Intro Question - What do you think would happen if the government placed a price cap (maximum price) for the sale of gasoline? Let’s say they force companies to sell for no more than $1.00 per gallon.

What is supply? Supply: The amount of a product that is offered for sale at all possible prices in a market.

The Law of Supply The Tendency of suppliers to offer more of a good/service at a higher price and less of that good/service at lower prices.

The Supply Curve

So…

Factors of Supply Costs of inputs (factors of production)

Factors of Supply Changes in productivity.

Factors of Supply Change of the number of sellers in a market. More sellers in a market = increased supply Less sellers in a market = decreased supply

The Best Price! The equilibrium price is the best price where supply and demand intersect. This is the point where suppliers and consumers are in perfect harmony.

Supply and Demand are put together to determine equilibrium price and equilibrium quantity Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D o 10 20 30 40 50 60 70 80 Q 10

Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30 Supply and Demand are put together to determine equilibrium price and equilibrium quantity P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Equilibrium Price = $3 (Qd=Qs) D o 10 20 30 40 50 60 70 80 Q Equilibrium Quantity is 30 11

What if the price increases to $4? Supply and Demand are put together to determine equilibrium price and equilibrium quantity What if the price increases to $4? P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D o 10 20 30 40 50 60 70 80 Q 12

How much is the surplus at $4? At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 Surplus (Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 How much is the surplus at $4? Answer: 20 D o 10 20 30 40 50 60 70 80 Q 13

How much is the surplus if the price is $5? What if the price decreases to $2? P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Answer: 40 D o 10 20 30 40 50 60 70 80 Q 14

How much is the shortage at $2? At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 How much is the shortage at $2? Answer: 30 Shortage (Qd>Qs) D o 10 20 30 40 50 60 70 80 Q 15

How much is the shortage if the price is $1? Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Answer: 70 D o 10 20 30 40 50 60 70 80 Q 16

The FREE MARKET system automatically pushes the price toward equilibrium. Supply Schedule Demand Schedule S $5 4 3 2 1 When there is a surplus, producers lower prices P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 When there is a shortage, producers raise prices D o 10 20 30 40 50 60 70 80 Q 17

Price Controls Price Ceiling Price Floor Price controls are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Price Ceiling A legally established maximum price at which a good can be sold. Price Floor A legally established minimum price at which a good can be sold.

Binding Price Ceiling

Price Ceilings What are price ceilings? What if there are price ceilings on a product? (perhaps gas?) What can that company do to fight the shortage, without raising prices, so they aren’t faced with losses?

In a small group: Discuss the following prompt, brainstorm ideas, then write a half page response with your plan. If gasoline was going through a shortage, what would you do if you were in charge of the government? A) Create a price ceiling to prevent gas from being too expensive What would you do to combat the shortage? B) Allow the price to skyrocket How would you care for those who could no longer drive?