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

Bob Jones University Press. 1998 “ECONOMICS ” By Alan J. Carper Bob Jones University Press. 1998

Chapter 4: “Supply and Prices” Unit I: What Is Economics?

Objectives: 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.

BIBLICAL INTEGRATION: 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)

SUPPLY The Law of Supply Supply is the “amount of goods and services business firms are willing and able to provide at different prices.” The Law of Supply The “higher the price buyers are willing to pay, other things being held constant, the greater the quantity of the product a supplier will produce.” Likewise, if the price of a good falls, the quantity supplied of that good decreases. (Carter 30)

Supply Schedule and Supply Curve A supply schedule is a list of the quantities supplied at each different price when all other influences on selling plans remain the same. A supply curve is a graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same. (Bade 99)

SUPPLY (Bade 99)

Individual Supply and Market Supply Market supply is the sum of the supplies of all sellers in a market. The market supply curve is the horizontal sum of the supply curves of all the sellers in the market. (Bade 100)

SUPPLY (Bade 100)

Change in Supply A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. (Bade 101)

Change in Supply 1. When supply decreases, the supply curve shifts leftward from S0 to S1. 2. When supply increases, the supply curve shifts rightward from S0 to S2. When you draw a shift of the supply curve, again be careful to draw the arrows in the horizontal direction. Follow the text by always describing shifts of supply curves as “rightward” or “leftward.” Do not say that the curves shift “up” or “down.” This description of a shift is especially confusing for the supply curve. A rightward shift of the supply curve makes it look as if the curve is moving lower. Students who do not think in terms of “rightward” and “leftward” believe this shift reflects a decrease in supply, which is wrong. Get the student to always go left and right and draw the shift arrows too. Figure 4.7 shows changes in supply. (Bade 101)

Change in Supply The main influences on selling plans that change supply are Prices of related goods Prices of resources and other Inputs Expectations Number of sellers Productivity (Bade 101)

Substitute in Production A change in the price of one good can bring a change in the supply of another good. A substitute in production is a good that can be produced in place of another good. For example: cookie dough ice cream for chocolate chip ice cream in an ice cream factory. The supply of a good increases if the price of one of its substitutes in production falls. The supply a good decreases if the price of one of its substitutes in production rises. (Bade 101)

Complement In Production A complement in production is a good that is produced along with another good. For example: straw and wheat The supply of a good increases if the price of one of its complements in production rises. The supply a good decreases if the price of one of its complements in production falls. (Bade 102)

Prices of Resources and Expectations Prices of Resources and Other Inputs Resource and input prices influence the cost of production. And the more it costs to produce a good, the smaller is the quantity supplied of that good. Expectations Expectations about future prices influence supply. Expectations of future input prices also influence supply. (Bade 102)

Number of Sellers & Productivity The greater the number of sellers in a market, the larger is supply. Productivity Productivity is output per unit of input. An increase in productivity lowers costs and increases supply. For example, an advance in technology. A decrease in productivity raises costs and decreases supply. For example, a severe hurricane. (Bade 102)

Change in Quantity Supplied vs Change in Supply A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good. A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. (Bade 102)

Change in Quantity Supplied vs Change in Supply Figure 4.8 illustrates and summarizes the distinction (Bade 103)

National Council on Economic Education, New York, N.Y. Activity 6 Supply National Council on Economic Education, New York, N.Y.

Supply Activities 5 by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education, New York, N.Y.

Objectives Define supply schedule and supply curve. 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 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. 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.

Introduction 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 curve is a graphical representation of the supply schedule. Remember, understanding a market is essential to success in AP Economics!

Introduction In Activity 5, you will graph a supply schedule, which will help you understand the implications of a shift in the supply curve. The activity then focuses on the factors that shift the supply curve. 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.

Movement Along a Supply Curve As the price declines from P1 to P, the quantity decreases from Q1 to Q Price decreases, the quantity supplied decreases.

Shift in Supply 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 S1 shows that at the same price (P), the quantity increased from Q to Q1.

Shift in Supply Factors that Shift supply: Number of suppliers Prices of resources used to produce good Prices of related goods produced Technology Expectations about future prices

Activity 6: Reasons for Changes in Supply Part 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. 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. In the third column, decide whether the supply curve shifts left or right. Finally, write the letter for the new supply curve. Use Figure 6.1 to help you. Always start at curve B, and move only one curve at a time. Two headlines imply that the supply of cars does not change

Activity 6 Y Inc R C Y Inc R C Dec L A Y Y Dec L A Y Dec L A Y Dec L A -- -- -- N -- -- --

Part B 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 some cases, more than one headline could be matched to a reason. Two headlines do not indicate a shift in supply.

