Pump Primer CHAPTER 4 In your own words, explain the difference between having a shortage vs. a surplus.

Pump Primer

CHAPTER 4

In your own words, explain the difference between having a shortage vs. a surplus.

CHAPTER 4

Supply and Prices

Objectives:

CHAPTER 4

Should be able to...• Define supply, budget deficit & surplus• Identify the law of supply• Explain how changes in supply occur• Explain the existence of the market equilibrium point.• Describe the causes of a surplus and a shortage• Explain how the market price system works to alleviate a surplus or

a shortage.

Biblical Integration:

CHAPTER 4

Instead of pursuing earthly wealth, pursue the wisdom of God and what glorifies Him; and He will bless you with prosperity as He chooses. (Prov. 2:1-11; 3:5-10)

supply

CHAPTER 4 pp. 64-71

the amount of goods and services business firms are willing and able to provide at

different prices

business firms

CHAPTER 4 pp. 64-71

include all sellers of goods and services, not just major corporations

law of supply

CHAPTER 4 pp. 64-71

the higher the price buyers are willing to pay, other things being held constant, the

greater the quantity of a product a firm will produce and that the lower the price

consumers are willing to pay, the smaller the quantity the supplier will produce

supply schedule

CHAPTER 4 pp. 64-71

a tabular model noting the quantities of an item that suppliers are willing to produce at

various prices

supply curve

CHAPTER 4 pp. 64-71

a graph illustrating the quantities of an item that suppliers are willing to produce at various prices

change in quantity supplied

CHAPTER 4 pp. 64-71

whenever a change in the price consumers are willing to pay causes a change in the

number of goods produced and sold

Changes in Supply

• decrease in supply• leftward shift• suppliers produce less at any given price

CHAPTER 4 pp. 64-71

Changes in Supply

• increase in supply• rightward shift• suppliers produce more at any given price

CHAPTER 4 pp. 64-71

2. When supply increases, the supply curve shifts rightward from S0 to S2.

1. When supply decreases, the supply curve shifts leftward from S0 to S1.

Figure 4.7 shows changes in supply.

CHANGE IN SUPPLY

(Bade 101)

Supply Shift Factors

1. Changes in technology

2. Changes in productivity or production costs

3. Changes in the price of related goods

4. Expectations

5. Number of sellers

CHAPTER 4 pp. 64-71

1. Changes in Technology

• improves tools used to produce goods and services

• improves production or reduces cost

CHAPTER 4 pp. 64-71

CHAPTER 4 p. 68

2. Changes in Production Costs

• costs of natural resources, labor, and capital

• changes in these costs affect supply

CHAPTER 4 pp. 64-71

CHAPTER 4 p. 68

3. Changes in the Prices of Related Goods

• usually substitute goods• shift production to the more-profitable

good

CHAPTER 4 pp. 64-71

CHAPTER 4 p. 71

SUPPLY

by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education, New York, N.Y.

Activities 6

OBJECTIVES• Define supply schedule and supply curve.• Construct a supply curve using hypothetical data.• Explain why producers are willing to supply more of a

good or service when the price increases.• Explain the difference between a shift in the supply

curve and a movement along the supply curve.• Explain the difference between an increase in supply

and an increase in the quantity supplied.• Describe and analyze the forces that shift the supply

curve.• Explain why a supply curve would shift to the right or

left given specific changes in the economy.

INTRODUCTION

• This lesson introduces supply, the other half of the market system.

• A supply schedule represents the quantities that firms are willing and able to supply at alternative prices.

• A supply curve is a graphical representation of the supply schedule.

INTRODUCTION

• Activity 6 reinforces the factors that cause a supply curve to shift, the direction of the shift and whether the shift represents an increase or decrease in supply.

MOVEMENT ALONG A SUPPLY CURVE

• As the price declines from P1 to P, the quantity decreases from Q1 to Q

• Price decreases, the quantity supplied decreases.

SHIFT IN SUPPLY• An increase in supply is

a shift to the right( and a decrease in supply is a shift to the left).

