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. Question: Question 36 15 Pts Using Supply And Demand Analysis Explain Why There Was A Shortage Of Toilet Paper In March And April? Toilet paper supply chains are so constant that major manufacturers have fine-tuned demand relative to suppl y. None of these things can be determined just from theory, they depend on the specifics of the business. This doesn’t make sense. 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.” . 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. 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. (On what a “shortage” is, you may want to follow the link to my former post in the post above. The cost of producing that ring is roughly $25 in material and labor. 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. I already stipulated that people are not pooping any more than they normally poop. Toilet paper will continue being produced and it is highly unlikely grocery stores will close. Can the machines operate at better efficiency when running 24/7? In other words, the manufacturers are supplying future competitors. I don’t know what you are saying here. See my post farther down on monopolistic markets. What they’re unlikely to do is expand capacity. In those markets, firms cannot affect demand at all (by definition). 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. 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?). © 2003-2021 Chegg Inc. All rights reserved. Yet, products are highly differentiated, or at least perceived to be highly differentiated. My contention is that firms very often operate at a place where they are producing widgets for $x a pop, and if they increased production the next set of widgets would be$0.9x, but they don’t produce them yet, because the demand just isn’t there. * The demand is increasing regardless. Producing more would leave some product unsold (a higher marginal cost because those resources could have gone to other uses)  and producing fewer would leave some rent that could have been captured (again, a higher marginal cost). The monopoly model doesn’t apply here. If a firm is building a plant (good for the short-run, by definition of the short-run), its forecasts of future price and cost (and thus how much it will want to produce) are probabilistic. Answer: toilet paper investors, not consumers. Absent perfect planning and information that is perfectly executed, a direction of error must be built in. Walmart distribution centers give a narrow half-an-hour window for supplier deliveries. It might seem like the process doesn’t involve many human beings at all, because it’s so automated. A whole bidet might be hard to find space for, but a bidet shower is comparatively easy to fit. If I am reading you right, you’re looking at average costs, not marginal costs. Yes, so I don’t see why more of this isn’t going on. I have belatedly answered some of your good questions that I had overlooked. (Charities can offer toilet paper below the market price, but they would have to pay a higher price to the producer.). The mistake y’all are making is assuming that the marginal cost curve is independent of the demand curve. 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”). An overnight report from a friend in Australia about shortages of toilet paper compels me to write about the supply chain for this product. There’s a bit of a tension between implications from the margin and a margin. Demand for Marcal toilet paper from retail customers is up over 25%, he said. That might be the case right now (although even there, I’m doubtful, since I don’t think either of us are all that great at optimizing for efficiency), but it certainly isn’t the moment she gets an order for 10 rings. And the fact that price controls have created shortages on this market is an indication that it is. Walmart could sell them with some sort of sign saying, “We apologize for the low quality of this toilet paper, but we figure some toilet paper is better than none. Take the COGS of producing one piece and double it. Craig: The 213% increase is sales over one week, not a doubling of production, especially not in the whole US market. I believe this to be the real world stuff Dylan is working on. Toilet paper is not special: all goods, including those in more demand during the current crisis, have increasing marginal costs of production. “He (or she) is the one to whom we owe our federal ration of recycled toilet paper, thank God!”. My wife charges $100 for a ring to a retail buyer. Thank you for the economic point. Monopolistically competitive markets are likely closer to the “truth” but the added complexity here doesn’t help a ton. Or, will I be able to sell it to Europe at a much lower price? Their profit is maximized where p=mc at 60 units. Firms that better work with middlemen grab market share from their competitors). Hmm.. It is a commodity that is always in stock. The first dose of a new approved drug costs somewhere north of a billion dollars. Estimates from the Statista Consumer Market Outlook show that the United States leads the way when it comes to the use of toilet paper. & The impulse to overbuy comes from the concern that the store will be closed or there won’t be enough, both of which are largely irrational. P = MC only in a specific situation: a perfectly competitive market. Like demand, supply can be illustrated using a table or a graph. Look, a profit-maximizing firm will operate wherever he can maximize profit. Is she not profitable making and selling items individually? My average cost is $15, but my marginal cost is $10, right? 