1. Pump Primer CHAPTER 4 In your own words, explain the difference between having a shortage vs. a surplus.

2. CHAPTER 4 Supply and Prices

3. Objectives: CHAPTER 4 Should be able to... Define supply, budget deficit & surplus Identify the law of supply Explain how changes in supply occur Explain the existence of the market equilibrium point. Describe the causes of a surplus and a shortage Explain how the market price system works to alleviate a surplus or a shortage.

4. Biblical Integration: CHAPTER 4 Instead of pursuing earthly wealth, pursue the wisdom of God and what glorifies Him; and He will bless you with prosperity as He chooses. (Prov. 2:1-11; 3:5-10)

5. supply CHAPTER 4 pp. 64-71 the amount of goods and services business firms are willing and able to provide at different prices

6. business firms CHAPTER 4 pp. 64-71 include all sellers of goods and services, not just major corporations

7. law of supply CHAPTER 4 pp. 64-71 the higher the price buyers are willing to pay, other things being held constant, the greater the quantity of a product a firm will produce and that the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce

8. supply schedule CHAPTER 4 pp. 64-71 a tabular model noting the quantities of an item that suppliers are willing to produce at various prices

9. supply curve CHAPTER 4 pp. 64-71 a graph illustrating the quantities of an item that suppliers are willing to produce at various prices

10. change in quantity supplied CHAPTER 4 pp. 64-71 whenever a change in the price consumers are willing to pay causes a change in the number of goods produced and sold

11. Changes in Supply decrease in supplydecrease in supply leftward shiftleftward shift suppliers produce less at any given pricesuppliers produce less at any given price CHAPTER 4 pp. 64-71

12. Changes in Supply increase in supplyincrease in supply rightward shiftrightward shift suppliers produce more at any given pricesuppliers produce more at any given price CHAPTER 4 pp. 64-71

13. 2.When supply increases, the supply curve shifts rightward from S 0 to S 2. 1.When supply decreases, the supply curve shifts leftward from S 0 to S 1. Figure 4.7 shows changes in supply. CHANGE IN SUPPLY (Bade 101)

14. Supply Shift Factors 1.Changes in technology 2.Changes in productivity or production costs 3.Changes in the price of related goods 4.Expectations 5.Number of sellers CHAPTER 4 pp. 64-71

15. 1. Changes in Technology improves tools used to produce goods and servicesimproves tools used to produce goods and services improves production or reduces costimproves production or reduces cost CHAPTER 4 pp. 64-71

16. CHAPTER 4 p. 68

17. 2. Changes in Production Costs costs of natural resources, labor, and capitalcosts of natural resources, labor, and capital changes in these costs affect supplychanges in these costs affect supply CHAPTER 4 pp. 64-71

18. CHAPTER 4 p. 68

19. 3. Changes in the Prices of Related Goods usually substitute goodsusually substitute goods shift production to the more-profitable goodshift production to the more-profitable good CHAPTER 4 pp. 64-71

20. CHAPTER 4 p. 71

22. SUPPLY by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education, New York, N.Y. Activities 6

23. OBJECTIVES Define supply schedule and supply curve.Define supply schedule and supply curve. Construct a supply curve using hypothetical data.Construct a supply curve using hypothetical data. Explain why producers are willing to supply more of a good or service when the price increases.Explain why producers are willing to supply more of a good or service when the price increases. Explain the difference between a shift in the supply curve and a movement along the supply curve.Explain the difference between a shift in the supply curve and a movement along the supply curve. Explain the difference between an increase in supply and an increase in the quantity supplied.Explain the difference between an increase in supply and an increase in the quantity supplied. Describe and analyze the forces that shift the supply curve.Describe and analyze the forces that shift the supply curve. Explain why a supply curve would shift to the right or left given specific changes in the economy.Explain why a supply curve would shift to the right or left given specific changes in the economy.

24. INTRODUCTION This lesson introduces supply, the other half of the market system.This lesson introduces supply, the other half of the market system. A supply schedule represents the quantities that firms are willing and able to supply at alternative prices.A supply schedule represents the quantities that firms are willing and able to supply at alternative prices. A supply curve is a graphical representation of the supply schedule.A supply curve is a graphical representation of the supply schedule.

