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SUPPLY AND DEMAND

SUPPLY AND DEMAND. UNIT 3 PART 11: THE SUPPLY SIDE OF THINGS. Skeleton Outline pgs 186-192. 1. Law of Supply: 1 fact or example 2. The Incentive of greater profits: 1 fact or example 3. The supply curve: 1 fact or example 4. Price of inputs: 1 fact or example

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SUPPLY AND DEMAND

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  1. SUPPLY AND DEMAND UNIT 3 PART 11: THE SUPPLY SIDE OF THINGS

  2. Skeleton Outline pgs 186-192 • 1. Law of Supply: 1 fact or example • 2. The Incentive of greater profits: 1 fact or example • 3. The supply curve: 1 fact or example • 4. Price of inputs: 1 fact or example • 5. Number of firms: 1 fact or example • 6. Taxes: 1 fact or example • 7. Technology: 1 fact or example • 8. Law of Diminishing Returns: 1 fact or example

  3. Skeleton Outline pgs 194-199 • 1. Equilibrium Price: 1 fact or example • 2. Shifts in Equilibrium: 1 fact or example • 3. Shortages: 1 fact or example • 4. Surpluses: 1 fact or example • 5. Market Forces: 1 fact or example • 6. Price Ceilings: 1 fact or example • 7. Price Floor: 1 fact or example

  4. SUPPLY WORD WALL • 1. PRICE CEILING • 2. PRICE FLOOR • 3. EQUILIBRIUM • 4. SHORTAGE • 5. SURPLUS • 6. LAW OF DIMINSHING RETURNS • 7. QUANTITY SUPPLIED • 8. SUPPLY CURVE

  5. SUPPLY/DEMAND WORD WALL • 9. DEMAND CURVE • 10. DEMAND SCHEDULE • 11. SUPPLY SCHEDULE • 12. LAW OF DIMINISHING MARGINAL UTILITY • 13. VOLUNTARY EXCHANGE • 14. DETERMINANTS OF DEMAND • 15. SUBSTITUTION EFFECT • 16. COMPLEMENTARY GOODS

  6. SUPPLY/DEMAND WORD WALLS • 17. CONSUMER TASTE AND PREFERENCES • 18. CHANGES IN INCOME • 19. CHANGES IN POPULATION • 20 . DETERMINANTS OF SUPPLY • 21. COST OF INPUTS • 22. TECHNOLOGY • 23. TAXES • 24. NUMBER OF FIRMS • 25. DETERMINANTS OF DEMAND ELASTICITY • 26. URGENCY • 27. NUMBER OF SUBSTITUTES • 28. AMOUNT OF INCOME REQUIRED

  7. QUESTIONS 1 AND 2 • LAST UNIT WE DISCUSSED YOUR ROLES AS CONSUMERS IN THE MARKET…IDENTIFY HOW YOU PLAY A PRODUCER IN THE MARKET • DEMAND IS CONCERNED WITH HOW PRICES AFFECT CONSUMERS’ SPENDING BEHAVIOR…CONSUMERS WILL DEMAND MORE AT LOWER PRICES THAN HIGHER PRICES…SUPPLY IS THE MIRROR IMAGE OF DEMAND…WHAT DO YOU THINK THIS MEANS?

  8. QUESTION 3 • WHAT DO YOU THINK HAPPENS AND WHY TO THE SUPPLY CURVE FOR CDS IN THE FOLLOWING SITUATION: • -COST OF MATERIALS USED TO MAKE CDS FALLS • -NEW TRAINING METHODS IMPROVE WORKER EFFICIENCY • -INNOVATIVE PROCESS FOR PRESSING CDS IS INTRODUCED • -LEADING CD PRODUCER GOES OUT OF BUSINESS

  9. QUESTION 4 AND 5 • 4. WHAT IS THE DIFFERENCE BETWEEN THE SHORT RUN AND THE LONG RUN? WHAT DO YOU THINK THIS HAS TO DO WITH BUSINESS? • 5. EXPLAIN THE FOLLOWING STATEMENT: THE MOST IMPORTANT ECONOMIC CONCEPT FOR BUSINESS MANAGERS TO UNDERSTAND IS THAT OF MARGINAL PRODUCT…HINT: THINK ABOUT WHAT MARGINAL PRODUCT REFERS TO…

  10. QUESTIONS 6 AND 7 • 6. IMAGINE THAT YOU OWN YOUR OWN FACTORY THAT PRODUCES SUNGLASSES…THE PRICE OF SUNGLASSES RISES RAPIDLY…WILL YOU PRODUCE MORE SUNGLASSES, FEWER PAIRS OR THE SAME NUMBER? • 7. WE’VE STUDIED ECONOMIC CONCEPTS SUCH AS ECONOMIC FREEDOM, SELF INTEREST AND PROFIT MOTIVE. HOW DO THESE 3 CONCEPTS RELATE TO THE LAW OF SUPPLY?

