Bell Ringer 12/4/08 Identify each as Elastic or Inelastic AND give and example of each 1. 2.

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 Inputs

2. # of Firms (Businesses) in the Industry

3. Taxes

4. 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 & Subsidies

Taxes 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.