Supply (& Demand), Lecture notes of Economics

Download Supply (& Demand) and more Lecture notes Economics in PDF only on Docsity! and Demand P Q S1D1 D2 D3 S3 S2 “OK, I was wrong. It is a matter of supply and demand, and now I think you da “man”. Consumers and Producers Feel Differently About High and Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price. I normally eat one, but at this low price, I’m having two. Supply (and Demand) “Bread & Butter” of Economics [“perfectly competitive markets”] Law of Supply – QS varies directly with price. Suppliers offer more for sale at higher prices than at lower prices. The consumers, being on the paying end, tend to buy a small amount of the product, but will buy more if the price is lowered. The supplier, on the receiving end, considers price as an incentive to sell a product. The higher the price, the more incentive he has. Bread Butter SUPPLY DEFINED SUPPLY SCHEDULE $1 2 3 4 5 PQS CORN Various Amounts 5 20 35 50 60 And why is talk so cheap? Supply is excessive. Cut Supply & you will increase demand. LAW OF SUPPLY - As price increases …Q S also increases Direct relationship between P & QS P2 P1 QS1 QS2 S P1 P2 S “Let’s make more.” “Take it. We are losing money.” QS2 QS1 -As price decreases … QS also decreases DETERMINANTS [Shifters] OF SUPPLY [RATNEST – non PL] • 1. ResourceCost [wages & raw materials] [inverse] • 58. Increase in wages (increases/decreases) supply. • Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. • 2. Alternative Output price changes [inverse] • 57. If the price of corn decreases, the supply of broccoli (increases/decreases). AS3 AS1 AS2 P Supply P S1 S2 3. Technological Improvement This lowers production costs & increases “S”. Ex: Suppose a new milking machine called “The Invisible Hand” has a very soothing effect on cows; cows find the new machine so “udderly” delightful that they produce 30% more milk. This technological advance will cause a shift to the right. 54 “Can’t wait till milking time.” 4. Number of producers [direct] 56. If more firms enter an industry, the supply curve will shift to the (left/right). • When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. 60. A new professional football league will (increase/decrease) the supply of football games. AS3 AS1 AS2 Shortage of Face Masks for SARS Young Hong Kong ballet dancers wear masks to protect themselves from SARS. 770 people died from this disease. EEN ATE ene Ee er erre A SEVERE SHORTAGE OF SURGICAL MASKS PROMPTS SOME PEOPLE TO THINK OF ALTERNATIVE PROTECTIVE ' MEASURES AGAINST THE SARS EPIDEMIC $1200 $600 $300 4 8 12 D1 Effects of an Increase in Demand on Equilibrium D2 $900 S P Q16 QD=16QS=8 Shortage $800 $200 20 40 60 80 D $600 S1 S2 $400 Effects of an Decrease in in Supply on Equilibrium QS=2 QD=6 Shortage P Q Decrease in Supply D S1 P1 Q1 P2 Q2 S2 Shortage Increase in Supply D S1 P1 Q2 P2 Q2 S2 Surplus $2.701.35 MARKET DEMAND & SUPPLY 7 S Qo $5 4 $3 2 1 2 4 6 8 10 12 14 16 P QD $5 $4 $3 $2 $1 2,000 4,000 7,000 11,000 16,000 $5 $4 $3 $2 $1 12,000 10,000 7,000 4,000 1,000 D P QS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium Banana Supply & Demand Qo D1 Quantity P ri c e ( p e r p o u n d ) S1 S2 P Q1Q2 P1 P2 Crop Freezing Damage… Price Floor – minimum price [creates surpluses] . $2.50 SP Q0 14 19 24 D Surplus Such as: Minimum Wage Agricultural Price Supports The price has to be IN the house. It can’t be below the floor. Some call agricultural price supports “udder insanity.” Price Floor-minimum price QS exceeds QD Millions of gallons per month 1.90 P ri c e p e r g a ll o n P ri c e p e r g a ll o n Equilibrium price for milk