1. September 25, 2013 • Review Demand Packet • Notes: Supply • Video Clips? Supply and Demand Curves HW: Supply Packet

2. Supply • Schedule or curve • Amount producers are willing and able to sell at a given price • Individual supply • Market supply 3-2 LO2

3. Law of Supply • Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. • Reason: • Price acts as an incentive to producers • Costs will rise! 3-3 LO2

4. The Supply Curve 5 4 3 2 1 0 P S Price (per bushel) Q 10 20 30 40 50 60 70 Quantity supplied (bushels per week) 3-4 LO2

5. Changes in Supply P S3 S1 $6 5 4 3 2 1 0 Decrease in supply S2 Price (per bushel) Increase in supply Q 2 4 6 8 10 12 14 16 Quantity supplied (thousands of bushels per week) 3-5 LO2

6. Changes in Supply P Change in Quantity Supplied S3 S1 $6 5 4 3 2 1 0 S2 Price (per bushel) Change in Supply Q 2 4 6 8 10 12 14 16 Quantity supplied (thousands of bushels per week) 3-6 LO2

7. Determinants of Supply“Supply Shifters” • What if the “All other things equal” assumption changes??? • Cost is the #1 Factor in Supply! • A change in resource prices • A change in technology • A change in the number of sellers • A change in taxes (a cost) and subsidies (tax in reverse) • A change in prices of other goods • A change in producer expectations 3-7 LO2

8. Market Equilibrium • Equilibrium occurs where the demand curve and supply curve intersect. • Surplus and shortage • Rationing function of prices • Efficient allocation • Productive efficiency • Allocative efficiency 3-8 LO3

9. Market Equilibrium 200 Buyers & 200 Sellers Market Supply 200 Sellers Market Demand 200 Buyers 6 5 4 3 2 1 0 6,000 Bushel Surplus S P Qd P Qs 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Price (per bushel) 3 7,000 Bushel Shortage D 2 4 6 8 10 12 14 16 18 7 Bushels of Corn (thousands per week) 3-9 LO3

10. Rationing Functions of Prices • The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. 3-10 LO3

11. Efficient Allocation • Productive efficiency • Producing goods in the least costly way • Using the best technology • Using the right mix of resources • Allocative Efficiency • Producing the right mix of goods • The combination of goods most highly valued by society 3-11 LO3

12. ` ` Changes in Demand and Equilibrium Changes in Demand and Equilibrium D increase: P, Q D decrease: P, Q P P S S D2 D3 D1 D4 0 0 Decrease in demand Increase in demand 3-12 LO4 LO4

13. ` ` Changes in Supply and Equilibrium Changes in Demand and Equilibrium S increase: P, Q S decrease: P, Q P P S1 S4 S3 S2 D D 0 0 Decrease in supply Increase in supply 3-13 LO4 LO4

14. Complex Cases 3-14 LO4

15. Government Set Prices • Price Ceilings • Set below equilibrium price • Rationing problem • Black markets • Example: Rent control 3-15 LO5

16. Government Set Prices P S $3.50 P0 ceiling 3.00 PC D Shortage Q Qs Q0 Qd 3-16 LO5

17. Government Set Prices • Price Floors • Prices are set above the market price • Chronic surpluses • Example: Minimum wage laws 3-17 LO5

18. Government Set Prices P S Surplus floor $3.00 Pf P0 2.00 D Q Qd Q0 Qs 3-18 LO5

19. Legal Market for Human Organs • What if we created a legal market for human organs? • Positive effects • Increase the incentive to donate • Eliminate the persistent shortage of eyes, livers, hearts, kidneys, etc. 3-19

20. Legal Market for Human Organs • Negative effects • Increases the cost of medical care • Diminishes the special nature of life by commercializing it 3-20