Download Chapter 3: “Supply and Prices”

Pump Primer
 In your own words, explain the difference between
having a shortage vs. a surplus.
“ECONOMICS ”
By Alan J. Carper
Bob Jones University Press. 1998
CHAPTER 4: “SUPPLY AND PRICES”
UNIT I: WHAT IS ECONOMICS?
Objectives:
Should be able to...
 Define supply, budget deficit & surplus
 Identify the law of supply
 Explain how changes in supply occur
 Explain the existence of the market equilibrium
point.
 Describe the causes of a surplus and a shortage
 Explain how the market price system works to
alleviate a surplus or a shortage.
BIBLICAL INTEGRATION:
Instead of pursuing earthly wealth, pursue the
wisdom of God and what glorifies Him; and He
will bless you with prosperity as He chooses.
(Prov. 2:1-11; 3:5-10)
SUPPLY
Supply is the “amount of goods and services
business firms are willing and able to provide at
different prices.”

The Law of Supply
 The “higher the price buyers are willing to pay,
other things being held constant, the greater the
quantity of the product a supplier will produce.”
 Likewise, if the price of a good falls, the quantity
supplied of that good decreases.
(Carter 30)
Supply Schedule and Supply Curve
A supply schedule is a list of the quantities supplied
at each different price when all other influences on
selling plans remain the same.
A supply curve is a graph of the relationship
between the quantity supplied and the price of the
good when all other influences on selling plans
remain the same.
(Bade 99)
SUPPLY
(Bade 99)
Individual Supply and Market Supply
 Market supply is the sum of the supplies
of all sellers in a market.
 The market supply curve is the horizontal
sum of the supply curves of all the sellers
in the market.
(Bade 100)
SUPPLY
(Bade 100)
Change in Supply
 A change in supply is a change in the
quantity that suppliers plan to sell when
any influence on selling plans other than
the price of the good changes.
(Bade 101)
Change in Supply
1. When supply
decreases, the supply
curve shifts leftward
from S0 to S1.
2. When supply
increases, the supply
curve shifts rightward
from S0 to S2.
Figure 4.7 shows changes in
supply.
(Bade 101)
Change in Supply
The main influences on selling plans that change
supply are
 Prices of related goods
 Prices of resources and other Inputs
 Expectations
 Number of sellers
 Productivity
(Bade 101)
Substitute in Production
 A change in the price of one good can bring a change
in the supply of another good.
 A substitute in production is a good that can be
produced in place of another good.
 For example: cookie dough ice cream for chocolate
chip ice cream in an ice cream factory.
 The supply of a good increases if the price of one
of its substitutes in production falls.
 The supply a good decreases if the price of one of
its substitutes in production rises.
(Bade 101)
Complement In Production
 A complement in production is a good that is
produced along with another good.

For example: straw and wheat
 The supply of a good increases if the price of
one of its complements in production rises.
 The supply a good decreases if the price of
one of its complements in production falls.
(Bade 102)
Prices of Resources and Expectations
Prices of Resources and Other Inputs
 Resource and input prices influence the cost of
production. And the more it costs to produce a good,
the smaller is the quantity supplied of that good.
Expectations
 Expectations about future prices influence supply.
 Expectations of future input prices also influence supply.
(Bade 102)
Number of Sellers & Productivity
Number of Sellers
 The greater the number of sellers in a market, the
larger is supply.
Productivity
 Productivity is output per unit of input.
 An increase in productivity lowers costs and
increases supply. For example, an advance in
technology.
 A decrease in productivity raises costs and decreases
supply. For example, a severe hurricane.
(Bade 102)
Change in Quantity Supplied vs Change in Supply
 A change in quantity supplied is a change in
the quantity of a good that suppliers plan to sell
that results from a change in the price of the
good.
 A change in supply is a change in the quantity
that suppliers plan to sell when any influence on
selling plans other than the price of the good
changes.
