Supply What is Supply? –Obj: Explain how supply works.

What is Supply? Supply = Sellers are willing to offer diff. quantities of a product depending on the price people are willing to pay for it

Law of Supply When people are willing to pay higher prices for a product, producers will supply more of the product When people are not willing to pay a higher price for a product, producers will supply (make) less of it

Law of Supply, Cont’d. Why is this? –The higher the price of the good, the greater the incentive the producer has to make more –Higher price = Higher profit for the producer

Supply Schedule Similar to the demand schedule At $5 per stuffed animal, the toy maker is not willing to supply any At $50 per animal, the toy maker is willing to produce 900

Profit Motive of Businesses Businesses have to make at least enough money on their products to cover the costs of making them Any money they make above those costs is profit Profit is the main motivating factor for businesses in a free market system

Market Supply Total number of products supplied by all the business that supply that particular product Example: The video game market

Econ. Basics Test Notes – Mon., May 3 1 st period

Factors Affecting Supply Obj: Identify how supply increases and decreases

Factors Causing Changes in Supply For change in supply to happen, producers must decide to supply a certain quantity of units at each possible price in the market This can happen for a number of different reasons

Changes in Supply = Changes in Supply Curve When supply decreases, the supply curve moves to the left When it increases, the supply curve moves to the right –Sellers are willing to supply more goods and services at higher prices

Causes of Changes in Supply Change in the cost of resources –When the cost of resources used to make a product decrease, sellers will produce more of it because it’s cheaper to make –When resource prices rise, sellers are less able to produce and sell the same quantities of the good or service

Changes in Productivity When productivity falls, costs to make same amount of goods and services increases –Supply curve shifts to the left When resources used to make something are more efficient, a company’s costs go down –The company will produce more goods at every price –Supply curve shifts to the right

Technology New technology can cut the costs to produce goods and services Sellers will supply more at the same price

Changes in Government Policy New government regulations can increase the costs of producing goods and services Sellers will produce less of a product at every price in the market Example: New safety feature requirements for auto makers or increased minimum wage

Changes in Taxes and Subsidies Subsidy – government payment to an individual or business for certain actions –If the govt. wants farmers to produce more corn, they may offer to pay them $2 a bushel –Supply will increase because current corn farmers will stay in the market and new ones will enter the market

$9.4 billion in last year

Lower taxes decrease producers’ costs –Supply will increase at each price in the market Higher taxes increase producers’ costs –Supply will decrease

Expectations of Demand If producers think demand for an item will go up, they will produce more at all possible prices –Example: stores order swimsuits from the factories before summer begins

Change in Number of Suppliers When more suppliers enter the market, supply will increase When suppliers leave the market, supply will decrease

Elasticity of Supply A measure of how the quantity supplied changes in response to changes in price –Depends on how quickly a company can change the amount of a product it makes in response to price changes

Supply Elasticity, Cont’d. If the quantity supplied changes a great deal when prices go up or down, supply is elastic If the quantity changes very little when prices go up or down, supply is inelastic –Oil companies cannot

Begin Notes Thurs., Dec. 2 All Classes

Markets and Prices Obj: Analyze the relationship between supply and demand

Oil suppliers

Law of Diminishing Returns If one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point.

For Example If more and more farm workers are hired to harvest a wheat field, at some point each new worker will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with.

Markets and Prices Market – Place where buyers & sellers meet Supply and demand work together to set prices

Price Adjustment Process Market = All buyers and sellers of a product or service By putting the supply and demand curves together, you can see how prices are adjusted to suit both buyers and sellers

Surplus If sellers are willing to supply 225 surfboards at $400 each, but buyers are only willing to purchase 150 surfboards at $400 each, this leaves a surplus of 75 surfboards Quantity supplied is greater than the quantity demanded

Surplus on the Graph (Price Adjustment, Cont’d.) It’s the distance between the supply curve and the demand curve Signals the producer that the price is too high

Surplus (Price Adjustment Process, Cont’d.) Sellers will lower their prices to sell their goods

Shortage (Price Adjustment Process, Cont’d.) Quantity demanded is greater than the quantity supplied It’s the horizontal distance between the supply curve and the demand curve at any price BELOW where the two curves meet.

