Chapter 3 Economics. SupplySupply amount of goods and services business firms are willing and able...

Chapter 3Chapter 3EconomicsEconomics

SupplSupplyy

SupplSupplyyamount of goods and amount of goods and

services business services business firms are willing and firms are willing and

able to provide at able to provide at different pricesdifferent prices

amount of goods and amount of goods and services business services business

firms are willing and firms are willing and able to provide at able to provide at different pricesdifferent prices

Law of Law of SupplySupplyLaw of Law of SupplySupplythe higher the the higher the price, the greater price, the greater the quantity of the the quantity of the product a supplier product a supplier

will producewill produce

the higher the the higher the price, the greater price, the greater the quantity of the the quantity of the product a supplier product a supplier

will producewill produce

BusinesBusinesss

BusinesBusinesssa seller of goods or a seller of goods or

servicesservicesa seller of goods or a seller of goods or

servicesservices

supply schedulesupply schedule

table of supply data

table of supply data

Supply curveSupply curveSupply curveSupply curveline-graph of line-graph of

supply schedule supply schedule informationinformation

line-graph of line-graph of supply schedule supply schedule

informationinformation

3000

1000

2000

4000

.50

1.00.90

1.101.20

.80

.70

.60

Supply CurveSupply Curve

5000

.40.40

31 2 4

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Vertical graphVertical graph

3010 20 40

$100

$200

$300

$400

$500

$600

Horizontal graphHorizontal graph

50 60

Change in quantity Change in quantity suppliedsupplied

Change in quantity Change in quantity suppliedsupplied

when a change in price when a change in price buyers will pay causes a buyers will pay causes a change in the number of change in the number of

goods suppliedgoods supplied

when a change in price when a change in price buyers will pay causes a buyers will pay causes a change in the number of change in the number of

goods suppliedgoods supplied

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1000

2000

4000

.50

1.00.90

1.101.20

.80

.70

.60

Change in Quantity Supplied

Change in Quantity Supplied

5000

.40

.90.90

.50.50

Change in SupplyChange in SupplyChange in SupplyChange in Supply• decrease in supplydecrease in supply

leftward shiftleftward shift• suppliers produce suppliers produce lessless at any at any

given pricegiven price

• decrease in supplydecrease in supplyleftward shiftleftward shift• suppliers produce suppliers produce lessless at any at any

given pricegiven price

Change in SupplyChange in SupplyChange in SupplyChange in Supply

• increase in supplyincrease in supplyrightward shiftrightward shiftsuppliers produce suppliers produce moremore

at any given priceat any given price

• increase in supplyincrease in supplyrightward shiftrightward shiftsuppliers produce suppliers produce moremore

at any given priceat any given price

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1000

2000

4000

.50

1.00.90

1.101.20

.80

.70

.60 Decrease in Supply

Decrease in Supply

5000

.40

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1000

2000

4000

.50

1.00.90

1.101.20

.80

.70

.60

Increase in Supply

Increase in Supply

5000

.40

Supply Shift FactorsSupply Shift Factors

• change in technology

• change in production costs

• change in price of related goods

• change in technology

• change in production costs

• change in price of related goods

Change in TechnologyChange in Technology

• improves tools used to produce goods and services

• improves production or reduces cost

• improves tools used to produce goods and services

• improves production or reduces cost

Change in Production Costs

Change in Production Costs

• costs of natural resources, labor, and financial capital

• changes in these costs affect supply

• costs of natural resources, labor, and financial capital

• changes in these costs affect supply

Change in Price of Related Goods

Change in Price of Related Goods

• usually substitute goods

• shift production to the more-profitable good

• usually substitute goods

• shift production to the more-profitable good

Market Equilibrium Point

Market Equilibrium Point

price at which consumers

are willing to pull out of the market the exact quantity of product that suppliers are willing to

push in

price at which consumers

are willing to pull out of the market the exact quantity of product that suppliers are willing to

