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CASE STUDY • Two ways to reduce the quantity of smoking demanded: -- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve) -- Raising the price of cigarettes through tobacco taxes (move along demand curve) SUMMARY variable change Demand Shift Income (Normal) Rise (fall) Rise (fall) Right (left) Income (Inferior) Rise (fall) Fall (rise) Left (right) Price of substitute Rise (fall) Rise (fall) Right (left) Price of complement Rise (fall) Fall (rise) Left (right) Taste Rise (fall) Rise (fall) Right (left) Expected Price Rise (fall) Rise (fall) Right (left) Number of buyers Rise (fall) Rise (fall) Right (left) SUPPLY • Quantity supplied is the amount of a good that sellers are willing and able to sell. • Law of Supply – The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises. SUPPLY SCHEDULE • Supply Schedule – The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. EXAMPLE OF SUPPLY SCHEDULE SUPPLY CURVE • Supply Curve – The supply curve is the graph of the relationship between the price of a good and the quantity supplied. Price of Ice-Cream Cone $3.00 1. An increase in price ... 2.50 2.00 1.50 1.00 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 2. ... increases quantity of cones supplied. Copyright©2003 Southwestern/Thomson Learning TWO VIEWS • For every possible price, it shows the production rate • For each unit of item, it shows the minimum price that the seller is willing to accept MARKET SUPPLY • Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. • Graphically, individual supply curves are summed horizontally to obtain the market supply curve. CHANGE IN QUANTITY SUPPLIED • Change in Quantity Supplied – Movement along the supply curve. – Caused by a change in price. CHANGE IN QUANTITY SUPPLIED Price of IceCream Cone S C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 0 1 5 Quantity of Ice-Cream Cones CHANGE IN SUPPLY • Change in Supply – A shift in the supply curve, either to the left or right. – Caused by a change in a determinant other than price. FIGURE 7 SHIFTS IN THE SUPPLY CURVE Price of Ice-Cream Cone Supply curve, S3 Decrease in supply Supply curve, S1 Supply curve, S2 Increase in supply 0 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning SHIFT IN THE SUPPLY CURVE • • • • Input prices Technology Expectations Number of sellers SUMMARY variable change Supply Input (factor) Rise price (fall) Technology Rise (fall) Expected Rise Price (fall) Number of Rise sellers (fall) Fall (rise) Rise (fall) Fall (rise) Rise (fall) Shift Left (right) Right (left) Left (right) Right (left) EQUILIBRIUM • Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. EQUILIBRIUM PRICE AND QUANTITY • Equilibrium Price – The price that balances quantity supplied and quantity demanded. – On a graph, it is the price at which the supply and demand curves intersect. • Equilibrium Quantity – The quantity supplied and the quantity demanded at the equilibrium price. – On a graph it is the quantity at which the supply and demand curves intersect. Price of Ice-Cream Cone Supply Equilibrium Equilibrium price $2.00 Equilibrium quantity 0 1 2 3 4 5 6 7 8 Demand 9 10 11 12 13 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning SURPLUS AND SHORTAGE • Surplus – When price > equilibrium price, then quantity supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales, thereby moving toward equilibrium. • Shortage – When price < equilibrium price, then quantity demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. ALTERNATIVE EXAMPLE: #2 LEAD PENCILS Price 0.05 Quantity demanded 1000 Quantity supplied 400 0.10 800 500 0.15 600 600 0.20 400 700 0.25 200 800 QUICK QUIZ 1 • Draw demand and supply curves • Find equilibrium price and quantity QUICK QUIZ 2 • How would following events shift either the demand or the supply of #2 lead pencil? -- an increase in the use of standardized exams (using opscan forms) -- a decrease in the price of ink pens -- a start of a school year INCREASE IN DEMAND Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting in a higher price . . . Initial equilibrium D D 0 7 3. . . . and a higher quantity sold. 10 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning DECREASE IN SUPPLY Price of Ice-Cream Cone S2 1. An increase in the price of sugar reduces the supply of ice cream. . . S1 New equilibrium $2.50 Initial equilibrium 2.00 2. . . . resulting in a higher price of ice cream . . . Demand 0 4 7 3. . . . and a lower quantity sold. Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning SUMMARY DISCUSSION • Each of the events listed below has an impact on the market for bicycles. 1.An increase in the price of automobile. 2.A decrease in incomes of consumers if bicycles are a normal good. DISCUSSION-CONTINUED 3.An increase in the price of steel used to make bicycle frames. 4.An environmental movement shifts tastes toward bicycling. DISCUSSION-CONTINUED 5.Consumers expect the price of bicycles to fall in the future. 6.A technological advance in the manufacture of bicycles. DISCUSSION-CONTINUED 7.A reduction in the price of bicycle helmets and shoes. 8.A decrease in incomes of consumers if bicycles are an inferior good.