Chapter 7 Supply

© OnlineTexts.com p. 2 The Law of Supply The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Why do producers produce more output when prices rise? They seek higher profits They can cover higher marginal costs of production

Supply schedule Graph the schedule. How is this different from a demand curve?

© OnlineTexts.com p. 4 Supply Curve The supply curve has a positive slope, consistent with the law of supply.

Practice Graphing Graphing a supply schedule. Draw the graph. Label the axis. Plot the points. Connect to create supply curve. Video Example of creating a supply curve Graphing from a supply equation. Q=a+(b x price) Solve equation. Determine interception points. Draw the graph. Label the axis. Plot points based on rise and run. (rise / run) Connect points to create supply curve.

Supply Schedule Practice Graph the supply curves for the schedules below. Graph 1: Plot schedules S 1 and S 2 Graph 2: Plot schedules S 1, S 2 and S 3 S1S1 S2S2 S2S2 S1S1 S3S3

Reason for law of supply The law of supply is the result of the law of increasing cost. As the quantity of a good produced rises, the marginal opportunity cost rises. Sellers will only produce and sell an additional unit of a good if the price rises above opportunity cost of producing the additional unit. DOES IT PAY TO MAKE MORE?

Change in supply vs. change in quantity supplied Change in supply Change in quantity supplied

© OnlineTexts.com p. 9 Shift in the Supply Curve A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply. Factors that shift the supply curve include: Change in input costs Increase in technology Change in size of the industry

© OnlineTexts.com p. 10 Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before.

Price of resources As the price of a resource rises, profitability declines, leading to a reduction in the quantity supplied at any price.

Technological improvements Technological improvements (and any changes that raise the productivity of labor) lower production costs and increase profitability.

Expectations and supply An increase in the expected future price of a good or service results in a reduction in current supply.

Increase in # of sellers What happens to the supply curve?

Prices of other goods Firms produce and sell more than one good or service. Firms respond to the profitability of the different items that they sell. (which has more profit?) The supply decision for a particular good is affected not only by the good’s own price but also by the prices of other goods and services the firm may produce.

© OnlineTexts.com p. 16 Equilibrium In economics, an equilibrium is a situation in which: there is no inherent tendency to change, quantity demanded equals quantity supplied, and the market just clears.

Market equilibrium cont. Where supply and demand intersect = best price and quantity for all consumers and firms

© OnlineTexts.com p. 18 Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units.

© OnlineTexts.com p. 19 Shortages and Surpluses A shortage occurs when quantity demanded exceeds quantity supplied. A shortage implies the market price is too low. A surplus occurs when quantity supplied exceeds quantity demanded. A surplus implies the market price is too high.

Price above equilibrium If the price exceeds the equilibrium price, a surplus occurs:

Price below equilibrium If the price is below the equilibrium a shortage occurs:

© OnlineTexts.com p. 22 Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price.

© OnlineTexts.com p. 23 Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.

Demand rises What happens to the equilibrium?

Demand falls What happens to the equilibrium?

© OnlineTexts.com p. 26 Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.

Supply rises What happens to the equilibrium?

Supply falls What happens to the equilibrium?

© OnlineTexts.com p. 29 Price Ceilings & Floors A price ceiling is a legal maximum that can be charged for a good. Results in a shortage of a product Common examples include apartment rentals and credit cards interest rates. A price floor is a legal minimum that can be charged for a good. Results in a surplus of a product Common examples include soybeans, milk, minimum wage

© OnlineTexts.com p. 30 Price Ceiling A price ceiling is set at $2 resulting in a shortage of 20 units.

© OnlineTexts.com p. 31 Price Floor A price floor is set at $4 resulting in a surplus of 20 units.

TO REVIEW:

Practice graphing supply and demand: Graph the two schedules on the same graph(remember, P=Price): #1: Demand Schedule Supply Schedule What is the equilibrium price?

Practice graphing supply and demand: Graph the two schedules on the same graph: #2 *What is the Equilibrium Price? *Draw an arrow and label to show the DIRECTION of change for each if: *DEMAND rises (D 2 ) *SUPPLY rises (S 2 ) *DEMAND falls (D 3 ) *SUPPLY falls (S 3 )

Practice Questions: SUPPLY/DEMAND PRACTICE LINK SUPPLY/DEMAND PRACTICE LINK Beef supplies are sharply reduced because of drought in the beef-raising states, and consumers turn to pork as a substitute for beef. How would you illustrate this change in the beef-market in supply-and-demand terms? Answer: The supply curve for beef should shift leftward (or upward), to reflect the drought. This causes the price of beef to rise, and the quantity consumed to decrease. We would not move the demand curve here. The decrease in quantity demanded is due to the price of beef rising, due to the shift of the supply curve.

Practice questions: In December, the price of Christmas trees rises and the quantity of trees sold rises. Is this a violation of the law of demand? Answer: No. This is not simply a move along the demand curve here. In December demand for Christmas trees rises, causing the curve to shift to the right. This allows both the price of Christmas trees and the quantity sold of Christmas trees to rise.