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Chapter 6: Demand, Supply & Markets The Supply Curve • Supply • The quantities of a good or service that sellers are willing and able to sell at various prices • Similar to demand, supply can be shown as a schedule and then as a graph The Law of Supply Law of Supply • Increase in price (P) will increase quantity supplied (Qs) • Decrease in price (P) will decrease quantity supplied (Qs) • Direct relationship between P and Qs An Increase In the Supply of Melons P$ S S1 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 An Increase In the Supply of Melons • An increase in supply is represented by a shift in the supply curve to the right (S1). • At each price point, producers are willing to supply more goods. For example, at $1.00, producers were supplying 10,000 units. Now producers are willing to supply 15,000 (an increase of 5,000 units) A Decrease in the Supply of Melons P$ S0 S $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 What causes Demand & Supply curves to shift? Causes For Demand Shifting 1. Market Size 2. Income (Normal / Inferior Goods) 3. Price of Substitutes 4. “ “ Complements 5. Tastes 6. Consumer Expectations Causes For Supply Shifting 1. Change in Nature 2. Resource Price 3. Technology 4. Labour Productivity 5. # of Producers 6. Producer Expectations Market Equilibrium • The point where the supply curve and the demand curve intersect • At this point, Qd = Qs (quantity demanded = quantity supplied) Market Equilibrium Supply=Demand P$ S D 0 Q Quantity Equilibrium in the Market for Melons P$ D S $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 An Increase in the Demand for Computers 5 D2 Shortage of 100 300 (thousands) A Decrease in the Demand for Computers Surplus of 100 3 D0 200 (thousands) An Increase in the Supply of Computers Surplus of 100 3 300 (thousands) S2 A Decrease in the Supply of Computers S0 5 Shortage of 100 200 (thousands) Elasticity of Supply • Similar to Dd shows the responsiveness of the quantity supply to a change in price • The key factor effecting supply elasticity is time. • Given more time a producer can supply more of a product in response to higher prices Elasticity of Supply • Goods that can be stored easily, inexpensively and for long periods of time will be more elastic than more perishable products Gov’t Involvement in the Market • At times the market system is unfair so in our mixed market system the government steps in to make the situation more fair • If the government feels the price is too high then they make the price legally lower. This is called a ceiling price, but the problem is Qd > Qs Gov’t Intervention in the Market • If the government feels the price is too low then they make the price legally higher. This is called a floor price, but the problem is Qs > Qd Your Turn • Complete Page 133 #1-3 • Complete key terms definitions, page 119 and page 133