X X X X X X X X

Market Equilibrium Market equilibrium occurs when the quantity demanded equals the quantity supplied—when buyers’ and sellers’ plans are consistent. Equilibrium price is the price at which the quantity demanded equals the quantity supplied. Equilibrium quantity is the quantity bought and sold at the equilibrium price. (Bade 105)

Equilibrium Price and Equilibrium Quantity 1. Market equilibrium at the intersection of the demand curve and the supply curve. 2. The equilibrium price is $1 a bottle. 3. The equilibrium quantity is 10 million bottles a day. Figure 4.9 shows the equilibrium price and equilibrium quantity. (Bade 105)

Price: A Market’s Automatic Regulator Law of market forces When there is a shortage, the price rises. When there is a surplus, the price falls. Surplus or Excess Supply is the quantity supplied exceeds the quantity demanded. Shortage or Excess Demand is the quantity demanded exceeds the quantity supplied. The law of market forces is important, so you want your students to grasp why prices are driven to the equilibrium. You can choose a good, like concert tickets to the hottest band. Draw a demand-supply graph with a reasonable equilibrium price and quantity. Ask the students what would happen if the concert promoter decided to charge only $10 a ticket. Would students line up before dawn to buy them? Yes! Explain that this is a case of excess demand. Ask them what could the promoter do to get the crowds to go away? Hopefully they will answer, “Raise ticket prices!” Show them how the market pressures the price to rise to the equilibrium price and use the graph to show how the promoter and students move up their respective supply and demand curves. You can do the same thing for excess supply. Let the promoter try to sell tickets for $1,000 each. Again, move down along the supply and demand curves as the market pressures the price to fall. (Bade 106)

Forces that Achieve Equilibrium At $1.50 a bottle: 1. Quantity supplied is 11 million bottles. 2. Quantity demanded is 9 million bottles. 3. There is a surplus of 2 million bottles. 4. Price falls until the surplus is eliminated and the market is in equilibrium. Figure 4.10(b) market achieves equilibrium. (Bade 106)

Forces that Achieve Equilibrium At 75 cents a bottle: 1. Quantity is demanded 11 million bottles. 2. Quantity supplied is 9 million bottles. 3. There is a shortage of 2 million bottles. The magic of market equilibrium and the forces that bring it about and keep the market there need to be demonstrated with the basic diagram, with intuition, and, if you’ve got the time, with hard evidence in the form of further class activity. If you did the demand experiment, you might want to begin with that and explain that in the classroom market, the supply was fixed (so there was vertical supply curve) at the quantity of bottles that you brought to class. The equilibrium occurred where the market demand curve (demand by the students) intersected your supply curve. Then, if you did the supply experiment, you can explain that in that classroom market, demand was fixed (so there was a vertical demand curve) at the quantity that you had decided to buy. The equilibrium occurred where the market supply curve (supply by the students) intersected your demand curve. Point out that the trades you made in your classroom economy made buyers and sellers better off. If you want to devote a class to equilibrium and the gains from trade in a market, you might want to run a double oral auction. There are lots of descriptions of these and one of the best is at Charlie Holt’s http://veconlab.econ.virginia.edu/admin.htm 4. Price rises until the shortage is eliminated and the market is in equilibrium. Figure 4.10(a) market achieves equilibrium. (Bade 106)

Surplus & Shortage Solutions to surplus: Solutions to shortage: Increase demand Decrease supply Allow the price to fall to the market equilibrium point (price cutting) – the simplest solution. Solutions to shortage: Decrease demand Increase supply Allow the price to rise to the market equilibrium point. (Carper. 40-44)

Effects of Changes in Demand Event: A new study says the public water is unsafe. To work out the effects on the market for bottled water: With public water being unsafe, demand for bottled water changes. The demand for bottled water increases, the demand curve shifts rightward. What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 107)

Effects of Change in Demand 1. An increase in demand shifts the demand curve rightward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. The quantity supplied increases along the supply curve. Tell students that they will do much better on the exam if they DRAW the demand-supply graph to answer a question. Show them how much easier it is to see the effects of a change in demand or a change in supply or both on the equilibrium price and equilibrium quantity if they draw the graph. 4. Equilibrium quantity increases. Figure 4.11(a) illustrates the outcome. (Bade 107)

Emphasize the distinction between a change in demand and a change in the quantity demanded. At this point, the students know enough for it to be worthwhile emphasizing the magic of the market’s ability to coordinate plans and reallocate resources.

