Bell Ringer 12/4/08
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Transcript of Bell Ringer 12/4/08
Bell Ringer 12/4/08Identify each as Elastic or Inelastic AND
give and example of each1. 2.
Law of Supply and the Supply Curve
Chapter 7 Section 3
Profits and the Law of Supply • To understand pricing, you must look at both
demand and supply.• The law of supply states that as the price of a good
rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls.
• The higher the price of a good, the greater the incentive is for a producer to produce more.
Supplied
Supplied
The Determinants of Supply
Many factors affect the supply of a specific product. Four of the major determinants are:
1. Price of Inputs2. # of Firms (Businesses) in the
Industry3. Taxes4. Technology
A change in the supply of a particular item shifts the entire supply curve to the left or right.
Any time the COST to the business DECREASES, then the COST of production DECREASES, and supplies will SUPPLY MORE goods
Any time the COST to the business INCREASES, then the COST of production INCREASES, and supplies will SUPPLY FEWER goods
1. The price of inputsExamples of Inputs (Anything that goes in to making a product):
raw materialswages (labor)land
Price of Inputs increasesSupply DecreasesPrice of Inputs decreasesSupply increases
2. The number of firms in the industry
# of Businesses increasesSupply Increases# of Businesses decreasesSupply decreases
Examples:Businesses
opening & closing
In a free-market economy, sellers enter and leave all the time
3. Taxes & SubsidiesTaxes increaseSupply decreases
Subsidies are payments the government gives to businesses to encourage their behaviors or to help out industries having financial troubles. They have the opposite effect that taxes have on supply.
The Determinants of Supply (cont.)
4. Technology
Any increase in technology with increase supply
The Law of Diminishing Returns
When a business wants to expand, it has to consider how much expansion will really help the business.
The Law of Diminishing Returns (cont.)
• Will product output continue to increase proportionally as more workers are hired?
• The law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease.
Equilibrium Price
Chapter 7 Section 4
Equilibrium Price
In free markets, prices are determined by the interaction of supply and demand.
• As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (and vice versa).
• The point at which the quantity demanded and quantity supplied meet is called the equilibrium price.
Prices as Signals Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.
Prices as Signals (cont.)
• A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied.
• Prices above the equilibrium price reflect a surplus to suppliers.
Graph of Equilibrium Price
Pric
e
Quantity
S1
D1
Equilibrium PriceSupply = Demand
Surplus
Shortage
Consumers
Producers
Surplus Produce less
Consume more
Shortage Produce more
Consume less
Graphing – do on boardIncrease in DemandDecrease in DemandIncrease in SupplyDecrease in Supply
Prices as Signals (cont.)
• When a market economy operates without restriction, it eliminates shortages and surpluses.
– When a shortage occurs, the price goes up to eliminate the shortage.
– When surpluses occur, the price falls to eliminate the surplus.