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. *  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. Can’t Georgia-Pacific evade the law of increasing marginal cost by having its commercial production lines produce toilet paper for consumers? So you’re incorporating in a monopoly model. A case is 60 rolls, so not a quantity that is too crazy to buy. But if that were the case, no firm would ever fail. I’ve got the choice to buy paper made of bamboo, or paper that is unbleached. If she could be guaranteed to sell all 10 rings, she would love to make them all at once. Strong demand for AFH (Away From Home) segment is driving the toilet paper market. Jewelry is on one sense a very competitive market. The standard supply-demand graph is all you need. The demand curve has shifted and the market price now reflects a higher demand for the good. The Medium story is very weak on the role of prices and the impact of price controls, but economic theory can fit this gap and help better understand the economic consequences that we observe. Maybe this is the point that has been missing, because I thought it was too obvious to state? If she succeeds and consumers discover that this is what they want, she will start producing the widgets in batches of 10 or 100. No, there is still increasing marginal cost. She has materials that could be used for other things that are tied up in a ring that no one might want. One must always have in mind the standard graph of a competitive and a monopolistic firm. Companies produce as much as they have demand for, which is rarely going to coincide with maximum efficiency. Again, price is measured in dollars per gallon of gasoline and quantity supplied is measured in millions of gallons. People use that rule when they are selling jewelry that retails for $10 or $1000 (it gets fudged a bit, but mostly because the artist don’t really have that great of a sense of what their input costs are, so they get roughly estimated). 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. During a crisis, one must not totally discount the desire to make special efforts, even if only for the corporate image, but also possibly for charitable or neighborly motives. She’s been doing this for about 15 years, mostly profitably, although not always. Consequently, marginal cost is increasing. I think what Dylan is objecting to is the unqualified, bald statement: “all goods, including those in more demand during the current crisis, have increasing marginal costs of production”. It looks like you’re confusing the accounting concept of costs and the economic concept of costs. Some equipment might have been idle, as we are told was the case in the P&G plant. The standard supply-demand graph is all you need. ;-)), P.P.S. The toilet paper bubble must eventually burst. Aside from the current Coronavirus pandemic and the associated crisis level response the supply of toilet paper is virtually never an issue. They just make a normal profit (return on capital). For a monopolist, since they can control the price by restricting output, they face a downward-sloping marginal revenue curve. 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. And in fact, this is where the vast majority of companies do operate, because of various possible mechanical/organizational economies of scale. Am I going to have to charge more for my drug than I did before? 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. I have two right beside me. But workers are needed to monitor and maintain the mill and all of its machines, as well as to handle the business side of things. if 1 pill is the equilibrium, then yes. If most firms were in monopolistic markets, most firms would make excess profits. Why are we assuming firms are not profit-maximizers? That is clearly a monopolistic model. One other important thing I should point out is the following. The graph below demonstrates these changes. People in the U.S. seem to be losing their “can do” spirit. @Dylan: You may want to scroll up this long thread. The problem of our friends is what you pointed out before: they assume that there is only one firm in each market. 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. Ultra toilet paper is the latest innovation in the field. However, that can only happen when the firm is a monopolist. 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. The perfectly competitive model works better here. That’s a business that has ~10 employees, and has been around for over 20 years. It is not sustainable. 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. Terms Let’s trace the great run on toilet paper and walk through the various scenarios that played out in the manufacturing, distribution and retail sectors. 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? 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. And there are wildly different prices for pieces that are almost identical, certainly are identical from a cost of the inputs perspective. In fact, she’ll give them a discount that reflects her lower cost of production. Producing more toilet paper for consumers on its current production lines would require more workers, whose marginal productivity would decrease. Here is a better way to explain why a firm will not operate on the downward-sloping portion of the marginal cost curve: When the marginal cost curve is downward-sloping, so is average costs. It certainly doesn’t seem like that to me. Once they setup the infrastructure, the marginal cost to produce an additional unit are very low. Sure, we can avoid an economic shortage in the sense that if the grocer jacks the price high enough, the shelves won’t be empty. But yes, this is typically what you would find in a rest stop or a McDonalds bathroom….. One jeweler gets most of their pieces cast by a third party. Let me add one point. Thanks very much for your clarification post that simplifies this long discussion. It is what you have to give up in order to perform an action: “The cost is not the things – e.g. (That may be what Daniel is getting at.). All that has changed is that people have decided to invest in toilet paper inventory (I). Thus, while it is mathematically possible for a firm to operate on the downward-sloping portion of the marginal cost curve, it is not economically possible. They get the product approved, and the demand is for an extra 20,000 doses. 