Download Supply and Demand #2 - Economics - Knoche

Supply and Demand #2
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Supply
Quantity supplied - the amount of a good or
service that producers are willing and able to
offer for sale at a specific price.
Supply - the amount of a good or service that
producers are willing and able to offer for sale at
all prices in a given period.
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The law of supply states that as price increases, the
quantity of goods & services supplied also
increases. As the price decreases, the quantity of
goods & services supplied also decreases.
Price and quantity move in the same direction.
Price
S
Qs
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Most economists agree that price and quantity move
in the same direction for two reasons:
1. Production decisions by existing producers.
In a market-based economy, every producer’s primary goal is
to maximize profits. Firms earn profits based partly on
revenue, the amount of money received in the course of doing
business.
So when prices increase, the desire to make a profit leads
producers to increase their production of goods. They expect
their profits to increase as a result.
Likewise, when prices fall, producers are likely to cut
production.
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Most economists agree that price and quantity move
in the same direction for two reasons:
2. Market entries and exits.
When the price of a good or service increases, new firms may
enter a market because they see the potential for profit.
For example, a building firm might enter the housing
construction market to take advantage of rising home prices.
Suppose the firm were to build 20 new homes and offer them
for sale at $500,000 each. This would increase the quantity of
houses supplied at that price.
The reverse can also happen when prices drop. Producers may
exit the market, decreasing the quantities supplied at certain
prices.
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So a supply curve is direct, upward sloping or
positive curve, due largely to the fact that the
higher the price the easier it is for the supplier to
cover his costs.
Price
S
Qs
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Lets look at the plotted
supply schedule which
shows how much of a certain
product a business will
supply at each price.
Supply Schedule
Price
$2
$3
$4
$5
$6
Quantity
50
100
150
200
250
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Supply Graph
S
Qs
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Price
There are six determinants
(shifters) that would cause the
entire supply curve to shift left
(decrease) or right (increase).
s2
S
S1
Qs
• S is the original supply curve
• S1 is the increased supply, to the right is more
supplied at each price.
• S2 is the lesser supply, again left is less supplied at
each price
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Supply Shifters
1. Input prices change.
The greater the cost of inputs into production,
the less that can be supplied. Therefore as input
prices rise, supply falls.
If wheat (input) prices rise,
bread companies will not be
able to produce as much
bread and the supply will
decrease.
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S1
Price
S
left
less
Qs
The supply of bread will decrease and the curve
shifts left.
Don’t bring demand in yet, we will do that later!
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2. Technology Changes
The more technology improves, the less labor or
other resources necessary to produce, therefore
supply can go up.
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Technology change that increases
supply
•
Price
s
s1
Qs
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3a. Future expectations
As a producer, if you
expect that the price of
your product will rise in
the future you might
stockpile your product
now and not send it out
until the price rises.
This means there will be
less in the marketplace
today.
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3b. Change in Price of Alternative Goods
Those are the goods that use the same
resources as the goods we are analyzing.
For example if you make children’s swing sets out of
iron, and you realize that iron beds are now selling at a
much higher price, it may make it very attractive for
you to switch to making iron beds.
Therefore the supply of iron beds would increase.
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3b. Change in Price of Alternative Goods
If you do that… the supply of iron beds will go
up, however the supply of children’s swing sets
may decrease.
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S1
Price
S
left
less
Qs
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4. Number of sellers
If more sellers enter a market, there will be an
increase in the supply of the products they sell.
This means that the
more producers
there are, the more
product possible.
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Price
S
S1
increase
Qs
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5. Effects of natural disasters
or world events
Fires, storms, floods,… can wipe out supplies of
materials or products.
Political situations or
problems around the
globe can change supply.
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6a. Taxes
• When the government levies taxes on
producers, those are effectively an addition to
the cost of production.
• Therefore, a tax levied on a product will shift
the supply curve to the left.
• So taxes rise, supply will decrease.
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6b. Subsidies
• A subsidy occurs when the government makes
a payment to a producer, usually in the form
of a cash grant.
• It is essentially a negative tax paid to the
producer by the gov’t.
• Therefore a subsidy to a producer would have
the opposite effect and shift the supply curve
to the right.
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Time for Practice
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Practice
High schools and colleges begin in the fall.
What happens to the supply curve for 3 ring binders in February?
What supply shifter tells you that?
Price
S1
S
Qs
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Practice
A mechanic invents a new machine that picks fruit in half the
time it takes people.
What happens to the supply curve for apples?
What supply shifter tells you that?
Price
S1
S
Qs
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Practice
Government increases taxes on imported foods.
What happens to the supply curve for Italian olive oil?
What supply shifter tells you that?
Price
S1
S
Qs
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Practice
A drought has ruined cotton production across the U.S.
What happens to the supply curve for t-shirts?
What supply shifter tells you that?
Price
S1
S
Qs
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Practice
Because of popularity, three new coffee shops have opened in
the Town Center area.
What happens to the supply curve for lattes?
What supply shifter tells you that?
Price
S1
S
Qs
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Practice
Sugar prices have dropped to their lowest price in four years.
What happens to the supply curve for candy?
What supply shifter tells you that?
Price
S1
S
Qs
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