SUPPLYSUPPLY

I want to wrap it all up in my pocket. I want to wrap it all up in my pocket. It’s my bar of chocolate…It’s my bar of chocolate…

GIVE IT TO ME NOW!GIVE IT TO ME NOW!

What is it?What is it?

The amount of goods or services for sale at The amount of goods or services for sale at a particular price.a particular price.

Breakdown: The lower the price the less Breakdown: The lower the price the less product…the higher the price the more product…the higher the price the more goods and services offered.goods and services offered.

The LAW of SupplyThe LAW of Supply

The quantity offered The quantity offered varies directly with the varies directly with the price offered.price offered.

1. Higher price allows for 1. Higher price allows for greater outputgreater output

2. Less efficient producers 2. Less efficient producers will join the game because the will join the game because the increased price will allow increased price will allow them to producethem to produce

Da GraphsDa Graphs

There are Supply There are Supply Schedules too.Schedules too.

These Schedules can These Schedules can be graphed! Yahoo!be graphed! Yahoo!

The slope is upward The slope is upward and to the right!and to the right!

Elasticity of SupplyElasticity of Supply

Just like demand, supply is sensitive or Just like demand, supply is sensitive or insensitive to price changes.insensitive to price changes.

Elastic = Change in price causes larger Elastic = Change in price causes larger change in supplychange in supply

-Candy, Cheeseburgers-Candy, Cheeseburgers Inelastic = Change in price causes smaller Inelastic = Change in price causes smaller

change in supply!change in supply!

-Milk, Oranges-Milk, Oranges

You want how much for that?You want how much for that?

You can’t always get You can’t always get what you want.what you want.

The price at which The price at which goods or services may goods or services may actually be bought or actually be bought or sold is the MARKET sold is the MARKET PRICE (Equilibrium PRICE (Equilibrium price)price)

Is this Paradise?Is this Paradise?NO! It is just a model of pure NO! It is just a model of pure

competition.competition. 1. All buyers work independently and are 1. All buyers work independently and are

too small to influence markets alone.too small to influence markets alone. 2. Competing products are practically 2. Competing products are practically

identical.identical. 3. All buyers have full knowledge of all 3. All buyers have full knowledge of all

price quotes.price quotes. 4. Buyers and sellers can enter and leave the 4. Buyers and sellers can enter and leave the

market at will.market at will.

How much for a side of ribs?How much for a side of ribs?

What we knowWhat we know-When price goes up supply goes -When price goes up supply goes up.up.-When price goes up demand -When price goes up demand goes down.goes down.-There will be a point at which -There will be a point at which the two are equal.the two are equal.

The price at which sales The price at which sales take place is the price at take place is the price at which the amount which the amount demanded is equal to demanded is equal to the quantity supplied.the quantity supplied.

Market Prices perform two Market Prices perform two important economic functions:important economic functions:

Ration scarce Ration scarce resources.resources.

Motivate ProductionMotivate Production

$2.50…That’s it?$2.50…That’s it? The equilibrium/market The equilibrium/market

price is the ONLY price.price is the ONLY price. Can’t afford it? You Can’t afford it? You

will leave the market.will leave the market. Won’t sell for that Won’t sell for that

cheap? You will leave cheap? You will leave the market.the market.

The market will drive The market will drive you to equilibrium price you to equilibrium price even if you are willing even if you are willing to act at another price.to act at another price.

What happens to What happens to market price if there is market price if there is a change in supply or a change in supply or demand?demand?

A change in demand A change in demand varies directly with a varies directly with a change in market price.change in market price.

A change in supply varies A change in supply varies inversely with the change inversely with the change in market price.in market price.

Supply schedule for Ice cream Supply schedule for Ice cream conescones

Price per conePrice per cone .50.50 .75.75 $1.00$1.00 $1.25$1.25 $1.50$1.50 $1.75$1.75 $2.00$2.00

Quant. SuppliedQuant. Supplied 5050 8080 125125 175175 235235 265265 300300

When it’s time to change…it’s When it’s time to change…it’s time to rearrange…time to rearrange…

When the determinants of supply When the determinants of supply change, it will cause a similar change change, it will cause a similar change

in the supply curve.in the supply curve.

The following changes can affect The following changes can affect the quantity supplied…the quantity supplied…

Determinants of SupplyDeterminants of Supply– 1.1. Price of ResourcesPrice of Resources

» Oranges for Minute MaidOranges for Minute Maid

– 2.2. Government ToolsGovernment Tools» Taxes, subsidies, regulationsTaxes, subsidies, regulations

– 3.3. TechnologyTechnology– 4.4. CompetitionCompetition– 5.5. Prices of related goodsPrices of related goods– 6.6. Producer ExpectationsProducer Expectations

Supply and Demand Schedules Supply and Demand Schedules can tell us…can tell us…

How many items buyers will purchase and How many items buyers will purchase and how many items sellers will offer at how many items sellers will offer at different prices.different prices.

BUT they DO NOT tell us…BUT they DO NOT tell us…

At what price goods or services would At what price goods or services would actually change hands.actually change hands.

What is the best price to sell at and what is What is the best price to sell at and what is the best price to buy at.the best price to buy at.

Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility Applies here too!Applies here too!