Chapter 3 Economics

SupplySupply amount of goods and services business firms are willing and able to provide at different prices

Law of Supply the higher the price, the greater the quantity of the product a supplier will produce

BusinessBusiness a seller of goods or services

supply schedule table of supply data

Supply curve line-graph of supply schedule information

Supply Curve

$5,000 $10,000 $15,000 $20,000 $25,000 $30,000 Vertical graph

$100 $200 $300 $400 $500 $600 Horizontal graph 5060

Change in quantity supplied when a change in price buyers will pay causes a change in the number of goods supplied

Change in Quantity Supplied

Change in Supply decrease in supplydecrease in supply leftward shift suppliers produce less at any given pricesuppliers produce less at any given price decrease in supplydecrease in supply leftward shift suppliers produce less at any given pricesuppliers produce less at any given price

Change in Supply increase in supplyincrease in supply rightward shift suppliers produce more at any given price increase in supplyincrease in supply rightward shift suppliers produce more at any given price

Decrease in Supply

Increase in Supply

Supply Shift Factors change in technology change in production costs change in price of related goods change in technology change in production costs change in price of related goods

Change in Technology improves tools used to produce goods and services improves production or reduces cost improves tools used to produce goods and services improves production or reduces cost

Change in Production Costs costs of natural resources, labor, and financial capital changes in these costs affect supply costs of natural resources, labor, and financial capital changes in these costs affect supply

Change in Price of Related Goods usually substitute goods shift production to the more- profitable good usually substitute goods shift production to the more- profitable good

Market Equilibrium Point price at which consumers are willing to pull out of the market the exact quantity of product that suppliers are willing to push in

demand supply market equilibrium

Economies of Scale the more produced, the cheaper each product supply more with hopes that demand increases the more produced, the cheaper each product supply more with hopes that demand increases

surplus an excess of unsold products

Surplus Costs storage security & insurance of the goods spoilage of the goods loss of income interest costs of financing storage security & insurance of the goods spoilage of the goods loss of income interest costs of financing

Surplus Solutions 1)increase demand for the goods 2)decrease the supply 3)allow the price to fall to the equilibrium point 1)increase demand for the goods 2)decrease the supply 3)allow the price to fall to the equilibrium point

Surplus Solutions 1)increase demand for the goods first and best solution for the supplier produce a great quantity and charge a higher price “demand solution” 1)increase demand for the goods first and best solution for the supplier produce a great quantity and charge a higher price “demand solution”

demand 1 demand 2 supply

Surplus Solutions 1)increase demand for the goods increasing tastes & preferences eliminate substitute goods establish price floors 1)increase demand for the goods increasing tastes & preferences eliminate substitute goods establish price floors

Surplus Solutions 2) decrease the supply cut production “supply solution” cut production “supply solution” problems = competition reaction

demand supply 2 supply 1

Surplus Solutions increase demand decrease supply demand solution supply solution shifts the demand curve shifts the supply curve favored by suppliers

Surplus Solutions 3) allow the price to fall to the market equilibrium point the market does the work supplier = gradually lowers price buyer = purchases more at lower price surplus gone; price stops falling the market does the work supplier = gradually lowers price buyer = purchases more at lower price surplus gone; price stops falling

Surplus Solutions 1)increase demand for the goods 2)decrease the supply 3)allow the price to fall to the equilibrium point 1)increase demand for the goods 2)decrease the supply 3)allow the price to fall to the equilibrium point

shortage caused by the price of a good being held lower than its market equilibrium price not enough of a good caused by the price of a good being held lower than its market equilibrium price not enough of a good

loss leaders products deliberately sold at a loss to lure in customers

Price Ceilings government restrictions on prices prevent prices from rising to equilibrium value always causes shortages government restrictions on prices prevent prices from rising to equilibrium value always causes shortages

Shortage Solutions 1)decrease demand 2)increase supply 3)allow the price to rise to the market equilibrium point 1)decrease demand 2)increase supply 3)allow the price to rise to the market equilibrium point

Shortage Solutions 1)decrease demand “demand solution” by discouraging demand for a product “demand solution” by discouraging demand for a product

supply demand 1 demand 2

Shortage Solutions 2) increase supply “supply solution” by: managing supply improving technology boosting productivity “supply solution” by: managing supply improving technology boosting productivity

supply 1 demand supply 2

Shortage Solutions decrease demand demand solution increase supply supply solution shifts demand curve shifts supply curve dangerous to suppliers focus on technology or production

Shortage Solutions 3) allow the price to rise to the market equilibrium point not imposing price ceilings benefits: encourages conservation and discourages wastefulness motivates entrepreneurs to enter the market not imposing price ceilings benefits: encourages conservation and discourages wastefulness motivates entrepreneurs to enter the market

supply demand