chapter 3 economics. supplysupply amount of goods and services business firms are willing and able...
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Chapter 3Chapter 3EconomicsEconomics
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SupplSupplyy
SupplSupplyyamount of goods and amount of goods and
services business services business firms are willing and firms are willing and
able to provide at able to provide at different pricesdifferent prices
amount of goods and amount of goods and services business services business
firms are willing and firms are willing and able to provide at able to provide at different pricesdifferent prices
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Law of Law of SupplySupplyLaw of Law of SupplySupplythe higher the the higher the price, the greater price, the greater the quantity of the the quantity of the product a supplier product a supplier
will producewill produce
the higher the the higher the price, the greater price, the greater the quantity of the the quantity of the product a supplier product a supplier
will producewill produce
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BusinesBusinesss
BusinesBusinesssa seller of goods or a seller of goods or
servicesservicesa seller of goods or a seller of goods or
servicesservices
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supply schedulesupply schedule
table of supply data
table of supply data
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Supply curveSupply curveSupply curveSupply curveline-graph of line-graph of
supply schedule supply schedule informationinformation
line-graph of line-graph of supply schedule supply schedule
informationinformation
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3000
1000
2000
4000
.50
1.00.90
1.101.20
.80
.70
.60
Supply CurveSupply Curve
5000
.40.40
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31 2 4
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Vertical graphVertical graph
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3010 20 40
$100
$200
$300
$400
$500
$600
Horizontal graphHorizontal graph
50 60
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Change in quantity Change in quantity suppliedsupplied
Change in quantity Change in quantity suppliedsupplied
when a change in price when a change in price buyers will pay causes a buyers will pay causes a change in the number of change in the number of
goods suppliedgoods supplied
when a change in price when a change in price buyers will pay causes a buyers will pay causes a change in the number of change in the number of
goods suppliedgoods supplied
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3000
1000
2000
4000
.50
1.00.90
1.101.20
.80
.70
.60
Change in Quantity Supplied
Change in Quantity Supplied
5000
.40
.90.90
.50.50
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Change in SupplyChange in SupplyChange in SupplyChange in Supply• decrease in supplydecrease in supply
leftward shiftleftward shift• suppliers produce suppliers produce lessless at any at any
given pricegiven price
• decrease in supplydecrease in supplyleftward shiftleftward shift• suppliers produce suppliers produce lessless at any at any
given pricegiven price
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Change in SupplyChange in SupplyChange in SupplyChange in Supply
• increase in supplyincrease in supplyrightward shiftrightward shiftsuppliers produce suppliers produce moremore
at any given priceat any given price
• increase in supplyincrease in supplyrightward shiftrightward shiftsuppliers produce suppliers produce moremore
at any given priceat any given price
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3000
1000
2000
4000
.50
1.00.90
1.101.20
.80
.70
.60 Decrease in Supply
Decrease in Supply
5000
.40
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3000
1000
2000
4000
.50
1.00.90
1.101.20
.80
.70
.60
Increase in Supply
Increase in Supply
5000
.40
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Supply Shift FactorsSupply Shift Factors
• change in technology
• change in production costs
• change in price of related goods
• change in technology
• change in production costs
• change in price of related goods
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Change in TechnologyChange in Technology
• improves tools used to produce goods and services
• improves production or reduces cost
• improves tools used to produce goods and services
• improves production or reduces cost
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Change in Production Costs
Change in Production Costs
• costs of natural resources, labor, and financial capital
• changes in these costs affect supply
• costs of natural resources, labor, and financial capital
• changes in these costs affect supply
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Change in Price of Related Goods
Change in Price of Related Goods
• usually substitute goods
• shift production to the more-profitable good
• usually substitute goods
• shift production to the more-profitable good
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Market Equilibrium Point
Market Equilibrium Point
price at which consumers
are willing to pull out of the market the exact quantity of product that suppliers are willing to
push in
price at which consumers
are willing to pull out of the market the exact quantity of product that suppliers are willing to
push in
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4000
1000
3000
5000
.50
1.00.90
1.101.201.30
.80
.70
.60
2000
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7000
8000
demanddemand
supplysupply
market equilibrium
market equilibrium
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Economies of ScaleEconomies of Scale• the more produced, the
cheaper each product
• supply more with hopes that demand increases
• the more produced, the cheaper each product
• supply more with hopes that demand increases
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surplussurplus
an excess of unsold products
an excess of unsold products
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Surplus CostsSurplus Costs• storage
