Lesson 2 Market Supply

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

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

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

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

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.

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

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

Change in Quantity Supplied versus Change in Supply 30

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

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

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

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

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

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

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

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

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

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

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…

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