(Bade 102)
Change in Quantity Supplied vs Change in Supply
 Figure 4.8 illustrates and summarizes the distinction
(Bade 103)
Activity 6
Supply
National Council on Economic Education, New York, N.Y.
SUPPLY
Activities 5
by
Advanced Placement Economics Teacher Resource
Manual. National Council on Economic Education,
New York, N.Y.
Objectives
 Define supply schedule and supply curve.
 Construct a supply curve using hypothetical data.
 Explain why producers are willing to supply more of a good




or service when the price increases.
Explain the difference between a shift in the supply curve
and a movement along the supply curve.
Explain the difference between an increase in supply and
an increase in the quantity supplied.
Describe and analyze the forces that shift the supply curve.
Explain why a supply curve would shift to the right or left
given specific changes in the economy.
Introduction
 This lesson introduces supply, the other half of the
market system.
 A supply schedule represents the quantities that
firms are willing and able to supply at alternative
prices.
 A supply curve is a graphical representation of the
supply schedule.
 Remember, understanding a market is essential to
success in AP Economics!
Introduction
 In Activity 5, you will graph a supply schedule,
which will help you understand the implications of
a shift in the supply curve.
 The activity then focuses on the factors that shift the
supply curve.
 Activity 6 reinforces the factors that cause a supply
curve to shift, the direction of the shift and
whether the shift represents an increase or
decrease in supply.
Movement Along a Supply Curve
 As the price
declines from P1
to P, the
quantity
decreases from
Q1 to Q
 Price decreases,
the quantity
supplied
decreases.
Shift in Supply
 An increase in
supply is a shift to
the right( and a
decrease in supply
is a shift to the
left).
 Increase in supply
from S to S1 shows
that at the same
price (P), the
quantity increased
from Q to Q1.
Shift in Supply
Factors that Shift supply:
 Number of suppliers
 Prices of resources used to produce good
 Prices of related goods produced
 Technology
 Expectations about future prices
Activity 6: Reasons for Changes in Supply
 Part A
 Read the eight newspaper headlines in Figure 6.2, and
use the table to record the impact, if any, of each event
on the supply of cars.
 Use the first column to the right of the headline to show
whether the event causes a change in supply.
 Use the next column to record whether the change is an
increase or a decrease in supply.
 In the third column, decide whether the supply curve
shifts left or right.
 Finally, write the letter for the new supply curve.
 Use Figure 6.1 to help you.
 Always start at curve B, and move only one curve at a
time.
 Two headlines imply that the supply of cars does not change
Activity 6
Y
Y
Y
Y
Y
Y
N
N
Inc
Inc
Dec
R
R
L
C
C
A
Dec
Dec
Dec
---
L
L
A
A
L
---
A
---
 Part B
 Categorize each change in supply in Part A according
to the reason why supply changed,
 In Figure 6.3, place an X next to the reason that the
event described in the headline caused a change in
supply.
 In some cases, more than one headline could be matched
to a reason.
 Two headlines do not indicate a shift in supply.
X
X
X
X
X
X
X
X
Market Equilibrium
Market equilibrium occurs when the quantity
demanded equals the quantity supplied—when buyers’ and
sellers’ plans are consistent.
Equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
Equilibrium quantity is the quantity bought and sold
at the equilibrium price.
(Bade 105)
Equilibrium Price and Equilibrium Quantity
1. Market equilibrium at
the intersection of the
demand curve and the
supply curve.
2. The equilibrium
price is $1 a bottle.
3. The equilibrium
quantity is 10 million
bottles a day.
Figure 4.9 shows the
equilibrium price and
equilibrium quantity.
(Bade 105)
Price: A Market’s Automatic Regulator
 Law of market forces
 When there is a shortage, the price rises.
 When there is a surplus, the price falls.
 Surplus or Excess Supply is the quantity
supplied exceeds the quantity demanded.
 Shortage or Excess Demand is the quantity
demanded exceeds the quantity supplied.
(Bade 106)
Forces that Achieve Equilibrium
At $1.50 a bottle:
1. Quantity supplied is 11
million bottles.