25. INTRODUCTION Activity 6 reinforces the factors that cause a supply curve to shift, the direction of the shift and whether the shift represents an increase or decrease in supply.Activity 6 reinforces the factors that cause a supply curve to shift, the direction of the shift and whether the shift represents an increase or decrease in supply.

26. MOVEMENT ALONG A SUPPLY CURVE As the price declines from P 1 to P, the quantity decreases from Q 1 to QAs the price declines from P 1 to P, the quantity decreases from Q 1 to Q Price decreases, the quantity supplied decreases.Price decreases, the quantity supplied decreases.

27. SHIFT IN SUPPLY An increase in supply is a shift to the right( and a decrease in supply is a shift to the left).An increase in supply is a shift to the right( and a decrease in supply is a shift to the left). Increase in supply from S to S 1 shows that at the same price (P), the quantity increased from Q to Q 1.Increase in supply from S to S 1 shows that at the same price (P), the quantity increased from Q to Q 1.

28. SHIFT IN SUPPLY Factors that Shift supply: Number of suppliersNumber of suppliers Prices of resources used to produce goodPrices of resources used to produce good Prices of related goods producedPrices of related goods produced TechnologyTechnology Expectations about future pricesExpectations about future prices

29. Part APart A Read the eight newspaper headlines in Figure 6.2, and use the table to record the impact, if any, of each event on the supply of cars.Read the eight newspaper headlines in Figure 6.2, and use the table to record the impact, if any, of each event on the supply of cars. Use the first column to the right of the headline to show whether the event causes a change in supply.Use the first column to the right of the headline to show whether the event causes a change in supply. Use the next column to record whether the change is an increase or a decrease in supply.Use the next column to record whether the change is an increase or a decrease in supply. In the third column, decide whether the supply curve shifts left or right.In the third column, decide whether the supply curve shifts left or right. Finally, write the letter for the new supply curve.Finally, write the letter for the new supply curve. Use Figure 6.1 to help you.Use Figure 6.1 to help you. Always start at curve B, and move only one curve at a time.Always start at curve B, and move only one curve at a time. Two headlines imply that the supply of cars does not changeTwo headlines imply that the supply of cars does not change

30. ACTIVITY 6 YIncRC Y RC Y DecLA Y LA Y LA Y LA N-- N

31. Part BPart B Categorize each change in supply in Part A according to the reason why supply changed,Categorize each change in supply in Part A according to the reason why supply changed, In Figure 6.3, place an X next to the reason that the event described in the headline caused a change in supply.In Figure 6.3, place an X next to the reason that the event described in the headline caused a change in supply. In some cases, more than one headline could be matched to a reason.In some cases, more than one headline could be matched to a reason. Two headlines do not indicate a shift in supply.Two headlines do not indicate a shift in supply.

32. XXX X XX X X

33. PUMP PRIMER Using your textbook draw a supply & demand graph in equilibrium. Make sure to label the vertical and horizontal lines correctly. Price Quantity D S E

34. market equilibrium point CHAPTER 4 pp. 71-78 the point at which the demand curve and the supply curve for an item intersect

35. market equilibrium price CHAPTER 4 pp. 71-78 the price corresponding to the intersection of an item’s supply and demand curves; the price at which consumers are willing to buy the same quantity that suppliers are willing to produce

36. Economy of Scale the more produced, the cheaper each productthe more produced, the cheaper each product supply more with hopes that demand increasessupply more with hopes that demand increases CHAPTER 4 pp. 71-78

37. surplus CHAPTER 4 pp. 71-78 an excess of unsold products

38. Carrying Costs storagestorage securitysecurity insuranceinsurance spoilagespoilage CHAPTER 4 pp. 71-78

39. Carrying Costs loss of income while the product is sitting idleloss of income while the product is sitting idle interest costs on financing the unsold productioninterest costs on financing the unsold production CHAPTER 4 pp. 71-78

40. Surplus Solutions 1.increase demand 2.decrease supply 3.allow the price to fall to the market equilibrium point CHAPTER 4 pp. 71-78

41. 1. Increase Demand first and best solution for the supplierfirst and best solution for the supplier produce a great quantity and charge a higher priceproduce a great quantity and charge a higher price “demand solution”“demand solution” CHAPTER 4 pp. 71-78

