Chapter 5/6: Supply/Prices

Section 1: Understanding Supply Supply is the counterpart to demand, together they shape markets.

Supply Supply is the amount of goods or services available.

Law of Supply Price Supply Price Supply Suppliers will offer more of a good at a higher price, and vice versa.

Price of a slice of pizza Quantity of slices supplied Supply Schedule Price of a slice of pizza Quantity of slices supplied $.50 1 $1.00 2 $1.50 3 $2.00 4 $2.50 5 A supply schedule is a table that lists quantity supply levels at different prices.

Market Supply Schedule Price of a slice of pizza Quantity of slices supplied $.50 1 million $1.00 2 million $1.50 3 million $2.00 4 million $2.50 5 million A market supply schedule charts supply levels for an entire economy.

Supply Curve Supply curves plot the data from demand schedules onto a graph.

Creating our own supply schedule How much would you sell an ipad for?

Elasticity of Supply Elasticity measures the way supply responds to changes in price. Elastic supply = supply changes greatly Inelastic supply = supply doesn’t change much

Elastic Supply An increase/decrease in price greatly impacts the level of supply. Examples?

Inelastic Supply An increase/decrease in price doesn’t greatly impact the level of supply. Examples?

Section 3: Costs of Production Supply is influenced not only by demand, but by the costs of production.

Costs Costs can be divided into two categories… Fixed cost: a cost that does not change, no matter how much is produced. Variable cost: A cost that rises and falls depending on how much is produced.

Business Cost Exercise With a partner, quickly create a business idea. Come up with a list of all the different costs you will have in supplying your good/service.

Business Cost Exercise With a partner, quickly create a business idea. Come up with a list of all the different costs you will have in supplying your good/service. Determine which are fixed costs and which are variable.

Examples of Fixed and Variable Costs Rent/mortgage Equipment purchase/repair Property taxes Salaries of workers Variable: Extra resources to produce more Extra employees Advertising/Marketing Utilities: heat/electric

Total Cost Fixed costs + variable costs = total cost

Managing Variable Costs Businesses need to decide whether creating additional supply is worth the additional costs.

Section 3: Changes in Supply Like demand curves, sometimes shifts occur along the curve, and sometimes the entire curve shifts.

Supply Shifts Impacts on supply include… Change of price for good/service Production costs Technology Government influence on supply

Supply Curve Supply Curves can shift right or left depending on increased or decreased supply levels at all costs.

Supply Decrease

Impacts on Supply: Technology Improved technology often increases the potential supply for goods or services.

Impacts on Supply: Government Subsidies: government payment to support a business or market. Examples: agriculture, oil

Impacts on Supply: Taxes Taxes impact supply levels Excise tax: tax on the production or sale of a good (often to discourage their supply)

Impacts on Supply: Government Regulation: government regulation can increase or decrease supply. Example: environmental regulation

Future Expectations Future expectations impact supply: will the demand go up or down for this product?

Chapter 6: Prices Prices are always changing, based on availability (supply) and demand.

Section 1: Combining Supply & Demand Together, supply and demand interact to determine prices.

Equilibrium Price The point where demand and supply meet is the equilibrium point where prices are set.

Supply/Demand Schedule Price of a slice of pizza Quantity of slices supplied Quantity of slices Demanded $.50 1 5 $1.00 2 4 $1.50 3 $2.00 $2.50

Supply/Demand Curve Equilibrium point is where the two lines intersect.

Disequilibrium Disequilibrium occurs whenever the amount supplied is not equal to the amount demanded at a certain price.

Excess Demand Excess demand occurs when there is more demand than supply.

Excess Demand When the price is below equilibrium, excess demand occurs.

Excess Supply Excess supply happens when there is more supply than demand.

Excess Supply When the price is above equilibrium, excess supply occurs.

Government Intervention: Price Ceilings Sometimes government intervenes to control prices. Price ceiling: a maximum price that can be legally charged for something. Example: rent control

Price Ceiling

Government Intervention: Price Floor Price Floor: a minimum amount that can be charged for an item. Example: Agriculture, minimum wage.

Price Floor

Section 2: Changes in Equilibrium As supply and demand shift, equilibrium prices change.

Shifts in Supply If demand remains the same… Example: bacon shortage! An increase in supply will lower price. A decrease in supply will raise the price. Example: bacon shortage!

Increase in Supply Curve A new supply curve changes the equilibrium price.

Decrease in Supply Curve A new supply curve changes the equilibrium price.

Shifts in Demand If supply remains the same… An increase in demand will increase the equilibrium price. A decrease in demand will lower equilibrium price. Example: Ironic, hipster t-shirts

Increase in Demand Curve P2 P1 A new demand curve changes the equilibrium price.

Decrease in Demand Curve P1 P2 A new demand curve changes the equilibrium price.

What if both Demand and Supply Increase (or Decrease)? Housing: increased demand + increased supply = consistent prices

What if both Demand and Supply Increase (or Decrease)?

What if demand increases and supply decreases? Fossil Fuels (Oil) Increased demand + decreased supply = runaway price increases

What if demand increases and supply decreases?