Chapter 5/6: Supply/Prices. Section 1: Understanding Supply Supply is the counterpart to demand,...

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

• Suppliers will offer more of a good at a higher price, and vice versa.

Price PriceSupply Supply

Supply Schedule

• A supply schedule is a table that lists quantity supply levels at different prices.

Price of a slice of pizza Quantity of slices supplied

$.50 1

$1.00 2

$1.50 3

$2.00 4

$2.50 5

Market Supply Schedule

• A market supply schedule charts supply levels for an entire economy.

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

Supply Curve• Supply curves plot the data from demand schedules

onto a graph.

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0.5

1

1.5

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3.5

Series 1Column2Column1

Quantity of pizza slices supplied

$ Pr

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of P

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Slic

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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

1. With a partner, quickly create a business idea. 2. Come up with a list of all the different costs you will

have in supplying your good/service.

Business Cost Exercise

1. With a partner, quickly create a business idea. 2. Come up with a list of all the different costs you will

have in supplying your good/service.3. Determine which are fixed costs and which are

variable.

Examples of Fixed and Variable Costs

• Fixed:– 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.

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Quantity of pizza slices supplied

$ Pr

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Supply Decrease

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0.51

1.52

2.53

3.54

4.5

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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 3

$2.00 4 2

$2.50 5 1

Supply/Demand Curve

• Equilibrium point is where the two lines intersect.

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SupplyDemandColumn1

Quantity of pizza slices

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Disequilibrium

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

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SupplyDemandColumn1

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Excess Demand

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

Excess Demand

• When the price is below equilibrium, excess demand occurs.

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Excess Supply

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

Excess Supply

• When the price is above equilibrium, excess supply occurs.

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SupplyDemandColumn1

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$ Pr

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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

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Government Intervention:Price Floor

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

Price Floor

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SupplyDemandColumn1

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Section 2: Changes in Equilibrium

• As supply and demand shift, equilibrium prices change.

Shifts in Supply

• If demand remains the same…– 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.

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SupplyDemandSupply 2

Quantity of pizza slices

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P2

P1

Decrease in Supply Curve

• A new supply curve changes the equilibrium price.

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1.5

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3.5

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4.5

SupplyDemandSupply 2

Quantity of pizza slices

$ Pr

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P2

P1

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

• A new demand curve changes the equilibrium price.

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SupplyDemandDemand 2

Quantity of pizza slices

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P2

P1

Decrease in Demand Curve

• A new demand curve changes the equilibrium price.

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SupplyDemandDemand 2

Quantity of pizza slices

$ Pr

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P1

P2

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)?

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SupplyDemandDemand 2Supply 2

Quantity of pizza slices

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P1 P2

What if demand increases and supply decreases?

• Fossil Fuels (Oil)– Increased demand + decreased supply = runaway price increases

What if demand increases and supply decreases?

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SupplyDemandDemand 2Supply 2

Quantity of pizza slices

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P1