  11. QUESTIONS 8 AND 9 • 8. WE STUDIED ELASTICITY IN TERMS OF DEMAND LAST WEEK. MAKE A PREDICTION ABOUT WHAT INELASTIC AND ELASTIC SUPPLY MEANS? • 9. WE STUDIED MARGINAL UTILITY LAST WEEK IN TERMS OF DEMAND…WHAT DO YOU THINK THE FOLLOWING PHRASES MEAN RELATED TO MARGIN: • -MARGINAL PRODUCT OF LABOR • -MARGINAL COST • -MARGINAL REVENUE

  12. WHAT IS SUPPLY • A SCHEDULE OF QUANTITIES THAT WOULD BE OFFERED FOR SALE AT ALL POSSIBLE PRICES • THE HIGHER THE PRICE, THE GREATER THE QUANTITY THE SUPPLIER WILL OFFER FOR SALE • EVERYONE WHO OFFERS AN ECONOMIC PRODUCT IS A SUPPLIER • AS PRICES RISE, PRODUCERS ARE WILLING TO SUPPLY MORE OF A GOOD OR SERVICE

  13. SUPPLY SCHEDULE • QUANTITIES OFFERED AT EACH AND EVERY MARKET PRICE • EX: PRICE PER T-SHIRT…QUANTITIES OF T-SHIRTS SUPPLIED • SUPPLY SCHEDULES AND CURVES FUNCTION LIKE DEMAND SCHEDULES AND CURVES EXCEPT THE ISSUE IS RISING PRICES AND INCREASED SUPPLY

  14. SUPPLY SCHEDULE FOR PIZZA • PRICE PER SLICE • .50 • ?? • ?? • 2.00 • 2.50 • ?? • SLICES PER DAY • 100 • ?? • 200 • ?? • 300 • ??

  15. SUPPLY CURVE • GRAPHIC ILLUSTRATION OF SUPPLY • SLOPES UPWARD AND TO THE RIGHT • THE OPPOSITE OF DEMAND CURVE • REFLECTS GREATER QUANTITIES OFFERED FOR SALE AT HIGHER PRICES

  16. LAW OF SUPPLY • QUANTITIES SUPPLIED (OFFERED FOR SALE) VARIES DIRECTLY WITH THE PRICE • THE HIGHER THE PRICE, THE MORE SUPPLIED (OFFERED FOR SALE)

  17. LAW OF SUPPLY FOCUS ACTIVITY • AS PRICE OF GOOD/SERVICE RISES QUANTITY SUPPLIED RISES… • AS PRICE FALLS, QUANTITY SUPPLIED FALLS • DIRECT RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED • SUPPLIERS SUPPLY MORE B/C OF PROFIT MOTIVE

  18. LAW OF SUPPLY ANSWERS • 1. DIRECT RELATIONSHIP • 2. B/C PRODUCER IS RECEIVING PAYMENT FOR HIS PRODUCT, MORE WILL BE OFFERED AT HIGHER PRICES • CHALLENGE QUESTION: WHEN PRICES GO DOWN, WOULDN’T A SUPPLIER WANT TO SELL MORE OF AN ITEM TO MAKE UP FOR THE DROP IN PRICE? SO WHY ISN’T THE LAW OF SUPPLY OPPOSITE?

  19. CHANGES IN SUPPLY EQUILIBRIUM FOCUS ACTIVITY • POINT AT WHICH THE SUPPLY CURVE AND THE DEMAND CURVE INTERSECT IS THE EQUILIBRIUM POINT • QUANTITY OF GOODS/SERVICES SUPPLIED IS EQUAL TO QUANTITY DEMANDED

  20. ANSWERS TO FOCUS ACTIVITY • 1. POINT WHERE SUPPLY AND DEMAND CURVES INTERSECT • 2. DESPITE ITS SIMPLIFICATION, IT DOES AN EXCELLENT JOB OF REPRESENTING COMPLEX, REAL WORLD BEHAVIORS • WHY ARE SUPPLIERS MOTIVATED TO SUPPLY A QUANTITY AT THE EQUILIBRIUM POINT

