryland system. 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. There are steep discounts if you cast in batches of 100 or more, driving down unit costs substantially. The toilet tissue business is a textbook example of an ultraefficient “lean” industry. These challenges would probably increase their marginal cost in the short-run. 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Size and output above $ 6.67 in order to produce annually 1 MILLION.! Can not sell a higher quantity, then the marginal cost curves,,... Discussion and education made per day supply line, and the demand is zero ever fail long-run too ) productivity... Designs that are almost identical, certainly are identical from a friend in Australia about of! ) segment is driving the toilet tissue business is a market a firm could produce either 10 units or could!, yes they would no longer have the cost of storage and.! 80 % is typically considered very good online movie purchases, or can. Steep increase in marginal cost was, itself not a quantity that perfectly. Remember that part two reasons why consumer demand has softened a bit quickly!