The Basics of Supply

Law of Demand vs. Law of Supply Partner A – take role of a producer Partner B – take role of a consumer Exploring Supply and Demand Handout From your perspective as a producer or consumer…how do the changes impact you? (DO NOT CONSIDER ANYTHING OTHER THAN PRICE)

Supply vs. Demand Selling price increases $1 per unit.

Supply vs. Demand Selling price decreases $20 per unit.

Supply vs. Demand Selling price increases $20 per unit.

Supply vs. Demand Selling price decreases $1 per unit.

Supply vs. Demand Selling price increases $100 per unit.

Supply vs. Demand Selling price decreases $100 per unit.

Debrief Compare responses with partner Consumers – you shouldn’t have encountered any difficulty here. Consumers – move to one side of the room Producers – move to the other side of the room – Stand = Increase – Sit = decrease – Raise hand = no change

The Basics of Supply Like demand, the word supply has a specific meaning in economics. Supply refers to the willingness and ability of sellers to produce a good or service Willingness: a person wants or desires to produce and sell the good Ability: a person is capable of producing and selling the good

Debrief More the selling price increased, the more willing producers were to produce more of a good/service. (this is law of supply – why not supply more when you make more per item?) Consumer responses to prices changes is the law of demand.

The Law of Supply The law of supply-quantity supplied varies positively (or directly) with price, other things constant. Price = quantity supplied

Marginal cost of production If production costs increase, supply will decrease. If production costs decrease supply will increase.

Why are price and quantity supplied positively (directly) related? According to economists it is because of the Profit motive. Producers are more willing and able to supply more goods at higher prices than at low prices because a higher price makes production more profitable Profit = Total Revenue – Total Cost

How We Look at Supply -- The Supply Schedule and Curve A schedule is a table that lists the quantity of a good that a producer is willing to make at each price. This is the STORY. The vertical axis ALWAYS shows price The horizontal axis ALWAYS shows quantity supplied Plot the points on the schedule Connect the dots!! The Supply curve slopes UP. Now you have created a PICTURE OF THE STORY. S Q P

Movement Along a Supply Curve A change in the price is a change in the quantity provided, other things constant. This causes a movement along a supply curve.

Change in Quantity Supplied Price Quantity

On to … Determinants of Supply

DETERMINANTS OF SUPPLY Factors That Can Shift the Supply Curve: Changes in... – The cost of resources used to make the good – Technology used to make the good – Producers’ price expectations – Producers’ expectations of the costs of resources – Government Action – excise tax (tobacco), Subsidies (Ethanol), and Regulation (prevent pollution) – The number of sellers in the market (competition)

Competition….

What happened?

Number of sellers or producers (availability) When new businesses enter a market, supply will increase. Also, supply will change if availability of resources changes. For example, if a freeze ruins most of the blueberry crops, the supply of blueberry muffins will decrease and cause price to increase.

DETERMINANTS OF SUPPLY Factors That Can Shift the Supply Curve: Changes in... – The cost of resources used to make the good – Technology used to make the good – Producers’ price expectations – Producers’ expectations of the costs of resources – Government Action – excise tax (tobacco), Subsidies (Ethanol), and Regulation (prevent pollution) – The number of sellers in the market (competition)

What do you see?

Now what?

DETERMINANTS OF SUPPLY Factors That Can Shift the Supply Curve: Changes in... – The cost of resources used to make the good – Technology used to make the good – Producers’ price expectations – Producers’ expectations of the costs of resources – Government Action – excise tax (tobacco), Subsidies (Ethanol), and Regulation (prevent pollution) – The number of sellers in the market (competition)

What does he need?

What is the issue?

DETERMINANTS OF SUPPLY Factors That Can Shift the Supply Curve: Changes in... – The cost of resources used to make the good – Technology used to make the good – Producers’ price expectations – Producers’ expectations of the costs of resources – Government Action – excise tax (tobacco), Subsidies (Ethanol), and Regulation (prevent pollution) – The number of sellers in the market (competition)

Change in Expectations If a good or service is expected to lose profit, the supply will decrease.

DETERMINANTS OF SUPPLY Factors That Can Shift the Supply Curve: Changes in... – The cost of resources used to make the good – Technology used to make the good – Producers’ price expectations – Producers’ expectations of the costs of resources – Government Action – excise tax (tobacco), Subsidies (Ethanol), and Regulation (prevent pollution) – The number of sellers in the market (competition)

Practice Problem #1 What would happen to the supply of pizza if more businesses enter the pizza market? Determinant? Increase or decrease in supply?

Answer to Practice Problem #1 What would happen to the supply of pizza if more businesses enter the pizza market? Determinant – more sellers in the market place (competition) Increase in supply

Practice Problem #2 What would happen to the supply of Nike shoes if there is an increase in the cost of rubber? Determinant? Increase or decrease in supply?

Answer to Practice Problem #2 What would happen to the supply of Nike shoes if there is an increase in the cost of rubber? Determinant – The cost of resources used to make the good Decrease in supply

Practice Problem #3 A new technology is invented that allows factories to produce energy drinks more efficiently. Determinant? Increase or decrease in supply?