• security & insurance of the goods
• spoilage of the goods
• loss of income
• interest costs of financing
• storage
• security & insurance of the goods
• spoilage of the goods
• loss of income
• interest costs of financing
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Surplus SolutionsSurplus Solutions
1) increase demand for the goods
2) decrease the supply
3) allow the price to fall to the equilibrium point
1) increase demand for the goods
2) decrease the supply
3) allow the price to fall to the equilibrium point
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Surplus SolutionsSurplus Solutions
1) increase demand for the goods
• first and best solution for the supplier
• produce a great quantity and charge a higher price
• “demand solution”
1) increase demand for the goods
• first and best solution for the supplier
• produce a great quantity and charge a higher price
• “demand solution”
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4000
1000
3000
5000
1.00.90
1.101.201.30
.80
.70
.60
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1.35
demand1
demand2
supply
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Surplus SolutionsSurplus Solutions
1) increase demand for the goods
• increasing tastes & preferences
• eliminate substitute goods
• establish price floors
1) increase demand for the goods
• increasing tastes & preferences
• eliminate substitute goods
• establish price floors
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Surplus SolutionsSurplus Solutions
2) decrease the supply2) decrease the supply• cut production• “supply solution”• cut production• “supply solution”
problems = competition reactionproblems = competition reaction
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4000
1000
3000
5000
1.00.90
1.101.201.30
.80
.70
.60
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1.35
demand
supply2
supply1
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Surplus SolutionsSurplus Solutionsincrease demandincrease demand
decrease supply
decrease supply
•demand solution
•demand solution
•supply solution•supply solution
•shifts the demand curve
•shifts the demand curve
•shifts the supply curve
•shifts the supply curve
• favored by suppliers
• favored by suppliers
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Surplus SolutionsSurplus Solutions
3) allow the price to fall to the market equilibrium point
3) allow the price to fall to the market equilibrium point• the market does the work• supplier = gradually lowers price• buyer = purchases more at lower price
• surplus gone; price stops falling
• the market does the work• supplier = gradually lowers price• buyer = purchases more at lower price
• surplus gone; price stops falling
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4000
1000
3000
5000
.90
.80
1.001.101.20
.70
.60
2000
6000
7000
8000
1.301.40
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Surplus SolutionsSurplus Solutions
1) increase demand for the goods
2) decrease the supply
3) allow the price to fall to the equilibrium point
1) increase demand for the goods
2) decrease the supply
3) allow the price to fall to the equilibrium point
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shortage
shortage• caused by the price of a good
being held lower than its market equilibrium price
• not enough of a good
• caused by the price of a good being held lower than its market equilibrium price
• not enough of a good
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loss leaders
loss leaders
products deliberately sold at a loss to lure
in customers
products deliberately sold at a loss to lure
in customers
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Price CeilingsPrice Ceilings
• government restrictions on prices
• prevent prices from rising to equilibrium value
• always causes shortages
• government restrictions on prices
• prevent prices from rising to equilibrium value
• always causes shortages
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Shortage SolutionsShortage Solutions
1) decrease demand
2) increase supply
3) allow the price to rise to the market equilibrium point
1) decrease demand
2) increase supply
3) allow the price to rise to the market equilibrium point
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Shortage SolutionsShortage Solutions
1) decrease demand1) decrease demand
• “demand solution”
• by discouraging demand for a product
• “demand solution”
• by discouraging demand for a product
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.90
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supply
demand1
demand2
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Shortage SolutionsShortage Solutions
2) increase supply2) increase supply• “supply solution”
• by:
managing supply
improving technology
boosting productivity
• “supply solution”
• by:
managing supply
improving technology
boosting productivity
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1000
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.30
.80
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.901.001.10
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supply1
demand
supply2
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Shortage SolutionsShortage Solutions
decrease demanddecrease demand• demand solution• demand solution
increase supplyincrease supply• supply solution• supply solution
• shifts demand curve
• shifts demand curve
• shifts supply curve
• shifts supply curve
• dangerous to suppliers
• dangerous to suppliers
• focus on technology or production
• focus on technology or production
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Shortage SolutionsShortage Solutions3) allow the price to rise to the
market equilibrium point3) allow the price to rise to the
market equilibrium point• not imposing price ceilings• benefits:
encourages conservation and discourages wastefulness
motivates entrepreneurs to enter the market
• not imposing price ceilings• benefits:
encourages conservation and discourages wastefulness
motivates entrepreneurs to enter the market
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supplydemand