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Chapter 4

Chapter 4. Supply. Supply vs. Demand. Demand is all about the buyer. Supply is all about the seller. Definition of Supply. The various amounts of something a producer is willing and able to sell at different possible prices at a particular time. Supply and the Price Effect.

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Chapter 4

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  1. Chapter 4 Supply

  2. Supply vs. Demand • Demand is all about the buyer. • Supply is all about the seller.

  3. Definition of Supply • The various amounts of something a producer is willing and able to sell at different possible prices at a particular time.

  4. Supply and the Price Effect • Like demand, there is a price effect for supply. • At higher prices, suppliers are willing to supply more goods and services than at lower prices.

  5. Increase in Price = Increase in Quantity Supplied

  6. Question for Thought • Why does OPEC (Organization of Petroleum Exporting Countries) strictly set and constantly change production rates for oil in the Middle East?

  7. Market Supply • The sum of all individual supplies in a given market at a particular time.

  8. Why would producer A supply 40 quarts of milk at 10 cents, and producer C supply 0 quarts of milk at that price?

  9. Marginal Cost of Production • Producer C won’t offer any quarts of milk at 5 or 10 cents because its marginal cost of production is higher than those prices • It costs more than 10 cents for producer C to make one quart of milk

  10. Marginal Cost of Production • For example, suppose it costs $1000 to produce 100 units and $1020 to produce 101 units.  The average cost per unit is $10, but the marginal cost of the 101st unit is $20

  11. Price Elasticity of Supply If the change in price has a large impact on the amount of goods and services that are supplied, then the price effect is big and the supply is elastic.

  12. Elastic Supply Example • CHICKEN!! • The number of chickens provided by chicken producers can increase greatly when the price of chickens goes up • Because Marginal Cost of raising more chickens is not very high

  13. Inelastic of Supply • If a change in price has little impact on the quantity of a good or service supplied, then the price effect is small and supply is inelastic.

  14. Inelastic supply example • Gasoline • Custom Made Furniture • Expensive Cars (Ferrari, Porsche…) All of these products have a high marginal cost of production

  15. The Price Effect vs. Change in Supply • The price effect concerns changes in quantity supplied (movements along the supply curve) • True change in supply involves a shift to right (increase) or left (decrease)

  16. Example • The price of gasoline has increased by 50 cents this past week because of unrest in the Middle East and particularly Libya • Was there a change in supply in this instance?

  17. NO—dealing simply with price effect • Remember! When price is changing, it is the price effect and NOT a change in demand • The amount that was able to leave the Middle East and Libya decreased (not the amount actually in existence)

  18. So What Causes a Change (SHIFT of curve) in Supply

  19. Changes in the Marginal Cost of Production • Companies and employees find more efficient ways to produce their goods and decrease production costs. • Sellers can then supply more at every possible price.

  20. Changes in the Number of Sellers or Producers • When new businesses enter the market the supply will increase, causing the supply curve to shift to the right.

  21. Change in Expectations • If producers expect higher future prices for their product they may produce more today.

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