Download Chapter 3 - Understanding Individual Markets:

SUPPLY DEFINED
SUPPLY SCHEDULE
Various Amounts
CORN
P QS
$1
2
3
4
5
Copyright McGraw-Hill/Irwin, 2002
5
20
35
50
60
SUPPLY DEFINED
SUPPLY SCHEDULE
Various Amounts
CORN
P QS
$1
A Series of Possible Prices 2
3
4
5
5
20
35
50
60
…a specified time period
…other things being equal
Copyright McGraw-Hill/Irwin, 2002
LAW OF SUPPLY
• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
A direct relationship exists between
price and quantity supplied
Copyright McGraw-Hill/Irwin, 2002
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o 5 10
20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60
50
35
20
5
GRAPHING SUPPLY
Plot the Points
Price of Corn
P
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60
50
35
20
5
GRAPHING SUPPLY
Plot the Points
Price of Corn
P
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 303540 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60
50
35
20
5
GRAPHING SUPPLY
Plot the Points
Price of Corn
P
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60
50
35
20
5
GRAPHING SUPPLY
Plot the Points
Price of Corn
P
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60
50
35
20
5
GRAPHING SUPPLY
Plot the Points
Price of Corn
P
S
$5
P QS
4
3
2
1
o
CORN
Connect the Points
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING SUPPLY
Price of Corn
P
S
$5
4
3
2
What if
Supply
Increases?
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
CORN
P QS
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING SUPPLY
Price of Corn
P
$5
4
Increase
in
Supply
3
2
1
S
S’
CORN
P QS
$5
4
3
Increase 2
in Quantity 1
Supplied
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60 80
50 70
35 60
20 45
5 30
GRAPHING SUPPLY
Price of Corn
P
S
$5
4
3
2
What if
Supply
Decreases?
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
CORN
P QS
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING SUPPLY
Price of Corn Decrease
P
$5
in
Supply
4
S
CORN
P QS
$5
4
3
Decrease
2
in Quantity 1
Supplied
3
2
1
o
S’
10 20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
60 45
50 30
35 20
20 0
5 --
DETERMINANTS OF
SUPPLY
• Prices of Resources
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
Copyright McGraw-Hill/Irwin, 2002
Determinants of Supply
1 Prices of Resources
As resource prices go up (natural, capital, human, and
entrepreneurial ability), Supply goes down.
I own an orange juice company. A Florida
freeze destroys oranges, which
makes them more expensive. The extra cost will
decrease the supply of OJ at my factory.
Supply shifts LEFT.
Copyright McGraw-Hill/Irwin, 2002
2 Technology
As new technologies are introduced, efficiency
improves and supply increases. Supply shifts
RIGHT.
Technology is the only determinant that
shifts right only. We do not forget or lose
technological developments
Copyright McGraw-Hill/Irwin, 2002
3 Taxes and Subsidies
• When taxes go up, supply goes down (shifts LEFT).
• When taxes go down, supply goes up (shifts RIGHT).
• Subsidies are taxes in reverse. The government may choose to
help a company’s ability to produce by handing them a grant
(free money).
Grant money given to students for college
increase the number of students who can
afford college. College educations
increase in supply (shift RIGHT)
Copyright McGraw-Hill/Irwin, 2002
4 Price of Related Goods
If footballs increase in
price, supply will go
up. My factory may
reduce the amount of
baseballs produced to
make more footballs.
Copyright McGraw-Hill/Irwin, 2002
Prices of Related Goods Exercise
SUBSTITUTES
footballs
Baseballs
Price
Increases
Stays the Same
Quantity Supplied
Increases
Decreases
Supply of baseballs decreased WITHOUT
a price change.
Football supply increased b/c it
became more profitable to produce them.
Copyright McGraw-Hill/Irwin, 2002
5 Expectations
If my tire company projects that the high
performance radial tires will go up in price in
the future. We should get started making more
today. Supply goes up (shifts LEFT).
Copyright McGraw-Hill/Irwin, 2002
6 Number of Sellers
As more pizza companies open for business,
more pizza will be produced. Supply will
increase (shift RIGHT).
S
S1
P
More Pizza!
Q
Copyright McGraw-Hill/Irwin, 2002
GRAPHING SUPPLY
Price of Corn
P
$5
S
P QS
4
$5
4
3
2
1
3
2
Combining
1
with
Demando 10
20 30 40 50 60 70 80
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
CORN
Q
60
50
35
20
5
MARKET DEMAND &
SUPPLY
BUSHELS
OF CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
MARKET
x
200 DEMAND
B 2,000
U
Y
E
R
4,000
7,000
11,000
16,000
S
BUSHELS
OF CORN
P QS
$5
4
3
2
1
60
50
35
20
5
MARKET
200 SUPPLY
S 12,000
x
E
L
L
E
R
S
EQUILIBRIUM
Copyright McGraw-Hill/Irwin, 2002
10,000
7,000
4,000
1,000
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
4
Market
S
$5 12,000
Clearing
Equilibrium 4 10,000
3
3 7,000
2 4,000
1 1,000
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
$5
Surplus
CORN
MARKET
S
P Q
At a $4 price
4
$5
supplied than 4
demanded 3
2
1
more is being
3
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
S
12,000
10,000
7,000
4,000
1,000
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
At a $2 price
4
$5
demanded than 4
3
supplied
2
1
Shortage
more is being
3
2
1
o
D
2
4
6
78
101112 14 16
Quantity of Corn
Copyright McGraw-Hill/Irwin, 2002
Q
S
12,000
10,000
7,000
4,000
1,000