Key Terms Supply: The amount of goods available Law of supply: If the price increases the supply will increase Supply schedule: A chart that list the quantity that will be supplied at different prices. Elasticity of Supply: A measure of how the supply will react to changes in price. Fixed cost: A cost that does not change Variable cost: A cost that rises or decreases depending on the level of production.

Key Terms Subsidy: A government payment that supports a business or market. Excise Tax: A tax on the production or sale of a good. Equilibrium: The point at which the supply and demand are equal. Disequilibrium: Any price or quantity that is not at equilibrium Rent control: A price ceiling placed on rents

Why does supply increase? Current producers making a profit produce more and new producers enter the market. Can you think of any examples?

Katrina and Supply Why did Katrina drive up prices? Which items were in demand? How did supply increase?

Disco For example Disco Music in the 1970s.

“The Disco Trend” As a few bands became popular, more disco bands were started and record companies released more albums.

Atkins The popularity of low Carb diets have lead to an increase in the number of producers marketing low carb products.

Round Table Goes “skinny” Here’s the ‘Skinny’: Round Table Pizza rolls out low-carb pizza

Individual and Market Supply Schedules The relationship between price and the individual/market supply from firm(s)

Individual Supply Curve for Pizza Mario’s Pizza Palace (Only) Price Per SliceSlices Supplied $ $ $ $ $ $

Market Supply Curve for Pizza All Pizza Places in Walnut Creek Price Per SliceSlices Supplied $0.501,000 $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500

Individual Supply Curve The quantity of goods or services supplied at various prices by one firm. For example, Mario’s Pizza Palace

Market Supply Curve The total quantity of goods or services supplied at various prices by all the firms. For example, Pizza places in Walnut Creek

Lets look at the Widgets Supply Schedule “Zac’s Widgets and More” Price of Widgets Sellers will Supply $ $ $ $

The Supply Curve for Zac’s

Draw a Supply Curve for Mario’s Pizza Palace (Only) Price Per SliceSlices Supplied $ $ $ $ $ $

Draw a supply Curve for All Pizza Places in Walnut Creek Price Per SliceSlices Supplied $0.501,000 $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500

Supply and Elasticity Just as consumers react to changes in price so too suppliers will also react to changes in price. Elasticity of supply is based upon the same concept. Elasticity of supply is a measure of how suppliers will react to a change in price.

Inelasticity If supply is inelastic there will be little if any change in the quantity supplied.

In the short run The key to determining if supply is elastic or inelastic is time. For most firms it is not possible to react quickly to changes in price. Longer term changes are more practical.

For example If the price of orange juice increases, suppliers will want to increase production.

The problem however is that it takes time to plant more trees. The grower will have to wait several years to increase his potential production.

A factory The same is true with regards to producing manufactured goods. Significant increases in the quantity supplied may require expanding your factory or possibly building a new plant and hiring additional workers.

Cost of Production Fixed costs: A cost that does not change. For example the cost of a building used by a firm. Regardless of the output the rent or other building costs will remain constant. Variable: Costs that rise or fall based upon production

Examples of variable costs Teachers: If there were a sudden drop in enrollment, the school might “lay- off” teachers, possibly even Lopez!. You are producing cars, each of which requires 4 tires. Produce 10,000 less cars and you will need 40,000 less tires.

Total cost The total cost is the combination of fixed and variable costs.

Changes in Supply Input costs –Effect of rising costs –Technology Government influences –Subsidies –Taxes –Regulation

Input Costs Rising costs: If a producer is confronted with increases in labor or other costs, the supplier’s most profitable level of production will change and the supplier will seek to adjust supply. Technology: Advances in technology can lower production costs and the supplier may be willing to provide larger quantities of goods or services at the same price.

Examples of changes in Technology and increases in supply As new computer chips have lowered the cost of memory etc, the suppliers of PC’s have increased the quantity supplied at lower prices. Companies may also increase efficiency by replacing workers with robots, the use of which lowers production costs.

Government Subsidies: The government can attempt to increase the supply of a good or service by providing subsidies or payments to producers. The government sometimes provides subsidies to providers of low cost housing, to farmers, to health providers.

Government Taxes: By placing an excise tax on a commodity the government can increase the cost to consumers and reduce demand. Can you think of any examples? Gas, Liquor, Cigarettes

Government Regulations: Regulations can increase the cost of doing business. Regulations might relate to waste disposal, pollution controls, minimum wage, requiring benefits etc.

Other influences on supply Future expectations: If suppliers believe that prices will remain constant or increase they will continue to invest in supplying this product and possibly increase supply. If they believe prices may drop they will reduce the quantity supplied. Fears of inflation (rising prices overall) will reduce their willingness to continue to supply the same quantities at current prices.

Airline Fares Several airlines have responded to increases in fuel cost by placing a surcharge on airfares. What are they saying about the cost of fuel? They are predicting that the higher costs are here to stay and may increase further.

Number of suppliers Changes in the quantity supplied also depend on the number of suppliers. If more producers start supplying a product the market supply schedule will increase.

Shifts in Supply Curves Changes in the quantity supplied will result in shifts in the supply curve. For example lets look again at the Widgets. If a new technology permits us to increase production while reducing costs or if a new cheaper method were found to transport our widgets to market we will be willing to increase the quantity supplied at the various prices.

What happened to the quantity we are willing to supply at $3.00?

Combining Supply and Demand How do consumers get the products and serves that they want in a market that rewards firms for producing what the consumers desire.

