1. Bell Ringer 12/4/08
Identify each as Elastic or Inelastic AND give and example of each 2. 1.

2. Law of Supply and the Supply Curve
Chapter 7 Section 3
Law of Supply and the Supply Curve

3. Profits and the Law of Supply
To understand pricing, you must look at both demand and supply.
The law of supply states that as the price of a good rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls.
The higher the price of a good, the greater the incentive is for a producer to produce more.
Supplied
Supplied

5. The Determinants of Supply
A change in the supply of a particular item shifts the entire supply curve to the left or right.
Many factors affect the supply of a specific product. Four of the major determinants are:
Price of Inputs
# of Firms (Businesses) in the Industry
Taxes
Technology

6. Any time the COST to the business INCREASES, then the COST of production INCREASES, and supplies will SUPPLY FEWER goods
Any time the COST to the business DECREASES, then the COST of production DECREASES, and supplies will SUPPLY MORE goods

7. 1. The price of inputs
Examples of Inputs (Anything that goes in to making a product):
raw materials
wages (labor)
land
Price of Inputs increases
Supply Decreases
Price of Inputs decreases
Supply increases

8. 2. The number of firms in the industry
Examples:
Businesses opening & closing
# of Businesses increases
Supply Increases
# of Businesses decreases
Supply decreases
In a free-market economy, sellers enter and leave all the time

9. 3. Taxes & Subsidies Taxes increase Supply decreases
Subsidies are payments the government gives to businesses to encourage their behaviors or to help out industries having financial troubles. They have the opposite effect that taxes have on supply.

10. The Determinants of Supply (cont.)
4. Technology
Any increase in technology with increase supply

11. The Law of Diminishing Returns
When a business wants to expand, it has to consider how much expansion will really help the business.

12. The Law of Diminishing Returns (cont.)
Will product output continue to increase proportionally as more workers are hired?
The law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease.

15. Chapter 7 Section 4
Equilibrium Price

16. Equilibrium Price
In free markets, prices are determined by the interaction of supply and demand.
As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (and vice versa).
The point at which the quantity demanded and quantity supplied meet is called the equilibrium price.

19. Prices as Signals
Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.

20. Prices as Signals (cont.)
A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied.
Prices above the equilibrium price reflect a surplus to suppliers.

21. Graph of Equilibrium Price
Surplus
Price
Quantity S1
Equilibrium PriceSupply = Demand D1
Shortage

22. Surplus Shortage Consumers Producers Produce less Consume more
Produce more
Consume less

23. Graphing – do on board Increase in Demand Decrease in Demand
Increase in Supply
Decrease in Supply

24. Prices as Signals (cont.)
When a market economy operates without restriction, it eliminates shortages and surpluses.
When a shortage occurs, the price goes up to eliminate the shortage.
When surpluses occur, the price falls to eliminate the surplus.