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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.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
Series 1Column2Column1
Quantity of pizza slices supplied
$ Pr
ice
of P
izza
Slic
e
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.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
Series 1Column2Column1
Quantity of pizza slices supplied
$ Pr
ice
of P
izza
Slic
e
Supply Decrease
0 2 3 4 50
0.51
1.52
2.53
3.54
4.5
Series 1Column2Column1
Quantity of pizza slices supplied
$ Pr
ice
of P
izza
Slic
e
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.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
Disequilibrium
• Disequilibrium occurs whenever the amount supplied is not equal to the amount demanded at a certain price.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
Excess Demand
• Excess demand occurs when there is more demand than supply.
Excess Demand
• When the price is below equilibrium, excess demand occurs.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
Excess Supply
• Excess supply happens when there is more supply than demand.
Excess Supply
• When the price is above equilibrium, excess supply occurs.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
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
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
Government Intervention:Price Floor
• Price Floor: a minimum amount that can be charged for an item.– Example: Agriculture, minimum wage.
Price Floor
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandColumn1
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
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.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandSupply 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
P2
P1
Decrease in Supply Curve
• A new supply curve changes the equilibrium price.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SupplyDemandSupply 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
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.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SupplyDemandDemand 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
P2
P1
Decrease in Demand Curve
• A new demand curve changes the equilibrium price.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
SupplyDemandDemand 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
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)?
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SupplyDemandDemand 2Supply 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e
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?
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SupplyDemandDemand 2Supply 2
Quantity of pizza slices
$ Pr
ice
of P
izza
Slic
e P2
P1