Presentation Transcript

1. Prices

   Lesson 10: Supply
2. $1,000,000
3. Laugher Curve A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to move to South Dakota.
4. Laugher Curve “Will this cure my illness?” she asked. No, but the half year will seem pretty long.”
5. Readings and Assignments “James Madison and Property Rights” Junior Achievement Chapter 4 “War on Property” “Lincoln’s Stepbrother” “Property Rights and Human Rights” “Immigration, Superstars & Poverty”
6. Economic Reasoning Principle # 3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.
7. Consumers are only ½ the Market Supply
8. What Incentive Do Producers have to make (Any or More) of a Product? Producers are in business to make… Producers will make more of a product only if that decision increases… Marginal Benefits (MB) and Marginal Cost (MC) MB > MC this is good, so make more MB < MC not good, so make less PROFIT PROFIT
9. Price an Incentive for Producers Producers of CDs
10. Individual and Market Supply Curves The market supply curve is derived by horizontally adding the individual supply curves of each supplier.
11. Price ≈ ≈ 0 Graphs: Pictures of Supply Sa Sb St Quantity Supplied (QS) How much will producers offer for sale at this price?
12. The Law of Supply If P then QS and If P then QS Remember: Producers can substitute, too. What causes the change in the producers’ behavior ? (think: price effect)
13. Law of Supply Law of Supply As the price of a product rises, producers will be willing to supply more. The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supplythat next unit to market. The height of the supply curve at any quantity also shows the opportunity cost ofproducing the next unitof the good.
14. The Law of Supply The Law of Supply is accounted for by two factors: When prices rise, firms substitute production of one good for another. Assuming firms’ costs are constant, a higher price means higher profits. Not in your book but something to think about!
15. A supply schedule shows how much of a good or service would be supplied at different prices. Supply Schedule for Tickets Supply Schedule
16. The Supply Curve The supply curve is the graphic representation of the law of supply. The supply curve slopes upward to the right. The slope tells us that the quantity supplied varies directly – in the same direction – with the price.
17. Shifting Supply What besides price affects producers’ willingness to offer products for sale? CLICK ! It's a new picture.
18. Supply shifters Costs of production Resource availability changes Technology changes Resources (inputs) price changes Numbers of suppliers Prices of production substitutes Producer could make more money producing other things (grow corn instead of soybeans, for example) In WWII auto factories switched to making tanks Suppliers’ expectations about the future “Prediction of bad hurricane season” “Minimum wage is going to go up” Weather
19. “Movement Along” vs. “Shift” of the Supply Curve A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price. from point A to point B: the decrease in quantity supplied reflects a movement along the supply curve it is the result of a fall in the price of the good. from point A to point C: the decrease in quantity supplied reflects a shift of the supply curve It is the result of a decrease in the quantity supplied at any given price.
20. Taxes and Subsidies When taxes go up, costs go up, and profits go down, leading suppliers to reduce output. When government subsidies go up, costs go down, and profits go up, leading suppliers to increase output. Not in your textbook but something to think about
21. Price of Inputs (Resource Prices) When costs go up, profits go down, so that the incentive to supply also goes down.
22. Technology Advances in technology reduce the number of inputs needed to produce a given supply of goods. Costs go down, profits go up, leading to increased supply.
23. Expectations If suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later.
24. Number of Suppliers As more people decide to supply a good the market supply increases (Rightward Shift).
25. Shifts of the Supply Curve (continued) Any “increase in supply” means a rightward shift of the supply curve: at any given price, there is an increase in the quantity supplied. (S1 S2) Any “decrease in supply” means a leftward shift of the supply curve: at any given price, there is a decrease in the quantity supplied. (S1 S3) The principal factors that shift the supply curve: changes in the price of an input changes in technology changes in expectations.
26. Supply shifters: Examples What will happen to the supply of hotdogs if the price of hotdog buns increases? Why? What will happen to the supply of DVDs if recording technology becomes more efficient? Why? What will happen to the supply of new houses after a summer of terrible fires destroys many forest areas? Why?
27. Remember: Determinants of Supply FACTORS THAT SHIFT THE SUPPLY CURVE Any factor that increases the cost of production decreases supply. Any factor that decreases the cost of production increases supply.
28. B Change in quantity supplied (a movement along the curve) A Change in Quantity Supplied S0 Price (per unit) $15 1,250 1,500 Quantity supplied (per unit of time)
29. S1 Price (per unit) A B Shift in Supply (a shift of the curve) Quantity supplied (per unit of time) Shift in Supply S0 $15 1,250 1,500
30. Supply Elasticities Price elasticity of supply tells us how much producers respond to changes in price. What factors most affect elasticity of supply? Willingness Ability (Capacity) Capacity is the ability to produce. If a firm is “at capacity” they are making 100% Time Elasticity increases over time. When supply and demand are highly inelastic, prices can fluctuate more.
31. Elastic Supply Products quickly made Inexpensive goods and services Readily available inputs
32. Inelastic Supply Take a long time to produce Expensive to produce Limited or lots of competition for inputs
33. The Numbers! Perfectly inelastic e=0 vertical line Perfectly elastic e=∞ horizontal line Unit elastic e=1 crosses at (0,0) Elastic e>1 crosses x above (0,0) Inelastic e<1 cross y before (0,0) Sorry!!! Can’t use the TR Test with supply.
34. The Pictures Inelastic Elastic Unit Elastic Perfectly Inelastic Perfectly Elastic
35. Supply Elasticities in the Long and Short Runs The shape of the supply curve depends primarily on the length of time being considered. In the short run, at least one of the resources used in production cannot be changed. In the long run, the firm has long enough to change any aspect of production, and therefore can more fully respond.