Answer to Practice Problem #3 A new technology is invented that allows factories to produce energy drinks more efficiently. Determinant – Improved technology used to make the good Increase in supply

Practice Problem # 4 A company that makes video games pays their workers the minimum wage. The government passes a law that increases the minimum wage businesses can pay workers. Determinant? Increase or decrease in supply?

Practice Problem # 4 A company that makes video games pays their workers the minimum wage. The government passes a law that increases the minimum wage businesses can pay workers. Determinant – the cost of resources to make the goods Decrease in supply of video games

Practice Problem # 5 A computer company finds out a competitor is planning to sell a new and improved type of computer. Determinant? Increase or decrease in supply?

Answer to Practice Problem # 5 A computer company finds out a competitor is planning to sell a new and improved type of computer. Determinant – technology or producers’ price expectations Increase in supply now because competition will likely lower prices later

Movement Along a Supply Curve Versus a Shift of the Curve Remember there is a difference between quantity supplied (Qs) and supply (S). Markets never stand still, there are always outside factors that change the actual price of the good or how much is supplied altogether. A change in price creates a change in the quantity supplied (Qs), other things constant. – This causes a movement along the supply curve. A change in one of the determinants of supply causes a change in supply (S). – This causes in a shift of the supply curve.

Determinants of increased supply change the story….. How so? Quantity supplied of pizza per week (by millions) Price of pizza 15$ $ $ $ $ $0.00 Quantity supplied of pizza per week (by millions) Price of pizza 9$ $ $ $ $ $0.00 Original StoryNew Story

How would determinants of increased supply change the picture of supply? S Millions of pizzas per week $ Price per pizza

Millions of pizzas per week $ Price per pizza How would determinants of increased supply change the picture of supply? S1 S2S2

Review - Demand 1. The cowboy hat is no longer fashionable 2. The U.S. admits 1 million new immigrants 3. Autoworkers receive a 20% pay cut 4. Price of hot dogs increases, causing people to buy less hot dog buns 5. Price of hot dogs decrease, causing people to buy less hamburgers 6. Consumers expect a sharp increase in the price of cars in the Fall, causing them to demand more in the summer

Review - Demand Factors that can shift the demand curve, which include: 1.tastes, preferences, habits 2.number of buyers 3.income 4.price and availability of complements 5.price and availability of substitutes 6.future expectations 1.The cowboy hat is no longer fashionable 2.the U.S. admits 1 million new immigrants 3.autoworkers receive a 20% pay cut 4.price of hot dogs increases, causing people to buy less hot dog buns 5.price of hot dogs decrease, causing people to buy less hamburgers 6.consumers expect a sharp increase in the price of cars in the Fall, causing them to demand more in the summer

Review - Supply 1. the price of aluminum used to build cars increases 2. the price of bread increases causing bagel suppliers to switch from bagel production to bread 3. faster assembly line process is developed permitting more shoes to be made per hour 4. producers believe they will be able to charge more for vitamin water because people want healthier beverage choices 5. Tim Horton’s comes to the United States to compete with others in selling coffee and breakfast food

Review - Supply Factors that can shift the supply curve, which include: 1.Change in the cost of resources used to make the good 2.Producers’ expectation on the costs of resources 3.change in technology used to make the good 4.change in producers’ price expectations 5.Change in number of sellers in the market. 1.the price of aluminum used to build cars increases 2.the price of tobacco increases due to excise taxes causing tobacco suppliers to decrease production 3.faster assembly line process is developed permitting more shoes to be made per hour 4.producers believe they will be able to charge more for vitamin water because people want healthier beverage choices 5.Tim Horton’s comes to the United States to compete with others in selling coffee and breakfast food

Graphing Changes in Supply Handout 7 groups Chart paper and markers I will give you one topic HOWEVER, you need to complete this handout in full Present to the class

What’s the Difference? Complete handout to show that you know the difference between supply and demand.

Determinants of Demand & Supply Need a partner, 1 piece of construction paper, scissors, & glue. 8 Minutes to complete! Find a picture and/or article that fits the determinant of demand AND supply. Ex: Unemployment rate increases (income effect) – determinant of demand. Ex: Monroe Sears to start closing sale (competition) – determinant of supply. Be prepared to tell class how current event fits into determinants of supply/demand and how the graph will change.

Productivity Total Product = product X input (labor) (we will complete a wkst on this) Marginal Product = change in output by adding one more unit of input (an extra worker). – You want this to increase – Calculate change in total product / change in # of workers.

Labor Affects Production Diminishing Returns to Labor – As you add labor, productivity will increase to a certain point, then will decrease (marginal product and total product will go backwards). Pg 139 – Increasing Marginal Returns – add labor, total and marginal product increases (this is good). – Diminishing Marginal Returns – not really worth adding another worker. – Negative Marginal Returns – too many workers, getting in each others way.

Marginal Cost Adding additional cost of producing one more unit of their product. Bottom line…once it starts to increase, stop hiring. – Calculate Change in Total cost / Change in Total Product