Changes in Supply Chapter 5 Section 3

S U P P L Y Objectives: Identify how determinants such as input costs create change in supply. Identify three ways that the government can influence the supply of a good. Understand supply and demand in the global economy. Analyze the effects of other factors that affect supply.

S U P P L Y Just as several factors affect demand at all price levels, a separate set of factors can affect supply. What factors can shift the Supply Curve to left or the right?

S U P P L Y Any change in the cost of an input used to produce a good - i.e. raw materials, machinery, or labor - will affect supply. A rise in the cost of an input will cause a fall in supply at all price levels because the good has become more expensive to produce.

S U P P L Y A fall in the cost of an input will cause to increase in supply at all levels.

S U P P L Y

S U P P L Y

S U P P L Y Factors that affect Supply 1. Effect of Rising Costs 2. Technology 3. Subsidies 4. Taxes 5. Regulations

S U P P L Y Subsidies a government payment or discounted loan that supports a business or market. Gov’t has several reasons to subsidize producers. European farmers after WWII Developed Countries - protect manufacturers U.S. - farm subsidies - usually to take land out of production {very controversial}

S U P P L Y Taxes A government can reduce the supply of some goods by placing an excise tax - a tax on the production or sale of a good. This tax increases the production cost of the good. Discourage the sale of goods…i.e. cigarettes, alcohol, high-pollutant gasoline

S U P P L Y Subsidies and Excise Taxes are ways that the government directly affects supply by changing revenue or production costs. Government can also raise or lower supply through indirect means. Regulation - gov’t intervention in a market that affects the price, quality, quantity of a good.

S U P P L Y Regulation - Automobile Industry Gov’t tried to stop the polluting of cars

S U P P L Y The U.S. imports oil from Russia. A new oil discovery in Russia would increase the supply of oil to the U.S. market and shift the supply curve to the right.

S U P P L Y Other influences on Supply Future Expectations of Prices IF a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future. On the other hand, if the price of the good is expected to drop in the near future, sellers will earn more money by placing goods on the market immediately before the price falls.

S U P P L Y Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect on the market. Inflation - a general rise in prices, makes your money not worth as much

S U P P L Y The Number of Sellers If more suppliers enter the market to produce a certain good, the market supply will rise and the supply curve will shift to the right. The opposite is true… If fewer suppliers enter the market to produce a certain good, the market supply will fall and the supply curve will shift to the left.

S U P P L Y Elasticity of Supply Elastic More than proportional Type of Elasticity Change in QS due to Price Change Elastic More than proportional Inelastic Less than proportional Unit Elastic Proportional

S U P P L Y Elastic Supply Old Price $ 1.00 QS = 2 units New Price $ 2.00 QS = 6 units This is more than proportional Price doubled and QS tripled

S U P P L Y Inelastic Supply Old Price $ 1.00 QS = 2 units New Price $ 2.00 QS = 3 units Price doubled and QS went up by 1 unit This is less than proportional

S U P P L Y Unit Elastic Supply Old Price $ 1.00 QS = 2 units New Price $ 2.00 QS = 4 units Price doubled and QS doubled This is proportional