2. Quantity demanded is 9
million bottles.
3. There is a surplus of 2
million bottles.
4. Price falls until the surplus
is eliminated and the
market is in equilibrium.
Figure 4.10(b) market
achieves equilibrium.
(Bade 106)
Forces that Achieve Equilibrium
At 75 cents a bottle:
1. Quantity is demanded 11
million bottles.
2. Quantity supplied is 9
million bottles.
3. There is a shortage of 2
million bottles.
4. Price rises until the shortage
is eliminated and the market
is in equilibrium.
Figure 4.10(a) market
achieves equilibrium.
(Bade 106)
Surplus & Shortage
Solutions to surplus:
 Increase demand
 Decrease supply
 Allow the price to fall to the market equilibrium
point (price cutting) – the simplest solution.
Solutions to shortage:
 Decrease demand
 Increase supply
 Allow the price to rise to the market equilibrium
point.
(Carper. 40-44)
Effects of Changes in Demand
 Event: A new study says the public water is
unsafe.
 To work out the effects on the market for bottled
water:
1. With public water being unsafe, demand for
bottled water changes.
2. The demand for bottled water increases, the
demand curve shifts rightward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
(Bade 107)
Effects of Change in Demand
1. An increase in demand
shifts the demand curve
rightward.
2. At $1.00 a bottle, there is a
shortage, so the price rises.
3. The quantity supplied
increases along the supply
curve.
4. Equilibrium quantity
increases.
Figure 4.11(a) illustrates the
outcome.
(Bade 107)
Effects of Change in Demand
Event: A new zero-calorie sports drink is invented.
 To work out the effects on the market for bottled
water:
1. The new drink is a substitute for bottled water,
so the demand for bottled water changes
2. The demand for bottled water decreases, the
demand curve shifts leftward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
(Bade 107)
Effect of Change in Demand
1. A decrease in demand shifts
the demand curve leftward.
2. At $1.00 a bottle, there is a
surplus, so the price falls.
3. Quantity supplied decreases
along the supply curve.
4. Equilibrium quantity
decreases.
Figure 4.11(b) shows the
outcome.
(Bade 107)
Effects of Changes in Supply
Event: Europeans produce bottled water in the
United States.
 To work out the effects on the market for
bottled water:
1. With more suppliers of bottled water,
supply changes.
2. The supply of bottled water increases, the
supply curve shifts rightward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
(Bade 108)
Effects of Change in Supply
1. An increase in supply shifts
the supply curve rightward.
2. At $1.00 a bottle, there is a
surplus, so the price falls.
3. Quantity demanded increases
along the demand curve.
4. Equilibrium quantity
increases.
Figure 4.12(a) shows the
outcome.
(Bade 108)
MARKET EQUILIBRIUM
Event: Drought dries up some springs in the
United States.
 To work out the effects on the market for
bottled water:
1. Drought changes the supply of bottled water.
2. The supply of bottled water decreases, the
supply curve shifts leftward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
(Bade 108)
Effects of Change in Supply
1. A decrease in supply shifts
the supply curve leftward.
2. At $1.00 a bottle, there is a
shortage, so the price rises.
3. Quantity demanded
decreases along the
demand curve.
4. Equilibrium quantity
decreases.
Figure 4.12(b) shows the
outcome.
Changes in Both Demand & Supply
When two events occur at the same time, work
out how each event influences the market:
1. Does each event change demand or supply?
2. Does either event increase or decrease
demand or increase or decrease supply?
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
(Bade 110)
Demand & Supply Change in the Same Direction
The figure shows the
effects of an increase in
both demand and supply.
An increase in demand
shifts the demand curve
rightward; an increase
in supply shifts the supply
curve rightward.
1. Equilibrium quantity increases.
2. Equilibrium price might rise
or fall.
(Bade 110)
Increase in Both Demand and Supply
 Increases the equilibrium quantity.
 The change in the equilibrium price is ambiguous
because the:
Increase in demand raises the price.
Increase in supply lowers the price.