42. CHAPTER 4 p. 73

43. 1. Increase Demand increasing tastes and preferencesincreasing tastes and preferences eliminate substitute goodseliminate substitute goods establish price floorsestablish price floors CHAPTER 4 pp. 71-78

44. 2. Decrease Supply cut productioncut production “supply solution”“supply solution” problems = competition reactionproblems = competition reaction CHAPTER 4 pp. 71-78

45. CHAPTER 4 p. 73

46. increase demand demand solutiondemand solution shifts the demand curveshifts the demand curve favored by suppliersfavored by suppliers decrease supply supply solutionsupply solution shifts the supply curveshifts the supply curve CHAPTER 4 pp. 71-78

47. 3. Allow the Price to Fall to the Market Equilibrium Point the market does the workthe market does the work supplier = gradually lowers pricesupplier = gradually lowers price buyer = purchases more at lower pricebuyer = purchases more at lower price surplus gone; price stops fallingsurplus gone; price stops falling CHAPTER 4 pp. 71-78

48. CHAPTER 4 p. 74

49. Shortage caused by the price of a good being held lower than its market equilibrium pricecaused by the price of a good being held lower than its market equilibrium price not enough of a goodnot enough of a good CHAPTER 4 pp. 71-78.

50. CHAPTER 4 p. 74

51. Price Ceilings government restrictions on pricesgovernment restrictions on prices prevent prices from rising to equilibrium valueprevent prices from rising to equilibrium value always causes shortagesalways causes shortages CHAPTER 4 pp. 71-78.

52. loss leaders CHAPTER 4 pp. 71-78 products that are deliberately sold at a loss to lure customers

53. Shortage Solutions 1.decrease demand 2.increase supply 3.allow the price to rise to the market equilibrium point CHAPTER 4 pp. 71-78

54. 1. Decrease Demand “demand solution”“demand solution” by discouraging demand for a productby discouraging demand for a product CHAPTER 4 pp. 71-78

55. CHAPTER 4 p. 75

56. 2. Increase Supply “supply solution”“supply solution” management of supplymanagement of supply two ways of increasing supplytwo ways of increasing supply 1.improving technology 2.boosting productivity CHAPTER 4 pp. 71-78

57. CHAPTER 4 p. 77

58. decrease demand demand solutiondemand solution shifts demand curveshifts demand curve dangerous to suppliersdangerous to suppliers increase supply supply solutionsupply solution shifts supply curveshifts supply curve focus on technology or productionfocus on technology or production CHAPTER 4 pp. 71-78

59. 3. Allow the Price to Rise to the Market Equilibrium Point not imposing price ceilingsnot imposing price ceilings benefitsbenefits encourages conservation and discourages wastefulnessencourages conservation and discourages wastefulness motivates entrepreneurs to enter the marketmotivates entrepreneurs to enter the market CHAPTER 4 pp. 71-78

60. CHAPTER 4 p. 78

61. EQUILIBRIUM Activity 7 by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education, New York, N.Y.

62. OBJECTIVES Define equilibrium price and equilibrium quantity.Define equilibrium price and equilibrium quantity. Determine the equilibrium price and quantity when given the demand for and supply of a good or commodity.Determine the equilibrium price and quantity when given the demand for and supply of a good or commodity. Explain why, at prices above or below the equilibrium price, market forces operate to move the price back toward equilibrium price.Explain why, at prices above or below the equilibrium price, market forces operate to move the price back toward equilibrium price. Predict the equilibrium price and quantity if there are changes in demand or supply.Predict the equilibrium price and quantity if there are changes in demand or supply. Given a change in supply or demand, explain which curve shifted and why.Given a change in supply or demand, explain which curve shifted and why. Explain how markets act as rationing devices.Explain how markets act as rationing devices.

63. Define price elasticity of demand and price elasticity of supply.Define price elasticity of demand and price elasticity of supply. Calculate price elasticity using the arc method.Calculate price elasticity using the arc method. Predict the effect on price and quantity given demand curves with different elasticity's.Predict the effect on price and quantity given demand curves with different elasticity's. Explain the difference between slope of a line and the elasticity between two points on a line.Explain the difference between slope of a line and the elasticity between two points on a line.

64. INTRODUCTION This lesson will bring the two sides of the market—demand and supply—together to determine the equilibrium price and quantity.This lesson will bring the two sides of the market—demand and supply—together to determine the equilibrium price and quantity. You should understand that unless there are forces operating to change supply or demand, the price and quantity will remain at the equilibrium.You should understand that unless there are forces operating to change supply or demand, the price and quantity will remain at the equilibrium.