Remember that Market Demand Curve for Widgets?

And the Market supply curve for Widgets?

You can combine the information in a market supply and demand schedule PriceQuantity Demanded by Consumers Quantity Supplied by Businesses $ $ $ $

And graph the data on a Market Supply and Demand Curve

Individual Supply and Demand Schedule for Pizza PriceQSQD

Market Supply and Demand Schedule for Pizza Use the data from your market demand and your market supply schedules to make a market demand and supply schedule.

Equilibrium The point of balance between price and quantity demanded and supplied. On a graph it is where the two curves intercept. In this case at $3.00

Disequilibrium Occurs when the quantity supplied is not equal to the quantity demanded. On a supply and demand curve it is anywhere other than where the two curves intercept.

Causes of Disequilibrium Excess Demand: The quantity demanded is greater than the quantity supplied. Excess Supply: The quantity supplied is greater than the quantity demanded.

Excess Demand At price P1 the quantity that can be purchased is Q1 even thought consumers demand Q2

Excess Supply If price is P2, only Q1 will be purchased even though sellers are willing to sell more, Q2.

Government Intervention While a free market will move towards equilibrium, the government can at times impose a price ceiling or price floor that results in disequilibrium. Can you think of a price ceiling? Can you think of a price floor?

Price Ceiling (Rent Control) In seeking to set the maximum rent, the government can create a shortage. For example, if the ceiling is below the equilibrium or market clearing price at Pc, the equilibrium or market clearing price becomes illegal. While buyers might be demanding Q4 at Pc, sellers will only sell Q1.

Rent Control Started during WWII to prevent inflation during a housing crisis resulting from people migrating to cities for higher paying jobs, it is now used to try and help renters find housing in areas they could not otherwise afford.

The Effects of Rent Control With income limited, what incentive is there for the landlord to maintain or improve an apartment? Since there is excess demand, landlords (suppliers) can also discriminate, provide substandard housing. With the price set lower, there is increased demand and even more consumers are not “satisfied”. Since the price is always below the equilibrium or market clearing price, rent control always results in a shortage of housing.

Disincentive Why is there an disincentive to supply new housing? Why do landlords supply housing…profit? If profits rise why would landlords want to supply more housing…more profits? Rent control limits the profits? Less profits means less reasons to supply more housing.

The Effects of Rent Control…

Why is the City of New York one of the largest landlords in the city? Landlords abandon buildings that are losing money. Rent Control discourages others from purchasing these units.

Permanent Shortage of Housing Since rent control establishes a price below equilibrium, at below equilibrium there is always excess demand, rent control always results in a shortage of housing.

Price Floors (Minimum Wage) In seeking to provide a “decent wage” for workers, the government establishes the minimum wage that can legally be paid. If the minimum wage is Pf which is greater than Pe (market clearing price or equilibrium), the price (wage) at which we achieve full employment is illegal.

Permanent Unemployment It might be possible to create more jobs by lowering wages but what can a firm do to hire additional workers without paying minimum wage? Deny benefits otherwise given Pay employees lower wage off the books. Use illegal workers and pay lower wages Export jobs

Price Supports Why does the government distribute “free cheese” to the poor and elderly? The government also provides subsidies to encourage suppliers to provide a good or service. What is the result of these subsidies? Excess Supply…The government has warehouses full of cheese and other products.

Changes in Equilibrium A shift in either a demand or supply curve will change equilibrium.

Economics and Social Justice Too often people discuss economics from a social justice point of view taking about “fairness” or what is “right”. You cannot win with these arguments because the strongest arguments are those made by the free market

Why Lopez supports Minimum Wage I support Minimum wage because I agree people sometimes require a “living” wage higher than that provided within the free market In making the point as to why I support this price floor however I use economic arguments rather than those heard in religion classes or preached in churches.

The Simple Fact Is… Most economists agree full employment is inflationary, since minimum wage results in a permanent excess supply of labor (unemployment) it is anti-inflationary. In addition while it causes unemployment it can increase overall consumption of goods and services.

For example If we have $1,000 people working for $7,00 each this creates $7,000 in demand or consumption. Increasing the minimum wage to $8.00 will increase unemployment costing perhaps 50 people their jobs. Overall however we now have 950 people each earning $8.00 which represents $7,600 in demand or comsumption.

Types of Business OPrganization Sole Proprietorship Partnership (general or limited) Corporation

What is discriminatory Pricing Have you noticed how seniors can eat cheaper than the rest of us? They just need to admit their age and eat dinner at 4pm. Why so early? Why not…they can be in bed by 6. Do families with kids ever get any breaks?

Consider this How is it possible that DLS can raise tuition and still have a full school of students or that a popular Broadway show or concert can raise ticket prices and still sell out?

Question Is attending De La Salle, going to a popular Broadway Show or popular concert inelastic?

The line at the door Since DLS typically receives an excess in applications, there was no problem in taking in 260 new freshmen. Sometimes if there is excess demand for a good or service, a price increase will result in the increase in revenue desired.

Tuition is in fact Elastic The school recognized that for some families already enrolled the increase could be a problem so financial aid was increased by almost $200,000. How significant is the tuition paid to LHS by your family?

Bottom Line DLS cannot accept everyone who applies. The school however, will never raise tuition to equilibrium. DLS likes to design each new freshman class and they need excess demand to accomplish this.

Some people will have skip the show or concert Higher prices will reduce the demand for the tickets. Since there are so many people (excess demand) who want those tickets it will create shorter lines but all the tickets will still sell.