Supply Demand and the Market Process Friday May 15 2015 1 33 PM I Supply a OPPORTUNITY COST OF PRODUCTION total economic cost of producing a good or service the value of the production of other goods sacrifices as the result of producing the good i Includes the opportunity cost of your time b c Economic costs are different from accounting costs PROFIT when revenue is greater than the opportunity cost of production The producer has increased the value of the resources Do not just mean accounting profit made 4 25 an hour Took 4 hours to make 4 25 economic loss i ii iii LOSS when revenue is less than the opportunity cost of production The producer has reduced the value of the resources In a pure market economy d e Profitable activities will continue Wasteful loss activities wills stop freeing up resources for more productive uses eventually will close II Law of Supply a There is a direct positive relationship between the price of a good and the quantity of its producers are willing to supply When the price rises quantity supplied rises When the price falls quantity supplied will fall 1 2 CETERIS PARIBUS Dominoes does NOT have to make just pizza they can also make pasta cookies breadsticks b QUANTITY SUPPLIED the number that people willing to sell at each price i SEE CH3 SUPPLYDEMANDMARKET2 PPT FOR GRAPHICAL EXAMPLES III The Supply Curve A Tell All Story about Producers a b c How much are producers willing to produce sell at a give price What is the minimum price to induce producers to sell Represents the opportunity cost of production IV PRODUCER SURPLUS the difference between price suppliers actually receive and the minimum price they would be willing to accept Represents the net benefit to all involved in production of producing the good a Ex Old Navy makes a shirt for 5 They sell if for 8 8 5 3 00 Producer surplus is ABOVEthe curve V Elastic and Inelastic Supply i i ii i ii i ii i ii i ii iii i ii i ii i i ii i IV PRODUCER SURPLUS the difference between price suppliers actually receive and the minimum price they would be willing to accept Represents the net benefit to all involved in production of producing the good a Ex Old Navy makes a shirt for 5 They sell if for 8 8 5 3 00 Producer surplus is ABOVEthe curve V Elastic and Inelastic Supply a Elastic supply i ii iii Inelastic b QS is quite responsive to a change in price The supply curve is relatively flat but still upward sloping When it is cheap easy to expand output the supply curve will be elastic QS is NOT responsive to a change in price The supply curve is relatively steep but still upward sloping When expanding output supply will be inelastic 1 doctor visits land Picasso paintings FIXED AMOUNT VI Change in QS vs Supply a b Increase in Supply is a RIGHTWARD SHIFT new curve goes below the OG Decrease in supply is a LEFTWARD SHIFT new curve above the OG Change in QS caused by a change in the price of the good Change in Supply caused by changes in factors other than a good s price that influence seller decisions 1 2 3 4 Changes in resource prices Changes in technology Nature and political disruptions Taxes VII Supply Shifts a Change in resource prices of flour increase supply of bread will fall of oil falls supply of gas will increase b Changes in technology When technology improves supply increases 1 Higher supply of laptops due to the convenience c Elements of nature and political disruptions d Change in taxes Change in weather conditions War political unrest 1 If the growing season for hazelnut is shortened supply of Nutella will fall When taxes increase supply falls 1 2 Tax cigarettes stop people from smoking Government taxes wages labor hours will fall more people laid off reduced hours VIII Market Equilibrium a b MARKET a concept encompassing the forces of supply and demand EQUILIBRIUM when quantity supplied quantity demanded i When taxes increase supply falls 1 2 Tax cigarettes stop people from smoking Government taxes wages labor hours will fall more people laid off reduced hours VIII Market Equilibrium MARKET a concept encompassing the forces of supply and demand EQUILIBRIUM when quantity supplied quantity demanded Excess demand puts upward pressure on the price Excess supply puts downward pressure on the price When QS and QD are not in balance the price will change IX Economic Efficiency A situation in which all gains from trade have been realized With well defined property rights mean competition i ii Increase in producer surplus comes at expense of consumers Increase in consumer surplus could not without taking something away from consumers X Market Equilibrium Did supply or demand shift both neither Was the shift an increase or a decrease Draw Graph Analyze what happened to equilibrium price and quantity XI Market Equilibrium and Changes in Supply and Demand a b c d e a b a b c d a Examples i ii Increase in demand 1 Higher price 2 Higher quantity Increase in quantity supplied 1 Ex natural gas which is used to heat homes during the snowpocalypse of 2014 1 2 3 Rightward shift in demand Equilibrium price increase equilibrium quantity increased All else constant we had the weather change which shifted the demand curve for natural gas The shift increased both equilibrium price and quantity iii iv v vi Lower price Lower quantity Decrease in demand 1 2 Decrease in QS 1 Increase in Supply 1 Lower price 2 Higher quantity Increase in QD Ex Bathing suits during polar vortex of 2014 1 2 Leftward shift in demand Equilibrium price decreased equilibrium quantity decreased 1 Ex Bathing suits during polar vortex of 2014 1 2 Leftward shift in demand Equilibrium price decreased equilibrium quantity decreased v vi Increase in Supply 1 Lower price 2 Higher quantity Increase in QD 1 vii viii Decrease in supply 1 Higher price 2 Lower quantity Decrease in quantity demanded 1 Ex an early winter freeze and ice wine 1 2 Supply shifted to the right Equilibrium price decreased equilibrium quantity increased Ex live stock need extra feed and shelter to cope w the cold 1 2 The Miracle of Markets Supply shifts left Equilibrium price increases equilibrium quantity decreases XII a b c Market prices communicate information to decision makers Price coordinate actions of market participants Price motivate economic plays
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