Effects of Change in Demand Event: A new zero-calorie sports drink is invented. To work out the effects on the market for bottled water: The new drink is a substitute for bottled water, so the demand for bottled water changes The demand for bottled water decreases, the demand curve shifts leftward. What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 107)

Effect of Change in Demand 1. A decrease in demand shifts the demand curve leftward. 2. At $1.00 a bottle, there is a surplus, so the price falls. 3. Quantity supplied decreases along the supply curve. Now emphasize the distinction between a change in supply and a change in the quantity supplied. 4. Equilibrium quantity decreases. Figure 4.11(b) shows the outcome. (Bade 107)

Effects of Changes in Supply Event: Europeans produce bottled water in the United States. To work out the effects on the market for bottled water: With more suppliers of bottled water, supply changes. The supply of bottled water increases, the supply curve shifts rightward. What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 108)

Effects of Change in Supply 1. An increase in supply shifts the supply curve rightward. 2. At $1.00 a bottle, there is a surplus, so the price falls. 3. Quantity demanded increases along the demand curve. 4. Equilibrium quantity increases. Figure 4.12(a) shows the outcome. (Bade 108)

MARKET EQUILIBRIUM Event: Drought dries up some springs in the United States. To work out the effects on the market for bottled water: Drought changes the supply of bottled water. The supply of bottled water decreases, the supply curve shifts leftward. What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 108)

Effects of Change in Supply 1. A decrease in supply shifts the supply curve leftward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. Quantity demanded decreases along the demand curve. 4. Equilibrium quantity decreases. Figure 4.12(b) shows the outcome.

Changes in Both Demand & Supply When two events occur at the same time, work out how each event influences the market: Does each event change demand or supply? Does either event increase or decrease demand or increase or decrease supply? What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 110)

Demand & Supply Change in the Same Direction The figure shows the effects of an increase in both demand and supply. An increase in demand shifts the demand curve rightward; an increase in supply shifts the supply curve rightward. 1. Equilibrium quantity increases. 2. Equilibrium price might rise or fall. (Bade 110)

Increase in Both Demand and Supply Increases the equilibrium quantity. The change in the equilibrium price is ambiguous because the: Increase in demand raises the price. Increase in supply lowers the price. (Bade 110)

Increase in Both Demand and Supply This figure shows the effects of a decrease in both demand and supply. A decrease in demand shifts the demand curve leftward; a decrease in supply shifts the supply curve leftward. 3. Equilibrium quantity decreases. 4. Equilibrium price might rise or fall. (Bade 110)

Decrease in Both Demand and Supply Decreases the equilibrium quantity. The change in the equilibrium price is ambiguous because the: Decrease in demand lowers the price Decrease in supply raises the price. (Bade 110)

Decrease in Both Demand and Supply The figure shows the effects of an increase in demand and a decrease in supply. An increase in demand shifts the demand curve rightward; a decrease in supply shifts the supply curve leftward. 1. Equilibrium price rises. 2. Equilibrium quantity might increase, decrease, or not change. (Bade 110)

Increase in Demand and Decrease in Supply Raises the equilibrium price. The change in the equilibrium quantity is ambiguous because the: Increase in demand increases the quantity. Decrease in supply decreases the quantity. (Bade 111)

MARKET EQUILIBRIUM This figure shows the effects of a decrease in demand and an increase in supply. A decrease in demand shifts the demand curve leftward; an increase in supply shifts the supply curve rightward. 3. Equilibrium price falls. 4. Equilibrium quantity might increase, decrease, or not change. (Bade 111)

Decrease in Demand and Increase in Supply Lowers the equilibrium price. The change in the equilibrium quantity is ambiguous because the: Decrease in demand decreases the quantity. Increase in supply increases the quantity. (Bade 111)

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

Objectives Define equilibrium price and equilibrium quantity. 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. 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. Explain how markets act as rationing devices.

Objectives Define price elasticity of demand and price elasticity of supply. Calculate price elasticity using the arc method. 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.

Introduction 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.

Introduction 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 second part of Activity 7 has you work through changes in supply and demand and the effects in related markets.

Equilibrium Quantity and Price What happens if the price is $10? The quantity supplied is 100, and the quantity demanded is 60. Therefore, there is excess supply.

Equilibrium Quantity and Price What happens if the price is $6? The quantity demanded is 100, and the quantity supplied is 60. Therefore, there is excess demand.

Equilibrium Quantity and Price 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.

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

S1 S E1 E E2 D1 D

S1 S1 D1 D1

S1 D1 D1 D1

D1 D1 D1 D1

Works Cited Carper, Alan. Economics for Christian Schools. Greenville: Bob Jones University Press, 1998. "The New King James Version." Logos Bible Software. CD_ROM. ed. 2004.