(Bade 110)
Increase in Both Demand and Supply
This figure shows the
effects of a decrease in
both demand and supply.
A decrease in demand
shifts the demand curve
leftward; a decrease in
supply shifts the supply
curve leftward.
3. Equilibrium quantity
decreases.
4. Equilibrium price might
rise or fall.
(Bade 110)
Decrease in Both Demand and Supply
 Decreases the equilibrium quantity.
 The change in the equilibrium price is ambiguous
because the:
Decrease in demand lowers the price
Decrease in supply raises the price.
(Bade 110)
Decrease in Both Demand and Supply
The figure shows the effects
of an increase in demand
and a decrease in supply.
An increase in demand shifts
the demand curve rightward;
a decrease in supply shifts
the supply curve leftward.
1. Equilibrium price rises.
2. Equilibrium quantity might
increase, decrease, or not
change.
(Bade 110)
Increase in Demand and Decrease in Supply
 Raises the equilibrium price.
 The change in the equilibrium quantity is ambiguous
because the:
Increase in demand increases the quantity.
Decrease in supply decreases the quantity.
(Bade 111)
MARKET EQUILIBRIUM
This figure shows the effects
of a decrease in demand
and an increase in supply.
A decrease in demand shifts
the demand curve leftward;
an increase in supply shifts
the supply curve rightward.
3. Equilibrium price falls.
4. Equilibrium quantity might
increase, decrease, or not
change.
(Bade 111)
Decrease in Demand and Increase in Supply
 Lowers the equilibrium price.
 The change in the equilibrium quantity is ambiguous
because the:
Decrease in demand decreases the quantity.
Increase in supply increases the quantity.
(Bade 111)
EQUILIBRIUM
Activity 7
by
Advanced Placement Economics Teacher
Resource Manual. National Council on
Economic Education, New York, N.Y.
Objectives
 Define equilibrium price and equilibrium quantity.
 Determine the equilibrium price and quantity when given




the demand for and supply of a good or commodity.
Explain why, at prices above or below the equilibrium price,
market forces operate to move the price back toward
equilibrium price.
Predict the equilibrium price and quantity if there are
changes in demand or supply.
Given a change in supply or demand, explain which curve
shifted and why.
Explain how markets act as rationing devices.
Objectives
 Define price elasticity of demand and price
elasticity of supply.
 Calculate price elasticity using the arc method.
 Predict the effect on price and quantity given
demand curves with different elasticity's.
 Explain the difference between slope of a line and
the elasticity between two points on a line.
Introduction
 This lesson will bring the two sides of the
market—demand and supply—together to
determine the equilibrium price and quantity.
 You should understand that unless there are forces
operating to change supply or demand, the price
and quantity will remain at the equilibrium.
Introduction
 Activity 7 brings the supply and demand sides of
the market together and helps the students
understand equilibrium price and quantity.
 The factors that shift supply and demand are also
used to emphasize the impact of supply or demand
on the equilibrium price and quantity.
 The second part of Activity 7 has you work through
changes in supply and demand and the effects in
related markets.
Equilibrium Quantity and Price
A.
What happens if the price is $10?
The quantity supplied is 100, and the quantity demanded
is 60. Therefore, there is excess supply.
Equilibrium Quantity and Price
B.
What happens if the price is $6?
The quantity demanded is 100, and the quantity supplied
is 60. Therefore, there is excess demand.
Equilibrium Quantity and Price
C.
What happens if the price is $8?
The quantity that producers want to sell is exactly equal to the
quantity that buyers want to buy. The market is in equilibrium.
Activity 7
 Find one partner (not your close friend)!
 Complete Activity 7.
 You will be called upon to come to the board and
share your answers.
E1
E2
S1
S
D1
D
E
S1
S1
D1
D1
S1
D1
D1
D1
D1
D1
D1
D1
Works Cited
Carper, Alan. Economics for Christian Schools.
Greenville: Bob Jones University Press, 1998.
"The New King James Version." Logos Bible
Software. CD_ROM. ed. 2004.