  21. WHAT WOULD HAPPEN TO SUPPLY • WHAT WOULD HAPPEN TO SUPPLY FOR TIRES IN THE FOLLOWING SITUATIONS: • 1. COST OF RUBBER INCREASES: • SUPPLY DECREASES B/C COST OF INPUTS INCREASE • 2. DEB’S TIRE COUNTRY OPENS • SUPPLY INCREASES B/C GREATER QUANTITIES ARES SUPPLIED AS NEW INDUSTRIES ENTER MARKET • 3. GOVT IMPOSES TAX • SUPPLY DECREASES….TAXES CAUSE COSTS TO RISE • 4. NEW EQUIPMENT IN TIRE BUSINESS • SUPPLY INCREASES…INCREASED EFFICIENCY MEANS LOWER COSTS

  22. SUPPLY AND LUXURY AIRPLANES • HOW WOULD THE SUPPLY OF LUXURY AIRPLANES BE AFFECTED BY THE FOLLOWING: • 5. COST OF PREMIUM LEATHER RISES • QS WOULD DECREASE…COST OF INPUTS • 6. GOVT SUBSIDIZES THE MANUFACTURE OF SMALL JET ENGINES • QS DECREASE…GOVT HELPS OUT SMALLER BUSINESS • 7. CONGRESS PASSES A LAW THAT GREATLY INCREASES THE NUMBER OF SAFETY DEVISES REQUIRED ON PRIVATE AIRCRAFT • QS DECREASES…GOVT INVOLVEMENT

  23. SUPPLY AND LUXURY PLANES • 8. THE NUMBER OF PRIVATE PLANE MANUFACTURERS IN THE US DOUBLES • QS INCREASE…MORE FIRMS ENTER MARKET • 9. COMPUTER SIMULATION PROGRAMS ENABLE MANUFACTURERS TO DESIGN AND TEST AIRCRAFT BEFORE PARTS ARE BUILT • QS INCREASES…BETTER TECHNOLOGY

  24. CHANGE IN SUPPLY • CHANGE IN SUPPLY AT ALL PRICES…SUPPLY CURVE SHIFTS

  25. DETERMINANTS OF SUPPLY • 1. COST OF INPUTS • 2. TAXES • 3. TECHNOLOGY • 4. NUMBER OF SELLERS/FIRMS

  26. SUPPLY ELASTICITY • EFFECT OF CHANGE IN PRICE ON CHANGE OF QUANTITY SUPPLIED • ELASTIC IF SMALL CHANGE IN PRICE CREATES LARGE CHANGE IN QUANTITY SUPPLIED • INELASTIC IF CHANGE IN PRICE BRINGS RELATIVELY SMALL CHANGE IN QUANTITY SUPPLIED

  27. DETERMINANTS OF SUPPLY ELASTICITY • AMOUNT OF CAPITAL, TECHNOLOGY, SKILLED LABOR NEEDED TO INCREASE PRODUCTION • OIL PRODUCTION VS PRODUCTS LIKE KITES, CANDY, ETC. • SMALLER PRODUCTS ARE EASIER TO PRODUCE IN THE SHORT RUN

  28. DEMAND AND SUPPLY ELASTICITY • THEY ARE BOTH A MEASURE OF RESPONSIVENESS TO CHANGE IN PRICE • DEMAND: HOW CHANGE IN PRICE EFFECTS QUANTITY DEMANDED • SUPPLY: HOW CHANGE IN PRICE EFFECTS QUANTITY SUPPLIED TO MARKET

  29. ELASTICITY ACTIVITY • IN YOUR NOTES CREATE A GRAPHIC ORGANZER WITH THE PHRASE INELASTIC SUPPLY IN THE MIDDLE • CREATE A SECOND WEB WITH THE PHRASE ELASTIC SUPPLY IN THE MIDDLE • FILL IN THE FACTORS THAT LEAD TO EACH CONDITION IN TERMS OF SUPPLY

  30. INELASTIC VS ELASTIC • 1. PRICE OF APPLES INCREASES • SUPPLY IS INELASTIC…DIFFICULT TO INCREASE SUPPLY IN SHORT RUN • 2. PRICE OF OIL CHANGE INCREASES… • ELASTIC…REPAIR SHOP COULD HIRE MORE WORKERS/INCREASE SUPPLY • 3. PRICE OF TICKETS TO PATS GAME INCREASES • INELASTIC…STADIUM OWNERS CAN’T INCREASE SUPPLY OF SEATS GREATLY IN SHORT RUN

  31. WHAT DO YOU THINK? • HOW DO OWNERS OF FAST FOOD RESTAURANTS KNOW HOW MUCH FOOD TO PRODUCE EACH DAY? • WHAT WOULD HAPPEN TO THE OWNER’S PROFITS IF THE RESTAURANT PRODUCED TOO MUCH OR TOO LITTLE FOOD… • HOW DO PRODUCERS DETERMINE LEVELS OF INPUT?

