What is the law of Demand in your own words? Do First

A market has 2 sides A buying side Demand is the buying side of the Market A selling side Supply is the selling side of the market I want to buy lots and lots of Doritos! I’ll sell you some Doritos. How many do you want?

Behavior of Sellers (Side 2) Quantity Supplied – The amount of any good or service that sellers are willing and able to sell – Think of the PPF! Wow – these Doritos are really selling well… I wonder if I should sell more?

What determines supply? Price – High price = profitable = produce more! – Low price = not so profitable = produce less Positive relationship between supply and price

The Law of Supply When all other things are equal (ceteris paribus), the quantity supplied of a good rises when the price of the good rises Wow, since the price of Doritos is getting higher, I’ll make more $ if I sell more! I’m going to sell more Doritos!

Starbucks’ Supply Schedule Table showing the relationship between the price of a good and the quantity supplied (Qs) Notice that Starbucks’ supply schedule obeys the Law of Supply Price of lattes Quantity of lattes supplied $

Starbucks’ Supply Schedule & Curve Price of lattes Quantity of lattes supplied $ P Q

Your turn! How does price affect supply? – (Ceteris Paribus) Why does this make sense? (explain!)

Supply Curve Shifters The supply curve shows how price affects quantity supplied, other things being equal. These “other things” are non-price determinants of supply. Changes in them shift the S curve…

Supply Curve Shifters: input prices Examples of input prices: wages, prices of raw materials. A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND Well, since the price of corn to make Doritos went down, I can offer more Doritos at the same price and make more money!

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND P Q Suppose the price of milk falls. At each price, the quantity of Lattes supplied will increase (by 5 in this example). Supply Curve Shifters: input prices

Supply Curve Shifters: technology Technology determines how much inputs are required to produce a unit of output. A cost-saving technological improvement has same effect as a fall in input prices, shifts the S curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND What happens if there is now a new fancy Doritos making machine?

Supply Curve Shifters: # of sellers An increase in the number of sellers increases the quantity supplied at each price, shifts the S curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND What happens to the if the store next door also starts to sell Doritos?

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND Supply Curve Shifters: expectations Suppose a firm expects the price of the good it sells to rise in the future. The firm may reduce supply now, to save some of its inventory to sell later at the higher price. This would shift the S curve leftward.

Your turn! What is an example of something that would shift the supply curve for ice cream? What is an example of something that would cause a movement along the supply curve for ice cream?

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND Summary: Variables That Affect Supply VariableA change in this variable… Price…causes a movement along the S curve Input prices…shifts the S curve Technology…shifts the S curve No. of sellers…shifts the S curve Expectations…shifts the S curve

A C T I V E L E A R N I N G 2 : Supply curve 17 Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios? (remember to graph price on the vertical axis) A. Retailers cut the price of the software. B. A technological advance allows the software to be produced at lower cost.

A C T I V E L E A R N I N G 2 : A. fall in price of tax return software 18 The S curve does not shift. Move down along the curve to a lower P and lower Q. The S curve does not shift. Move down along the curve to a lower P and lower Q. Price of tax return software Quantity of tax return software S1S1 P1P1 Q1Q1 Q2Q2 P2P2

A C T I V E L E A R N I N G 2 : B. fall in cost of producing the software 19 The S curve shifts to the right: at each price, Q increases. The S curve shifts to the right: at each price, Q increases. Price of tax return software Quantity of tax return software S1S1 P1P1 Q1Q1 S2S2 Q2Q2