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Pump Primer

Pump Primer. In your own words, explain the difference between having a shortage vs. a surplus. “ECONOMICS ”. By Alan J. Carper Bob Jones University Press. 1998. Chapter 4 : “Supply and Prices”. Unit I: What Is Economics?. Objectives:. Should be able to...

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Pump Primer

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

  2. “ECONOMICS ” By Alan J. Carper Bob Jones University Press. 1998

  3. Chapter 4: “Supply and Prices” Unit I: What Is Economics?

  4. Objectives: 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.

  5. BIBLICAL INTEGRATION: 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)

  6. SUPPLY Supply is the “amount of goods and services business firms are willing and able to provide at different prices.” • The Law of Supply • The “higher the price buyers are willing to pay, other things being held constant, the greater the quantity of the product a supplier will produce.” • Likewise, if the price of a good falls, the quantity supplied of that good decreases. (Carter 30)

  7. Supply Schedule and Supply Curve A supply schedule is a list of the quantities supplied at each different price when all other influences on selling plans remain the same. A supply curve is a graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same. (Bade 99)

  8. SUPPLY (Bade 99)

  9. Individual Supply and Market Supply • Market supply is the sum of the supplies of all sellers in a market. • The market supply curve is the horizontal sum of the supply curves of all the sellers in the market. (Bade 100)

  10. SUPPLY (Bade 100)

  11. Change in Supply • A change in supplyis a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. (Bade 101)

  12. Change in Supply 1. When supply decreases, the supply curve shifts leftward from S0 to S1. 2. When supply increases, the supply curve shifts rightward from S0 to S2. Figure 4.7 shows changes in supply. (Bade 101)

  13. Change in Supply The main influences on selling plans that change supply are • Prices of related goods • Prices of resources and other Inputs • Expectations • Number of sellers • Productivity (Bade 101)

  14. Substitute in Production • A change in the price of one good can bring a change in the supply of another good. • A substitute in production is a good that can be produced in place of another good. • For example: cookie dough ice cream for chocolate chip ice cream in an ice cream factory. • The supply of a good increases if the price of one of its substitutes in production falls. • The supply a good decreases if the price of one of its substitutes in production rises. (Bade 101)

  15. Complement In Production • A complement in productionis a good that is produced along with another good. • For example: straw and wheat • The supply of a good increases if the price of one of its complements in production rises. • The supply a good decreases if the price of one of its complements in production falls. (Bade 102)

  16. Prices of Resources and Expectations Prices of Resources and Other Inputs • Resource and input prices influence the cost of production. And the more it costs to produce a good, the smaller is the quantity supplied of that good. Expectations • Expectations about future prices influence supply. • Expectations of future input prices also influence supply. (Bade 102)

  17. Number of Sellers & Productivity Number of Sellers • The greater the number of sellers in a market, the larger is supply. Productivity • Productivity is output per unit of input. • An increase in productivity lowers costs and increases supply. For example, an advance in technology. • A decrease in productivity raises costs and decreases supply. For example, a severe hurricane. (Bade 102)

  18. Change in Quantity Supplied vs Change in Supply • A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good. • A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. (Bade 102)

  19. Change in Quantity Supplied vs Change in Supply • Figure 4.8 illustrates and summarizes the distinction (Bade 103)

  20. Activity 6 Supply National Council on Economic Education, New York, N.Y.

  21. Supply by Advanced Placement Economics Teacher Resource Manual. National Council on Economic Education, New York, N.Y. Activities 5

  22. 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.

  23. 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. • Remember, understanding a market is essential to success in AP Economics!

  24. Introduction • In Activity 5, you will graph a supply schedule, which will help you understand the implications of a shift in the supply curve. • The activity then focuses on the factors that shift the supply curve. • 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.

  25. 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.

  26. 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.

  27. 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

  28. Activity 6: Reasons for Changes in Supply • 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

  29. Activity 6 Y Inc R C Y Inc R C Dec L A Y Y Dec L A Y Dec L A Y Dec L A N -- -- -- N -- -- --

  30. 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.

