Aim:

What conditions account for changes in supply?

Do Now:

Write down a list of at least three factors that distinct demand from supply

Law of SupplyLaw of Supply• Higher the prices, larger the quantity

supplied

• Quantity supplied – number of goods offered for sale at specific

price

• Ceteris Paribus – Latin for – Something is only true as long as the

assumption is true

Graphic Representation of Graphic Representation of SupplySupply

S

1. Label the graph

2. Label y-axis

3. Label x-axis

4. What does the

supply line represent?

5. At what price would the number of suppliers be minimal? Maximum? Why?

5

15

25

30

The Supply CurveThe Supply CurveMARKET FOR CARS

S - PRODUCERS

P

QS

A

B

C

P1

P2

P3

Q1 Q2 Q3

• Supply – what producers are able and willing to sell

• As Price increases more produces are able and willing to participate in the market, which leads to an increase in the Quantity of goods supplied

Important VocabularyImportant Vocabulary

• Supply– The relationship between price and quantity

supplied

• Supply schedule– Relationship between price and quantity for a

specific good

• Elasticity of Supply– Measures the way suppliers respond to a

change in price; key factor is time-short run the curve is inelastic and long run it is elastic

– Supply is inelastic when the output cannot be easily changed

Elasticity of SupplyElasticity of Supply

• Similar to demand, elasticity of supply is a measure of the way suppliers respond to a change in price

• If elasticity of supply curve is >1 it is elastic; <1 it is inelastic; =1 it is unitary

• TimeTime is the key factor in determining whether the supply of a good will be elastic or inelastic

• Output cannot be easily changed in the short run (inelastic), but most production is flexible in the long run (elastic)

What would cause a shift of What would cause a shift of supply curve?supply curve?

• Change in Input PricesChange in Input Prices– What is meant by Input? Give examples of input that would be

true for any business

• TechnologyTechnology– To what extent is technology relevant to quantity or quality of

production? Explain or give example

• Expectations for the futureExpectations for the future– Why is business mapping/planning crucial for the success of the

business? What must one consider while mapping business projections?

• Number of ConsumersNumber of Consumers – How would production change due to the number of consumers

interested in the product?

Supply, Demand, and Government Policies

In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities.

While equilibrium conditions may be efficient, it may be true that not everyone is satisfied.

One of the roles of economists is to use their theories to assist in the development of policies.

Price Controls...

Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.

Result in government-created price ceilings and floors.

Price Ceilings & Price Floors

Price Ceiling A legally established maximum price at which

a good can be sold.

Price Floor A legally established minimum price at which

a good can be sold.

Price Ceilings

Two outcomes are possible when the government imposes a price ceiling:

The price ceiling is not binding if set above the equilibrium price.

The price ceiling is binding if set below the equilibrium price, leading to a shortage.

A Price Ceiling That Is Not Binding...

$4

3

Quantity ofIce-Cream

Cones

0

Price ofIce-Cream

Cone

Demand

Supply

Priceceiling

Equilibriumprice

100Equilibrium

quantity

A Price Ceiling That Is Binding...

$3

Quantity ofIce-Cream

Cones

0

Price ofIce-Cream

Cone

2

Demand

Supply

Equilibriumprice

Priceceiling

Shortage

125Quantity

demanded

75Quantitysupplied

Price Floors

When the government imposes a price floor, two outcomes are possible.

The price floor is not binding if set below the equilibrium price.

The price floor is binding if set above the equilibrium price, leading to a surplus.

A Price Floor That Is Not Binding...

$3

Quantity ofIce-Cream

Cones

0

Price ofIce-Cream

Cone

100Equilibrium

quantity

Equilibrium

price

Demand

Supply

Pricefloor2

A Price Floor That Is Binding...

$3

Quantity ofIce-Cream

Cones

0

Price ofIce-Cream

Cone

Equilibrium

price

Demand

Supply

Price floor$4

120Quantitysupplied

80Quantity

demanded

Surplus