Supply. QUESTION: What do you think the motivation for SUPPLY is?

Transcription

1 Supply The motivation for DEMAND is to save money. Consumers will buy more of a product as the price becomes lower (Law of Demand). QUESTION: What do you think the motivation for SUPPLY is? The motivation for SUPPLY is to maximize profit. As we proceed with studying supply, think from this perspective: Am I going to profit if I provide this supply?

2 Supply Is there anyone in class who has experience either running a business, or who knows someone who runs a business and has observed their business or spoken with them about it?

3 Supply Now as a class we will watch the following clip on youtube fore dirty jobs: MCXs

4 Supply At the top of your handout write down the amount you would have to be paid per hour working 9-5 all week. Do not talk with anyone or share your amount you would take! Who would do it for: $9, $15 etc.

5 Supply DEFINITION: The amount of a product that would be offered for sale at all possible prices that could prevail in the market. Law of Supply DEFINITION: The principle that suppliers will normally offer more for sale at higher prices and less at lower prices.

6 Demonstrating understanding Create a supply schedule (see at right). First, write the price points. Then fill in the quantity supplied $ Quantity Supplied 2. Create a supply curve based upon your supply schedule. Remember: zero point, label both axes, label hash marks, plot the points, draw the curve.

7 SUPPLY ELASTICITY THREE TYPES Elastic Supply: The increase in supply is greater than proportional to the increase in price. Inelastic Supply: The increase in supply is less than proportional to the increase in price. Unit Elastic Supply: The increase in supply is precisely proportional to the increase in price.

8 IMPORTANT: Supply elasticity is determined by the nature of a company s production - how quickly can the business respond and adjust its supply? If it can respond quickly, supply is likely to be ELASTIC. They respond quickly to take advantage of higher prices (example: Super Bowl t-shirts). If it cannot respond quickly, supply is likely to be INELASTIC. They cannot crank up supply quickly because of costs and complexity of production (example: Toyota Prius in ).

9 Change in Supply There are SEVEN FACTORS that can produce a change in supply. A change in supply is shown on a supply curve when the entire curve shifts to the right (increase in supply) or the entire curve shifts to the left (decrease in supply). 1. Cost of Inputs: If the cost of inputs (such as labor, materials or packaging) decreases, suppliers are willing to produce more of the product at each and every price point, shifting the entire curve to the right. If the cost of inputs rises, the opposite occurs. 2. Productivity: If workers become more productive (each worker is more efficient and can make more or achieve more in the same amount of time), then the supplier can make more goods at the same price and shift the entire curve to the right. If workers become less productive (unmotivated, poorly trained, unhappy) the opposite occurs. 3. Technology: New technology tends to shift the entire curve to the right by increasing efficiency or otherwise lowering the cost of production. 4. Taxes and Subsidies: Raising taxes - or eliminating subsidies - raises the costs for suppliers and usually causes the entire curve to shift to the left; lowering taxes or adding subsidies reduces costs and tends to encourage suppliers (moving the curve to the right). 5. Change in Expectations: If suppliers expect prices for their product to rise in the future, they may hold onto supply to make more profit in the near future; if they expect prices to drop, they may increase supply to take advantage of higher prices now. 6. Government Regulations: New government regulations (rules) increase costs and tend to move the supply curve to the left; reduced regulations tend to do the opposite. 7. Number of Sellers: As more companies (sellers) enter a market, the supply curve shifts to the right. As more companies leave a market, the curve typically shifts to the left.

10 Change in Supply Provide 2 examples of an economic good whose producer would increase the quantity supplied if the price were to go up. Identify 1 factor that caused the change and if the supply would be elastic or inelastic for each example.

11 Demonstrating understanding Create a supply schedule (see at right). First, write the price points. Then fill in the quantity supplied for S (original), S 1 (increase) and S 2 (decrease). & $ S (Old) S 1 (New) Steps 1 and 2 S 2 (New) 2. Columns S 1 & S 2 assume at least one factor has caused a change in supply for the product. Create new numbers at every price point - make all numbers in S 1 larger - and all in S 2 smaller - than in S.

12 3. Now graph both supply curves: (a) create the graph, (b) plot the points for S 1 and S 2, (c) draw both curves, (d) label the increase or decrease in supply and draw arrows to show it. Step 3 Remember: zero point, label both axes, label hash marks, plot the points, draw the curves.

13 Bringing the curves together 1. Create a combined demand and supply schedule (see at right). IMPORTANT: Make sure you create an equilibrium price by making one of the price levels have the exact same quantity demanded (D) and quantity supplied (S). D $ Quantity Demanded Price Step 1 S Quantity Supplied 2. Now create ONE graph but plot both sets of points - first make the demand curve and label it D; then make the supply curve and label it S. Steps 2 and 3 3. Now label the equilibrium price and draw dotted lines (vertically and horizontally) to show the price point at which quantity demanded and quantity supplied are equal.