1. Lesson 2
Market Supply

2. Supply Curve
Price of Ice-Cream Cone
$3.00
2.50
2.00
1.50
1.00
0.50
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 29

3. Law of Supply
The law of supply states that there is a direct (positive) relationship between price and quantity supplied. 28

4. Supply
Quantity supplied is the amount of a good that sellers are willing and able to sell. 25

5. Change in Quantity Supplied
Price of Ice-Cream Cone S C
$3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of Ice-Cream Cones 1 5 30

6. Market Supply
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

7. Determinants of Supply
Market price
Input prices
Technology
Expectations
Number of producers 27

8. Change in Supply S3 S1 S2 Decrease in Supply Increase in Supply
Price of Ice-Cream Cone S1 S2
Decrease in Supply
Increase in Supply
Quantity of Ice-Cream Cones 30

9. Change in Quantity Supplied versus Change in Supply30

10. Equilibrium of Supply and Demand
Price of Ice-Cream Cone
Supply
$3.00
Demand
Equilibrium
2.50
2.00
1.50
1.00
0.50
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

11. Excess Supply Surplus Supply $3.00 2.50 2.00 1.50 1.00 0.50 Demand 1 2
Price of Ice-Cream Cone
Supply
Surplus
$3.00
2.50
2.00
1.50
1.00
0.50
Demand
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

12. Excess Demand Shortage Supply Demand Price of Ice-Cream Cone $2.00
$1.50
Campus Parking situation page 63 in the Instructors Manual.
Shortage
Demand 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of
Ice-Cream Cones 37

13. Three Steps To Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity. 45

14. How an Increase in Demand Affects the Equilibrium
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream... D2
Supply
$2.50
New equilibrium
2. ...resulting
in a higher
price...
2.00
Initial
equilibrium D1 7 10
Quantity of
Ice-Cream Cones
3. ...and a higher
quantity sold. 46

15. How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream
Cone
1. An earthquake reduces
the supply of ice cream... S2 S1
New
equilibrium
$2.50
2. ...resulting
in a higher
price...
2.00
Initial equilibrium
Arrange students in groups and give them hypothetical scenarios that force them to shift either supply or demand and then have them write their answers on the board. Focus on the three steps to analyze equilibrium.
Demand 1 2 3 4 7 8 9 10 11 12 13
Quantity of
Ice-Cream Cones
3. ...and a lower
quantity sold. 46

16. The Costs of Production
What are costs?
Opportunity Costs
Actual costs paid for factors of production
Fixed Costs
Variable Costs

17. The Costs of Production
Fixed Costs
Variable Costs
Labour
Materials
Total Costs
Average Costs

18. Total Revenue (from Sales)
Profit
Total Revenue (from Sales)
MINUS Total Costs

19. Cost Benefit Analysis Weighing up options.. Direct costs…
Indirect costs..
Direct Benefit
Indirect – longer term benefits…

20. Cost Benefit Analysis Weighing up options.. High speed 2
COSTS - Building – New trains, Training
Environmental Impact
Direct Benefit – better travel
Indirect – longer term benefits – easier business environment – better trained workforce = export opportunities…

21. Homework Think about a decision you have to make…
For example - New Iphone? Trip abroad? Learning Japanese?
Assess the decision in cost benefit terms..