push in

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1.101.201.30

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.70

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2000

6000

7000

8000

demanddemand

supplysupply

market equilibrium

market equilibrium

Economies of ScaleEconomies of Scale• the more produced, the

cheaper each product

• supply more with hopes that demand increases

• the more produced, the cheaper each product

• supply more with hopes that demand increases

surplussurplus

an excess of unsold products

an excess of unsold products

Surplus CostsSurplus Costs• storage

• security & insurance of the goods

• spoilage of the goods

• loss of income

• interest costs of financing

• storage

• security & insurance of the goods

• spoilage of the goods

• loss of income

• interest costs of financing

Surplus SolutionsSurplus Solutions

1) increase demand for the goods

2) decrease the supply

3) allow the price to fall to the equilibrium point

1) increase demand for the goods

2) decrease the supply

3) allow the price to fall to the equilibrium point

Surplus SolutionsSurplus Solutions

1) increase demand for the goods

• first and best solution for the supplier

• produce a great quantity and charge a higher price

• “demand solution”

1) increase demand for the goods

• first and best solution for the supplier

• produce a great quantity and charge a higher price

• “demand solution”

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1.35

demand1

demand2

supply

Surplus SolutionsSurplus Solutions

1) increase demand for the goods

• increasing tastes & preferences

• eliminate substitute goods

• establish price floors

1) increase demand for the goods

• increasing tastes & preferences

• eliminate substitute goods

• establish price floors

Surplus SolutionsSurplus Solutions

2) decrease the supply2) decrease the supply• cut production• “supply solution”• cut production• “supply solution”

problems = competition reactionproblems = competition reaction

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1.35

demand

supply2

supply1

Surplus SolutionsSurplus Solutionsincrease demandincrease demand

decrease supply

decrease supply

•demand solution

•demand solution

•supply solution•supply solution

•shifts the demand curve

•shifts the demand curve

•shifts the supply curve

•shifts the supply curve

• favored by suppliers

• favored by suppliers

Surplus SolutionsSurplus Solutions

3) allow the price to fall to the market equilibrium point

3) allow the price to fall to the market equilibrium point• the market does the work• supplier = gradually lowers price• buyer = purchases more at lower price

• surplus gone; price stops falling

• the market does the work• supplier = gradually lowers price• buyer = purchases more at lower price

• surplus gone; price stops falling

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1000

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.80

1.001.101.20

.70

.60

2000

6000

7000

8000

1.301.40

Surplus SolutionsSurplus Solutions

1) increase demand for the goods

2) decrease the supply

3) allow the price to fall to the equilibrium point

1) increase demand for the goods

2) decrease the supply

3) allow the price to fall to the equilibrium point

shortage

shortage• caused by the price of a good

being held lower than its market equilibrium price

• not enough of a good

• caused by the price of a good being held lower than its market equilibrium price

• not enough of a good

loss leaders

loss leaders

products deliberately sold at a loss to lure

in customers

products deliberately sold at a loss to lure

in customers

Price CeilingsPrice Ceilings

• government restrictions on prices

• prevent prices from rising to equilibrium value

• always causes shortages

• government restrictions on prices

• prevent prices from rising to equilibrium value

• always causes shortages

Shortage SolutionsShortage Solutions

1) decrease demand

2) increase supply

3) allow the price to rise to the market equilibrium point

1) decrease demand

2) increase supply

3) allow the price to rise to the market equilibrium point

Shortage SolutionsShortage Solutions

1) decrease demand1) decrease demand

• “demand solution”

• by discouraging demand for a product

• “demand solution”

• by discouraging demand for a product

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1.001.101.20

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supply

demand1

demand2

Shortage SolutionsShortage Solutions

2) increase supply2) increase supply• “supply solution”

• by:

managing supply

improving technology

boosting productivity

• “supply solution”

• by:

managing supply

improving technology

boosting productivity

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supply1

demand

supply2

Shortage SolutionsShortage Solutions

decrease demanddecrease demand• demand solution• demand solution

increase supplyincrease supply• supply solution• supply solution

• shifts demand curve

• shifts demand curve

• shifts supply curve

• shifts supply curve

• dangerous to suppliers

• dangerous to suppliers

• focus on technology or production

• focus on technology or production

Shortage SolutionsShortage Solutions3) allow the price to rise to the

market equilibrium point3) allow the price to rise to the

market equilibrium point• not imposing price ceilings• benefits:

encourages conservation and discourages wastefulness

motivates entrepreneurs to enter the market

• not imposing price ceilings• benefits:

encourages conservation and discourages wastefulness

motivates entrepreneurs to enter the market

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supplydemand