ECON 1 1st Edition Lecture 6Outline of Last Lecture I. Supply and DemandOutline of Current Lecture I. Supply and Demand cont. II. EquilibriumCurrent Lecture1. Supplya. Def.: Supply curve: A graph of the relationship between the price of a good and the quantity demanded. b. Def.: Producer Surplus: The producer’s gain from exchangec. Def.: Total Producer Surplus: The area above the supply curve and below the price. i. Ex: Assume the ice-cream market price is $1/scoop. If Ann can produce ice cream at $.25/scoop, she earns a $0.75 producer surplus per scoop. Supply increase and decrease graphQ: Why is the supply curve upward sloping?- A: At a low price, a good is produced and sold only by the lowest cost suppliers.o At a high price, a good is also produced and sold by higher cost suppliers.  Important supply shifters: 1. Technological innovations:o Determines how much inputs are required to produce a unit of output. o Technologies=improvemento Ex: Invention of mechanized ice cream machine.  Reduced the amount of labor necessary to make ice cream.  Increases supply2. Input prices: The supply of a good is negatively related to the price of the inputs used to make the food. a. Ex.: wages and price of raw materialsb. What would happen to sellers of ice cream if price of sugar increases?i. Smaller profit margin. If the price continues to increase, it may even drive ice cream supply to 0. 3. Taxes and Subsidiesa. Subsidy on production makes sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price.b. Tax to producers: increase in production costsc. Subsidy on production lowers costs and increases supplyi. Ex. When U.S. decreases its cotton subsidies, U.S. cotton supply decreases. 4. Expectations:a. A change in producers’ expectations about profitability will affect supply curvesi. Ex. Events in Middle East lead to expectations of higher oil prices.ii. In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher priceiii. Supply curve shifts left.iv. Sellers may adjust their supply when their expectations of future prices change. 5. Entry or exit producers: As producers enter and exit the market, the overall supply changes. a. Entry implies more sellers in the market increasing supply.b. Exit implies fewer sellers in the market decreasing supply.Entry increases supply graph.6. Change in Opportunity CostsInputs used in production have opportunity costs. Sellers will choose to use those inputs where the profit is the highest. – Sellers will supply less of a good if the price of an alternate good using the same inputs rises (and vice versa).– Sellers always chase the highest profit goods.– Producers have the ability to produce other goods– Example: An increase in the profitability of small cars will decrease the supply of SUVs2. Equilibriumo -Def.: A situation in which the market price has reached the level at which quantity supplied equals quantity demanded. (Qs=Qd)o -The amount consumers would purchase at this price is matched exactly by the amount producers wish to sell.o -There’s only one price where Qs=Qd.o Def.: Equilibrium price: The price that balances quantity supplied and quantity demanded. o Def.: Equilibrium Quantity = the quantity supplied and the quantity demanded at the equilibrium price.o Def.: Surplus = A situation in which quantity supplied is greater than quantity demanded. o Def.: Shortage = the quantity supplied and the quantity demanded at the equilibrium price.- Shift vs. Movement Along the Curve- Change in supply- Change in quantity suppliedo A movement along a fixed supply curve when non-price determinant of supply changes (technology or costs)- Change in demando A shift in the demand curve when non-price determinant of demand changes (income or # of buyers)- Change in the quantity demandedo Movement along a fixed demand curve occurs when price