Download Supply

Unit 2: Supply, Demand,
and Consumer Choice
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Supply
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Supply Quick Simulation
• You are all able to help me with grading (you can read,
write, and follow instructions) , and I have a ton of grading
to do on Friday from 3:30-5:30. How many people will
help me if I were to pay you…
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Supply Defined
What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices.
What is the Law of Supply?
There is a DIRECT (or positive) relationship between
price and quantity supplied.
•As price increases, the quantity producers make
increases
•As price falls, the quantity producers make falls.
Why? Because, at higher prices profit seeking
firms have an incentive to produce more.
EXAMPLE: Mowing Lawns
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Why does the law of supply occur?
The law of supply is the result of three
separate behavior patterns that overlap:
1.The law of increasing opportunity cost
2.The Law of Diminishing Marginal
Returns
We will define and explain each…
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Why does the Law of
Supply occur?
1. The law of increasing opportunity costs
• Factors of production (labor, equipment)
are not equally productive, and to produce
more requires more time, better equipment,
better workers, etc. and so producers need
a greater financial incentive.
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Why does the Law of Supply occur?
2. The law of diminishing marginal returns
A business has fixed costs (e.g. rent) and variable costs (e.g.
labor).
For example: at first, you hire the best workers and they
can specialize, so they produce a large amount pretty cheaply
and you can sell first few goods at a high price. However, as
more and more workers are hired they become less effective.
Therefore, it becomes more and more expensive to produce
over time.
 To produce more, businesses need an incentive in the form
of more money.
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Why does the Law of Supply occur?
2. The law of diminishing marginal returns
We have to charge more for each output,
because as we put in more resources to
produce, those resources become less
and less productive.
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Example of Supply
You own an lawn mower and you are
willing to mow lawns.
How many lawns will you mow at these prices?
Supply
Schedule
Price per
lawn mowed
Quantity
Supplied
$1
$5
$20
$50
$100
$1000
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GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Draw this large
in your notes
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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GRAPHING SUPPLY
Supply
Schedule
Price
$5
$4
Quantity
Supplied
Price of Cereal
Supply
$5
What if new
50
companies
start
making
40
cereal?
30
4
3
2
$3
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 70
$4
40 60
Price of Cereal
Supply
$5
4
3
2
$3
30 50
$2
20 40
1
$1
10 30
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 70
$4
40 60
Price of Cereal
Supply
4
3
2
$3
S2
$5
Increase in Supply
Prices didn’t change but
there is MORE cereal
produced
30 50
$2
20 40
1
$1
10 30
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
$5
$4
Quantity
Supplied
Price of Cereal
Supply
$5
What if a drought
50
destroys
corn
and
wheat
40
crops?
30
4
3
2
$3
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 30
$4
40 20
Price of Cereal
Supply
$5
4
3
2
$3
30 10
$2
20 1
1
$1
10 0
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 30
$4
40 20
Price of Cereal
S2
$5
4
3
Decrease in Supply
Prices didn’t change but
there is LESS cereal
produced
2
$3
Supply
30 10
$2
20 1
1
$1
10 0
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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Change in Supply
Supply
Schedule
Price
$5
$4
$3
Quantity
Supplied
Price of Cereal
Supply
$5
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What if cereal companies
50
3
find
a
quicker
way
to
make
40
2
cereal?
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
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6 Shifters (Determinants) of Supply
1.
2.
3.
4.
5.
6.
Prices of related goods in production
Prices of resources & other inputs
Expectations of Future Prices
Number of sellers
Productivity/technology
Government Action: Taxes & Subsidies
Subsidies
A subsidy is a government payment that supports a business or market.
Subsidies cause the supply of a good to increase.
Regulation
ChangesTaxes
in PRICE don’t shift the
curve. It only
The government can reduce the
Regulation occurs when the
causes
movement
along steps
theinto
curve.
supply of some
goods by
placing an government
a market to 23
Supply Practice
First, identify the determinant (shifter) then
decide if supply will increase or decrease
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
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Supply Practice
1. Which determinant (SHIFTER)?
2. Increase or decrease?
3. Which direction will curve shift?
1.
2.
3.
4.
5.
6.
7.
8.
Hamburgers
Mad cow disease kills 20% of cows
Price of hamburgers increase 30%
Government taxes burger producers
Restaurants can produce burgers and/or
tacos. A demand increase causes the price for
tacos to increase 500%
New bun baking technology cuts production
time in half
Minimum wage increases to $20
Price of steak increases 300%
Government subsidizes cow ranches
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Double Shifts
• Suppose the demand for sports cars fell at the
same time as production technology improved.
• Use S&D Analysis to show what will happen to
PRICE and QUANTITY.
If TWO curves shift at the same
time, EITHER price or quantity
will be indeterminate.
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DEMAND
SUPPLY
EQUILIBRIUM PRICE
EQUILIBRIUM QUANTITY
DECREASE
DECREASE
INDETERMINATE
DECREASE
DECREASE
INCREASE
DECREASE
INDETERMINATE
INCREASE
DECREASE
INCREASE
INDETERMINATE
INCREASE
INCREASE
INDETERMINATE
INCREASE
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Use a S&D to explain this double shift
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