• Increase in supply from S to S1 shows that at the same price (P), the quantity increased from Q to Q1.

SHIFT IN SUPPLY

Factors that Shift supply:• Number of suppliers• Prices of resources used to produce good• Prices of related goods produced• Technology• Expectations about future prices

• Part A• Read the eight newspaper headlines in Figure 6.2, and use the table to

record the impact, if any, of each event on the supply of cars.• Use the first column to the right of the headline to show whether the

event causes a change in supply.• Use the next column to record whether the change is an increase or a

decrease in supply.• In the third column, decide whether the supply curve shifts left or right.• Finally, write the letter for the new supply curve.

• Use Figure 6.1 to help you.• Always start at curve B, and move only one curve at a time.

• Two headlines imply that the supply of cars does not change

ACTIVITY 6

Y Inc R C

Y Inc R C

Y Dec L A

Y Dec L AY Dec L A

Y Dec L AN -- -- --N -- -- --

• Part B• Categorize each change in supply in Part A

according to the reason why supply changed,• In Figure 6.3, place an X next to the reason

that the event described in the headline caused a change in supply. • In some cases, more than one headline could be

matched to a reason.• Two headlines do not indicate a shift in supply.

X X X

X

X X

X

X

PUMP PRIMER• Using your textbook draw a supply & demand graph in

equilibrium.• Make sure to label the vertical and horizontal lines

correctly. Price Quantity D S E

market equilibrium point

CHAPTER 4 pp. 71-78

the point at which the demand curve and the supply curve for an item intersect

market equilibrium price

CHAPTER 4 pp. 71-78

the price corresponding to the intersection of an item’s supply and demand curves; the price at which consumers are willing to buy the same quantity that suppliers are willing to produce

Economy of Scale

• the more produced, the cheaper each product

• supply more with hopes that demand increases

CHAPTER 4 pp. 71-78

surplus

CHAPTER 4 pp. 71-78

an excess of unsold products

Carrying Costs

• storage• security• insurance• spoilage

CHAPTER 4 pp. 71-78

Carrying Costs

• loss of income while the product is sitting idle

• interest costs on financing the unsold production

CHAPTER 4 pp. 71-78

Surplus Solutions

1. increase demand

2. decrease supply

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

CHAPTER 4 pp. 71-78

1. Increase Demand

• first and best solution for the supplier• produce a great quantity and charge a

higher price• “demand solution”

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 73

1. Increase Demand

• increasing tastes and preferences• eliminate substitute goods• establish price floors

CHAPTER 4 pp. 71-78

2. Decrease Supply

• cut production• “supply solution”• problems = competition reaction

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 73

increase demand

• demand solution• shifts the demand curve• favored by suppliers

decrease supply

• supply solution• shifts the supply curve

CHAPTER 4 pp. 71-78

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

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 74

Shortage

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

• not enough of a good

CHAPTER 4 pp. 71-78

.

CHAPTER 4 p. 74

Price Ceilings

• government restrictions on prices• prevent prices from rising to equilibrium

value• always causes shortages

CHAPTER 4 pp. 71-78

.

loss leaders

CHAPTER 4 pp. 71-78

products that are deliberately sold at a loss to lure customers

Shortage Solutions

1. decrease demand

2. increase supply

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

CHAPTER 4 pp. 71-78

1. Decrease Demand

• “demand solution”• by discouraging demand for a product

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 75

2. Increase Supply

• “supply solution”• management of supply• two ways of increasing supply

1. improving technology

2. boosting productivity

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 77

decrease demand

• demand solution• shifts demand curve• dangerous to suppliers

increase supply

• supply solution• shifts supply curve• focus on technology or

production

CHAPTER 4 pp. 71-78

3. 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

CHAPTER 4 pp. 71-78

CHAPTER 4 p. 78

EQUILIBRIUM

Activity 7

by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education,

New York, N.Y.