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). Demand for Marcal toilet paper from retail customers is up over 25%, he said. People are investing in inventory rather than spending on consumption. When you’re talking about ALL companies, you need to consider that most are not profitable at a specific point in time. There are huge numbers of sellers and buyers and little in the way of barriers to entry. I think one of the points in contention here is the assumption on profit maximizing. Should I be advising her that she should charge bulk purchasers higher prices for purchasing multiples, instead of lower prices? Toilet Paper Market $11.00 $10.00 59.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 50.00 0 1 2 3 4 5 6 7 8 9 10 11 Q demanded Q Supplied. Thanks for the condescension, so refreshing. Take Georgia-Pacific, a leading American producer of toilet paper. *This is the OpenStax textbook I use in my Principles courses at Frederick Community College and approved by the University of Maryland system. The more toilet paper to be supplied, the higher the price must be. Despite price caps, the price of a roll of toilet paper will increase stealthily if the quality decreases: lower quality for the same price. You’re not going to want to do that, unless you think you can sell more than just one additional widget. 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. But they aren’t perfect at it. That a given price control does create as shortage is a necessary (but not sufficient) condition for the hypothesis that the industry is competitive. As demand outstrips US toilet paper supply, imports roll in Toilet paper is often not worth the cost of importing. So, when you state that a firm “produce[s] as much as they have [quantity] demand for [at the given price],” that implies that they are at minimal marginal cost. Stores implemented strict purchase limits, but that didn't prevent complete sell-throughs. They will handle all the regulatory, distribution, and selling, all I have to do is get the product to them. But large companies like Georgia-Pacific or Procter and Gamble, which are incited to maintain the value of their brands (which are worth billions or even tens of billions of dollars), will not yield to this temptation except if the shortage situation gets closer to Cuba or Venezuela. The reason for my optimism: economizing and substitution. 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. But they did expand capacity: “Georgia-Pacific plant near Zachary maxing out at 120% capacity”. For any firm (or individual), the profit-maximizing point is where marginal revenue = marginal cost (I’ll leave it as an exercise for the reader to prove this; it involves calculus and I don’t want to do calculus tonight). As usual for all goods and services, the marginal cost of producing toilet paper increases with quantity supplied (produced). 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. What you must mean is that a monopoly does not have a supply curve, but it does have a marginal cost curve (which is certainly raising in the short-run). (Note, however, that a firm can still make a loss, although not maximizing it, on the upward-sloping part of its marginal cost curve–only if, at that point, average cost is higher.). I was making a point on a particular interpretation of an action and whether it was constitutional or not. But smaller no-brand producers, including entrepreneurs in foreign countries, will work to meet the unsatisfied demand that the shortage implies. You’re are right. Why, just the other day, I was discussing law with a friend who is a constitutional law professor (law is something I study alongside economics, but it is not the subject of my graduate degree the way econ is). Ultra toilet paper is produced using a newer technology where air is blown into the fibers during the drying process. I also think that companies not busy being born, are busy dying. 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. If so, where do those costs show up? And this would just end the shortage. The commercial production lines would need to be retooled at the packaging end too, again at additional cost. The standard supply-demand graph is all you need. Stores replenish supply on generally stable demand signals and patterns. 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. And my muddlebrain didn’t help things (again, sorry for that). I have trouble understanding both John’s point about demand being a cost. 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. There are steep discounts if you cast in batches of 100 or more, driving down unit costs substantially. Jon, we are explicitly talking about a demand shock in the toilet paper market in the United States in April 2020 caused by the coronavirus pandemic. Indeed, in any technical field, basic (which does not equate to “simple”) points can be misunderstood by laymen. Have my marginal costs just gone up? 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