Chapter 5/6: Supply/Prices
description
Transcript of Chapter 5/6: Supply/Prices
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Chapter 5/6: Supply/Prices
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Section 1: Understanding Supply
• Supply is the counterpart to demand, together they shape markets.
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Supply
• Supply is the amount of goods or services available.
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Law of Supply
• Suppliers will offer more of a good at a higher price, and vice versa.
Price PriceSupply Supply
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Supply Schedule
• A supply schedule is a table that lists quantity supply levels at different prices.
Price of a slice of pizza Quantity of slices supplied
$.50 1
$1.00 2
$1.50 3
$2.00 4
$2.50 5
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Market Supply Schedule
• A market supply schedule charts supply levels for an entire economy.
Price of a slice of pizza Quantity of slices supplied
$.50 1 million
$1.00 2 million
$1.50 3 million
$2.00 4 million
$2.50 5 million
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Supply Curve• Supply curves plot the data from demand schedules
onto a graph.
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Creating our own supply schedule
How much would you sell an ipad for?
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Elasticity of Supply• Elasticity measures the way supply responds to
changes in price.• Elastic supply = supply changes greatly• Inelastic supply = supply doesn’t change much
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Elastic Supply
• An increase/decrease in price greatly impacts the level of supply.
• Examples?
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Inelastic Supply• An increase/decrease in price doesn’t greatly impact
the level of supply.• Examples?
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Section 3: Costs of Production
• Supply is influenced not only by demand, but by the costs of production.
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Costs
• Costs can be divided into two categories…– Fixed cost: a cost that does not change, no matter how
much is produced.– Variable cost: A cost that rises and falls depending on how
much is produced.
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Business Cost Exercise
1. With a partner, quickly create a business idea. 2. Come up with a list of all the different costs you will
have in supplying your good/service.
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Business Cost Exercise
1. With a partner, quickly create a business idea. 2. Come up with a list of all the different costs you will
have in supplying your good/service.3. Determine which are fixed costs and which are
variable.
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Examples of Fixed and Variable Costs
• Fixed:– Rent/mortgage– Equipment purchase/repair– Property taxes– Salaries of workers
• Variable:– Extra resources to produce more– Extra employees – Advertising/Marketing– Utilities: heat/electric
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Total Cost
• Fixed costs + variable costs = total cost
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Managing Variable Costs
• Businesses need to decide whether creating additional supply is worth the additional costs.
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Section 3: Changes in Supply
• Like demand curves, sometimes shifts occur along the curve, and sometimes the entire curve shifts.
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Supply Shifts
• Impacts on supply include…– Change of price for good/service– Production costs– Technology – Government influence on supply
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Supply Curve
• Supply Curves can shift right or left depending on increased or decreased supply levels at all costs.
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Supply Decrease
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Impacts on Supply: Technology
• Improved technology often increases the potential supply for goods or services.
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Impacts on Supply: Government
• Subsidies: government payment to support a business or market.
• Examples: agriculture, oil
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Impacts on Supply: Taxes
• Taxes impact supply levels• Excise tax: tax on the production or sale of a good
(often to discourage their supply)
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Impacts on Supply: Government• Regulation: government regulation can increase or
decrease supply.• Example: environmental regulation
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Future Expectations
• Future expectations impact supply: will the demand go up or down for this product?
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Chapter 6: Prices
• Prices are always changing, based on availability (supply) and demand.
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Section 1: Combining Supply & Demand
• Together, supply and demand interact to determine prices.
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Equilibrium Price
• The point where demand and supply meet is the equilibrium point where prices are set.
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Supply/Demand Schedule
Price of a slice of pizza Quantity of slices supplied
Quantity of slices Demanded
$.50 1 5
$1.00 2 4
$1.50 3 3
$2.00 4 2
$2.50 5 1
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Supply/Demand Curve
• Equilibrium point is where the two lines intersect.
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Disequilibrium
• Disequilibrium occurs whenever the amount supplied is not equal to the amount demanded at a certain price.
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Excess Demand
• Excess demand occurs when there is more demand than supply.
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Excess Demand
• When the price is below equilibrium, excess demand occurs.
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Excess Supply
• Excess supply happens when there is more supply than demand.
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Excess Supply
• When the price is above equilibrium, excess supply occurs.
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Government Intervention: Price Ceilings
• Sometimes government intervenes to control prices.• Price ceiling: a maximum price that can be legally
charged for something.– Example: rent control
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Price Ceiling
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Government Intervention:Price Floor
• Price Floor: a minimum amount that can be charged for an item.– Example: Agriculture, minimum wage.
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Price Floor
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Section 2: Changes in Equilibrium
• As supply and demand shift, equilibrium prices change.
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Shifts in Supply
• If demand remains the same…– An increase in supply will lower price.– A decrease in supply will raise the price.
• Example: bacon shortage!
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Increase in Supply Curve
• A new supply curve changes the equilibrium price.
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SupplyDemandSupply 2
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Decrease in Supply Curve
• A new supply curve changes the equilibrium price.
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Shifts in Demand• If supply remains the same…– An increase in demand will increase the equilibrium price.– A decrease in demand will lower equilibrium price.
• Example: Ironic, hipster t-shirts
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Increase in Demand Curve
• A new demand curve changes the equilibrium price.
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Decrease in Demand Curve
• A new demand curve changes the equilibrium price.
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What if both Demand and Supply Increase (or Decrease)?
• Housing: – increased demand + increased supply = consistent prices
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What if both Demand and Supply Increase (or Decrease)?
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Quantity of pizza slices
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P1 P2
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What if demand increases and supply decreases?
• Fossil Fuels (Oil)– Increased demand + decreased supply = runaway price increases
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What if demand increases and supply decreases?
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