65. Activity 7 brings the supply and demand sides of the market together and helps the students understand equilibrium price and quantity.Activity 7 brings the supply and demand sides of the market together and helps the students understand equilibrium price and quantity. The factors that shift supply and demand are also used to emphasize the impact of supply or demand on the equilibrium price and quantity.The factors that shift supply and demand are also used to emphasize the impact of supply or demand on the equilibrium price and quantity. The second part of Activity 7 has you work through changes in supply and demand and the effects in related markets.The second part of Activity 7 has you work through changes in supply and demand and the effects in related markets.

66. EQUILIBRIUM QUANTITY AND PRICE A.What happens if the price is $10? The quantity supplied is 100, and the quantity demanded is 60. Therefore, there is excess supply.

67. EQUILIBRIUM QUANTITY AND PRICE B.What happens if the price is $6? The quantity demanded is 100, and the quantity supplied is 60. Therefore, there is excess demand.

68. EQUILIBRIUM QUANTITY AND PRICE C.What happens if the price is $8? The quantity that producers want to sell is exactly equal to the quantity that buyers want to buy. The market is in equilibrium.

69. ACTIVITY 7 Find one partner (not your close friend)!Find one partner (not your close friend)! Complete Activity 7.Complete Activity 7. You will be called upon to come to the board and share your answers.You will be called upon to come to the board and share your answers.

70. S D E

71. 1.Under these conditions, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of _____ million Greebes. (Equilibrium price and quantity) 2.If the price currently prevailing in the market is $0.30 per Greebe, buyers would want to buy ____ Greebes. And sellers would want to sell ____ million Greebes. Under these conditions, there would be a (shortage / surplus) of _____ million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of ____ per Greebe. (Market Equilibrium price) $ 0.25 200 150 250 100 $0.25

72. At this new price (equilibrium), buyers would now want to buy ____ million Greebes, and sellers now want to sell ____ million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by ____ million Greebes, and the (supply / quantity demanded) changed by ____ million GreebesAt this new price (equilibrium), buyers would now want to buy ____ million Greebes, and sellers now want to sell ____ million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by ____ million Greebes, and the (supply / quantity demanded) changed by ____ million Greebes 200 50

73. 3. If the price currently prevailing in the market is $0.20 per Greebe, buyers would want to buy ____ million Greebes, and sellers would want to sell ____ million Greebes. Under these conditions, there would be a (shortage / surplus) of ____ million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of ____ per Greebe. At this new price buyers would now want to buy ____ million Greebes, and sellers now want to sell ____ million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by 50 Greebes, and the (supply / quantity supplied) changed by ____ million Greebes. 250 150 100 $0.25 200 50

74. SS1S1 D E E1E1 4. Now, suppose a mysterious blight causes the supply schedule for Greebes to change to the following:

75. Under these conditions, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes.Under these conditions, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes. Compare with the equilibrium price in Question 1, we say that because of this change in (price, underlying conditions), the (supply / quantity supplied) changed; and both the equilibrium price and the equilibrium quantity changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased).Compare with the equilibrium price in Question 1, we say that because of this change in (price, underlying conditions), the (supply / quantity supplied) changed; and both the equilibrium price and the equilibrium quantity changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased). $0.30 150

76. SS1S1 DD1D1 E E1E1 E2E2 5. Now, with the supply schedule at S 1, suppose further that a sharp drop in people’s income as the result of a prolonged recession cause the demand to change to the following:

77. Under these conditions, with the supply schedule at S 1, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes. Compare with the equilibrium price in Question 4, because of this change in (price / underlying conditions), the (demand / quantity demanded) changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased).Under these conditions, with the supply schedule at S 1, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes. Compare with the equilibrium price in Question 4, because of this change in (price / underlying conditions), the (demand / quantity demanded) changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased). 6. The movement from the first equilibrium price and quantity to the equilibrium price and quantity is the result of a (price / nonprice) effect. $0.25 100

78. S1S1 S1S1 D1D1 D1D1

79. S1S1 D1D1 D1D1 D1D1

80. D1D1 D1D1 D1D1 D1D1