  32. THEORY OF PRODUCTION • EXPLAINS CHANGES OF OUTPUT DUE TO CHANGES OF INPUT • EX: CHILI • DEALS WITH RELATIONSHIP BETWEEN FACTORS OF PRODUCTION WITH OUTPUT OF GOODS/SERVICES • BASED ON THE SHORT RUN…PERIOD WHEN PRODUCERS CAN CHANGE ONLY VARIABLE INPUT-LABOR

  33. THE LONG RUN • PERIOD OF PRODUCTION LONG ENOUGH FOR ALL INPUTS, INCLUDING CAPITAL TO VARY

  34. LAW OF VARIABLE PROPORTIONS • IN SHORT RUN, OUTPUT WILL CHANGE AS ONE INPUT IS VARIED, WHILE ALL OTHERS ARE CONSTANT

  35. TOTAL PRODUCT • TOTAL OUTPUT OF A FIRM

  36. MARGINAL PRODUCT • THE EXTRA OUTPUT GENERATED BY ADDING ONE MORE UNIT OF VARIABLE INPUT • HOW MUCH OUTPUTS YOUR ADDITIONS CREATE • EX: HOW MUCH PRODUCT DOES ANOTHER WORKER PRODUCE?

  37. INTRODUCING MARGIN • WHAT DOES IT MEAN WHEN A COMPANY DOWNSIZES? • IMPORTANT FOR COMPANIES TO PAY ATTENTION TO HIRING LEVELS…

  38. THREE STAGES OF PRODUCTION • STAGE I: INCREASING RETURNS…MARGINAL PRODUCT INCREASES • STAGE II: DIMINSHING RETURNS…PRODUCTION (OUTPUT) GROWS BY A SMALLER AMOUNT • STAGE III: NEGATIVE RETURNS: MARGINAL PRODUCTION IS NEGATIVE AND TOTAL PLANT OUTPUT DECREASES…MOST COMPANIES WOULD NOT HIRE WORKERS IN THIS STAGE

  39. LAW OF DIMINISHING RETURNS • AT SOME POINT ADDING INPUTS TO ALL FACTORS OF PRODUCTION INCREASES TOTAL OUTPUT • AT SOME POINT EXTRA OUTPUT FOR EACH ADDITIONAL UNIT WILL BEGIN TO DECREASE • SHORT RUN PRINCIPLE • OUTPUT INCREASES, BUT AT A DIMINISHING RATE

  40. COLLATING PAPERS • LABOR: STUDENTS • OUTPUT: PAPERS STAPLED IN ONE MINUTE • MARGINAL PRODUCT: HOW MUCH ONE MORE STUDENT CAN DO… • MARGINAL COST: WHAT IS THE COST OF THAT STUDENT • MARGINAL REVENUE: EXTRA PROFITS THE STUDENT CREATE AFTER COSTS…

  41. SUPPLY AND THE ROLE OF COST • BUSINESSES NEED TO CONSIDER BOTH PRODUCTIVITY AND COST---EFFICIENCY IS RELATED TO BOTH

  42. EQUILIBRIUM PRICE • AS PRICE GOES UP QD GOES DOWN AND QS RISES • PLACE WHERE THE QUANTITY DEMANDED AND QUANTITY SUPPLIED MEET: • EQUILIBRIUM PRICE • QS BY SELLERS IS SAME AS QD BY THE BUYERS

  43. PRICES AS SIGNALS: SHORTAGES • SHORTAGE: OCCURS WHEN THE QUANTITY DEMANDED IS GREATER THAN QUANTITY SUPPLIED • IF LEFT ALONE, WITHOUT REGULATIONS, SHORTAGES PUT PRESSURE ON PRICES TO RISE

  44. PRICES AS SIGNALS: SURPLUSES • ABOVE EQUILIBRIUM PRICE • SURPLUSES:LARGE INVENTORIES OF GOODS • PUT PRESSURE ON PRICE TO DROP TO EQUILIBRIUM PRICE • IF PRICE FALLS, SUPPLIERS HAVE LESS INCENTIVE TO SUPPLY…CONSUMERS PURCHASE A GREATER QUANTITY

  45. PRICE CONTROLS: PRICE CEILING • PRICE CEILING: GOVT SET MAXIMUM PRICE THAT CAN BE CHARGED FOR GOODS/SERVICES • PREVENTS PRICES FROM GOING ABOVE A SPECIFIED AMOUNT • EX: WHAT LANDLORDS CHARGE FOR RENT

  46. PRICE CONTROLS: PRICE FLOORS • GOVT SET MINUMUM PRICE THAT CAN BE CHARGED FOR GOODS/SERVICES • PREVENT PRICES FROM DROPPING TOO LOW • EX: MINUMUM WAGE

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