  31. X X X X X X X X

  32. Market Equilibrium Market equilibriumoccurs when the quantity demanded equals the quantity supplied—when buyers’ and sellers’ plans are consistent. Equilibrium priceis the price at which the quantity demanded equals the quantity supplied. Equilibrium quantityis the quantity bought and sold at the equilibrium price. (Bade 105)

  33. Equilibrium Price and Equilibrium Quantity Figure 4.9 shows the equilibrium price and equilibrium quantity. 1. Market equilibrium at the intersection of the demand curve and the supply curve. 2. The equilibrium price is $1 a bottle. 3. The equilibrium quantity is 10 million bottles a day. (Bade 105)

  34. Price: A Market’s Automatic Regulator • Law of market forces • When there is a shortage, the price rises. • When there is a surplus, the price falls. • Surplus or Excess Supply is the quantity supplied exceeds the quantity demanded. • ShortageorExcess Demand is the quantity demanded exceeds the quantity supplied. (Bade 106)

  35. Forces that Achieve Equilibrium Figure 4.10(b) market achieves equilibrium. At $1.50 a bottle: 1. Quantity supplied is 11 million bottles. 2. Quantity demanded is 9 million bottles. 3. There is a surplus of 2 million bottles. 4. Price falls until the surplus is eliminated and the market is in equilibrium. (Bade 106)

  36. Forces that Achieve Equilibrium Figure 4.10(a) market achieves equilibrium. At 75 cents a bottle: 1. Quantity is demanded 11 million bottles. 2. Quantity supplied is 9 million bottles. 3. There is a shortage of 2 million bottles. 4. Price rises until the shortage is eliminated and the market is in equilibrium. (Bade 106)

  37. Surplus & Shortage • Solutions to surplus: • Increase demand • Decrease supply • Allow the price to fall to the market equilibrium point (price cutting) – the simplest solution. • Solutions to shortage: • Decrease demand • Increase supply • Allow the price to rise to the market equilibrium point. (Carper. 40-44)

  38. Effects of Changes in Demand • Event: A new study says the public water is unsafe. • To work out the effects on the market for bottled water: • With public water being unsafe, demand for bottled water changes. • The demand for bottled water increases, the demand curve shifts rightward. • What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 107)

  39. Effects of Change in Demand Figure 4.11(a) illustrates the outcome. 1. An increase in demand shifts the demand curve rightward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. The quantity supplied increases along the supply curve. 4. Equilibrium quantity increases. (Bade 107)

  40. Effects of Change in Demand Event: A new zero-calorie sports drink is invented. • To work out the effects on the market for bottled water: • The new drink is a substitute for bottled water, so the demand for bottled water changes • The demand for bottled water decreases, the demand curve shifts leftward. • What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 107)

  41. Effect of Change in Demand Figure 4.11(b) shows the outcome. 1. A decrease in demand shifts the demand curve leftward. 2. At $1.00 a bottle, there is a surplus, so the price falls. • 3. Quantity supplied decreases along the supply curve. 4. Equilibrium quantity decreases. (Bade 107)

  42. Effects of Changes in Supply Event: Europeans produce bottled water in the United States. • To work out the effects on the market for bottled water: • With more suppliers of bottled water, supply changes. • The supply of bottled water increases, the supply curve shifts rightward. • What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 108)

  43. Effects of Change in Supply Figure 4.12(a) shows the outcome. 1. An increase in supply shifts the supply curve rightward. 2. At $1.00 a bottle, there is a surplus, so the price falls. 3. Quantity demanded increases along the demand curve. 4. Equilibrium quantity increases. (Bade 108)

  44. MARKET EQUILIBRIUM Event: Drought dries up some springs in the United States. • To work out the effects on the market for bottled water: • Drought changes the supply of bottled water. • The supply of bottled water decreases, the supply curve shifts leftward. • What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 108)

  45. Effects of Change in Supply Figure 4.12(b) shows the outcome. 1. A decrease in supply shifts the supply curve leftward. 2. At $1.00 a bottle, there is a shortage, so the price rises. 3. Quantity demanded decreases along the demand curve. 4. Equilibrium quantity decreases.

  46. Changes in Both Demand & Supply When two events occur at the same time, work out how each event influences the market: • Does each event change demand or supply? • Does either event increase or decrease demand or increase or decrease supply? • What are the new equilibrium price and equilibrium quantity and how have they changed? (Bade 110)

  47. Demand & Supply Change in the Same Direction The figure shows the effects of an increase in both demand and supply. An increase in demand shifts the demand curve rightward; an increase in supply shifts the supply curve rightward. 1. Equilibrium quantity increases. 2. Equilibrium price might rise or fall. (Bade 110)

  48. Increase in Both Demand and Supply • Increases the equilibrium quantity. • The change in the equilibrium price is ambiguous because the: Increase in demand raises the price. Increase in supply lowers the price. (Bade 110)

  49. Increase in Both Demand and Supply This figure shows the effects of a decrease in both demand and supply. • A decrease in demand • shifts the demand curve • leftward; a decrease in • supply shifts the supply • curve leftward. 3. Equilibrium quantity decreases. 4. Equilibrium price might rise or fall. (Bade 110)

  50. Decrease in Both Demand and Supply • Decreases the equilibrium quantity. • The change in the equilibrium price is ambiguous because the: Decrease in demand lowers the price Decrease in supply raises the price. (Bade 110)

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