Transcript AP Micro
Unit 2: Supply, Demand, and Consumer Choice 1 Supply 2 Supply Defined What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. •As price increases, the quantity producers make increases •As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns 3 Why does the law of supply occur? The law of supply is the result of three separate behavior patterns that overlap: 1.The law of increasing opportunity cost 2.The Law of Diminishing Marginal Returns We will define and explain each… 4 Why does the Law of Supply occur? 1. The law of increasing opportunity costs • Factors of production (labor, equipment) are not equally productive, and to produce more requires more time, better equipment, better workers, etc. and so producers need a greater financial incentive. 5 Why does the Law of Supply occur? 2. The law of diminishing marginal returns A business has fixed costs (e.g. rent) and variable costs (e.g. labor). For example: at first, you hire the best workers and they can specialize, so they produce a large amount pretty cheaply and you can sell first few goods at a high price. However, as more and more workers are hired they become less effective. Therefore, it becomes more and more expensive to produce over time. To produce more, businesses need an incentive in the form of more money. 6 Example of Supply You own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these prices? Supply Schedule Price per lawn mowed Quantity Supplied $1 $5 $20 $50 $100 $1000 7 GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Draw this large in your notes $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 8 GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Supply $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 9 GRAPHING SUPPLY Supply Schedule Price $5 $4 Quantity Supplied Price of Cereal Supply $5 What if new 50 companies start making 40 cereal? 30 4 3 2 $3 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 10 Change in Supply Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Supply $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 11 Change in Supply Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Supply $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 12 Change in Supply Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 Price of Cereal Supply $5 4 3 2 $3 30 50 $2 20 40 1 $1 10 30 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 13 Change in Supply Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 Price of Cereal Supply 4 3 2 $3 S2 $5 Increase in Supply Prices didn’t change but there is MORE cereal produced 30 50 $2 20 40 1 $1 10 30 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 14 Change in Supply Supply Schedule Price $5 $4 Quantity Supplied Price of Cereal Supply $5 What if a drought 50 destroys corn and wheat 40 crops? 30 4 3 2 $3 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 15 Change in Supply Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Supply $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 16 Change in Supply Supply Schedule Price Quantity Supplied $5 50 $4 40 Price of Cereal Supply $5 4 3 2 $3 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 17 Change in Supply Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 Price of Cereal Supply $5 4 3 2 $3 30 10 $2 20 1 1 $1 10 0 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 18 Change in Supply Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 Price of Cereal S2 $5 4 3 Decrease in Supply Prices didn’t change but there is LESS cereal produced 2 $3 Supply 30 10 $2 20 1 1 $1 10 0 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 19 Change in Supply Supply Schedule Price $5 $4 $3 Quantity Supplied Price of Cereal Supply $5 4 What if cereal companies 50 3 find a quicker way to make 40 2 cereal? 30 $2 20 1 $1 10 o 10 20 30 40 50 60 70 Quantity of Cereal 80 Q 20 6 Shifters (Determinants) of Supply 1. Prices of related goods (substitutes/complements) 2. Prices of resources & other inputs 3. Expectations 4. Number of sellers 5. Productivity/technology 6. Government Action: Taxes & Subsidies Subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. Regulation Changes Taxes in PRICE don’t shift the curve. It only The government can reduce the Regulation occurs when the causes movement along steps the into curve. supply of some goods by placing an government a market to 21 Supply Practice First, identify the determinant (shifter) then decide if supply will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 22 Supply Practice 1. Which determinant (SHIFTER)? 2. Increase or decrease? 3. Which direction will curve shift? 1. 2. 3. 4. 5. 6. 7. 8. Hamburgers Mad cow disease kills 20% of cows Price of hamburgers increase 30% Government taxes burger producers Restaurants can produce burgers and/or tacos. A demand increase causes the price for tacos to increase 500% New bun baking technology cuts production time in half Minimum wage increases to $20 Price of steak increases 300% Government subsidises cow ranches 23