Shortage, Cont’d. A shortage signals the seller that the price is too low They will raise the price, and the shortage will not last The flu vaccine shortage will leave millions of Americans vulnerable to influenza this season. Historian John M. Barry hopes it will serve as a wake-up call for government officials

Market Forces A surplus forces the price of a product down A shortage forces the price of a product up The point where supply and demand meet is the Equilibrium Price (EP)

Equilibrium Price, Cont’d. EP = No shortage & no surplus. There is exactly enough of the product at exactly the right price. Buyers and sellers are in balance on quantity and price E.P. will stay the same until demand or supply changes. When that happens, there will be a temporary shortage or surplus until a new equilibrium price is reached.

Govt. Price Controls Price Floor – Minimum price that can be charged for goods and services –Ex: Minimum wage –Dashed line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price. –In contrast, the solid green line is a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market.

Govt. Price Controls, Cont’d. Price Ceiling – Maximum price that can be charged for something. Govt. sets the price –Ex: Local govt. that sets price ceiling on how much landlords can charge for rent –Often intended to protect consumers from certain conditions that could make necessities unattainable.

What Prices Do... They are signals of –What to produce –How to produce –For whom to produce

British Economist Promoted a mixed economymixed economy –Both the govt. & people and businesses play important roles Said govt. could fight deflation and unemployment by: –Reducing interest rates –Govt. investment in infrastructure Keynesian Theory of Economics John Maynard Keynes

Plan for Tues., Dec. 4 Notes on Keynesian Theory, etc. Notes on Ch. 22, Sec. 1 and 2

Ch. 21, Sec. 2 – Factors Affecting Supply Obj: Identify how supply increases and decreases

Changes in Supply For change in supply to happen, producers must decide to supply a certain quantity of units at each possible price in the market This can happen for a number of different reasons

Changes in Supply = Changes in Supply Curve When supply decreases, the supply curve moves to the left When supply increases, the supply curve moves to the right –Sellers are willing to supply more goods and services at lower prices

Causes of Changes in Supply Change in the cost of resources –When the cost of resources used to make a product decrease, sellers will produce more of it because it’s cheaper to make –When resource prices rise, sellers are less able to produce and sell the same quantities of the good or service

Productivity When productivity falls, it costs more for a company to make the same amount of goods and services –Supply curve shifts to the left When resources used to make something are more efficient, a company’s costs go down –The company will produce more goods at every price –Supply curve shifts to the right

Technology New technology can cut the costs to produce goods and services Sellers will supply more at the same price

Changes in Government Policy New government regulations can increase the costs of producing goods and services Sellers will produce less of a product at every price in the market Example: New safety feature requirements for auto makers or increases in minimum wage

Changes in Taxes and Subsidies Subsidy – government payment to an individual or business for certain actions –If the govt. wants farmers to produce more corn, they may offer to pay them $2 a bushel –Supply will increase because current corn farmers will stay in the market and new ones will enter the market Lower taxes decrease producers’ costs –Supply will increase at each price in the market Higher taxes increase producers’ costs –Supply will decrease

Expectations of Demand If producers think demand for an item will go up, they will produce more at all possible prices –Example: stores order swimsuits from the factories before summer begins

Change in Number of Suppliers When more suppliers enter the market, supply will increase When suppliers leave the market, supply will decrease

Elasticity of Supply A measure of how the quantity supplied changes in response to changes in price –Depends on how quickly a company can change the amount of a product it makes in response to price changes –Ex: When oil prices go up, oil producers cannot quickly and easily find and drill a new site, build a pipeline and to move the oil, and build a new refinery to process it into gasoline

Supply Elasticity, Cont’d. If the quantity changes a great deal when prices go up or down, supply is elastic If the quantity changes very little when prices go up or down, supply is inelastic –Oil companies cannot

Supply Elasticity, Cont’d. Products that have supply elasticity are those that can be made quickly without huge amounts of capital and skilled labor such as kites, candy, and baked goods