OBJECTIVES• Define equilibrium price and equilibrium quantity.• Determine the equilibrium price and quantity when given the demand for

and supply of a good or commodity.• Explain why, at prices above or below the equilibrium price, market forces

operate to move the price back toward equilibrium price.• Predict the equilibrium price and quantity if there are changes in demand or

supply.• Given a change in supply or demand, explain which curve shifted and why.• Explain how markets act as rationing devices.

• Define price elasticity of demand and price elasticity of supply.• Calculate price elasticity using the arc method.• Predict the effect on price and quantity given demand curves with

different elasticity's.• Explain the difference between slope of a line and the elasticity

between two points on a line.

INTRODUCTION• This lesson will bring the two sides of the

market—demand and supply—together to determine the equilibrium price and quantity.

• You should understand that unless there are forces operating to change supply or demand, the price and quantity will remain at the equilibrium.

• Activity 7 brings the supply and demand sides of the market together and helps the students understand equilibrium price and quantity.

• The factors that shift supply and demand are also used to emphasize the impact of supply or demand on the equilibrium price and quantity.

• The second part of Activity 7 has you work through changes in supply and demand and the effects in related markets.

EQUILIBRIUM QUANTITY AND PRICE

A. What happens if the price is $10?

The quantity supplied is 100, and the quantity demanded is 60. Therefore, there is excess supply.

EQUILIBRIUM QUANTITY AND PRICE

B. What happens if the price is $6?

The quantity demanded is 100, and the quantity supplied is 60. Therefore, there is excess demand.

EQUILIBRIUM QUANTITY AND PRICE

C. What happens if the price is $8?The quantity that producers want to sell is exactly equal to the quantity that buyers want to buy. The market is in equilibrium.

ACTIVITY 7

• Find one partner (not your close friend)!• Complete Activity 7.

• You will be called upon to come to the board and share your answers.

S

D

E

1. Under these conditions, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of _____ million Greebes. (Equilibrium price and quantity)

2. If the price currently prevailing in the market is $0.30 per Greebe, buyers would want to buy ____ Greebes. And sellers would want to sell ____ million Greebes. Under these conditions, there would be a (shortage / surplus) of _____ million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of ____ per Greebe. (Market Equilibrium price)

$ 0.25200

150

250

100

$0.25

• At this new price (equilibrium), buyers would now want to buy ____ million Greebes, and sellers now want to sell ____ million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by ____ million Greebes, and the (supply / quantity demanded) changed by ____ million Greebes

200

200

50

50

3. If the price currently prevailing in the market is $0.20 per Greebe, buyers would want to buy ____ million Greebes, and sellers would want to sell ____ million Greebes. Under these conditions, there would be a (shortage / surplus) of ____ million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of ____ per Greebe. At this new price buyers would now want to buy ____ million Greebes, and sellers now want to sell ____ million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by 50 Greebes, and the (supply / quantity supplied) changed by ____ million Greebes.

250

150

100

$0.25

200200

50

SS1

D

EE1

4. Now, suppose a mysterious blight causes the supply schedule for Greebes to change to the following:

• Under these conditions, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes.

• Compare with the equilibrium price in Question 1, we say that because of this change in (price, underlying conditions), the (supply / quantity supplied) changed; and both the equilibrium price and the equilibrium quantity changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased).

$0.30

150

SS1

DD1

EE1

E2

5. Now, with the supply schedule at S1, suppose further that a sharp drop in people’s income as the result of a prolonged recession cause the demand to change to the following:

• Under these conditions, with the supply schedule at S1, competitive market forces would tend to establish an equilibrium price of ____ per Greebe and an equilibrium quantity of ____ million Greebes. Compare with the equilibrium price in Question 4, because of this change in (price / underlying conditions), the (demand / quantity demanded) changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased).

6. The movement from the first equilibrium price and quantity to the equilibrium price and quantity is the result of a (price / nonprice) effect.

$0.25

100

S1 S1

D1

D1

S1

D1

D1 D1

D1 D1 D1D1