Chapter 4 Supply

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Chapter 4 Supply

  1. 1. Chapter 4: Supply
  2. 2. Supply <ul><li>Economically Speaking: Qty of a good or service one is willing and able to provide at various prices </li></ul><ul><ul><li>If you are unwilling and/or unable to sell, you can’t supply </li></ul></ul><ul><li>Law of Supply: Firms will sell more at a higher cost, and less at a lower cost </li></ul><ul><li>Price Effect: How Law of Demand affects sellers - they’ll sell more at a higher price than at a lower price </li></ul><ul><ul><li>(Prices = incentives, disincentives) </li></ul></ul>
  3. 3. How to Graph Supply: <ul><li>Market Supply: All possible P,Q combinations! </li></ul><ul><li>Aggregate Supply : Total of all goods,services of all firms </li></ul>Supply (S) Quantity (Q) Price (P)
  4. 4. Major Consideration of Supply <ul><li>Marginal Costs: Cost of producing add’l goods and services </li></ul><ul><ul><li> production =  cost of production </li></ul></ul><ul><ul><ul><li> labor costs </li></ul></ul></ul><ul><ul><ul><li> wear on machinery </li></ul></ul></ul><ul><ul><ul><li> difficulty in extracting resources (scarcity) </li></ul></ul></ul><ul><ul><li>Production will continue until marginal costs = marginal benefits </li></ul></ul>
  5. 5. Price Elasticity of Supply <ul><li>Elastic (Luxury item): </li></ul><ul><li>Price changes greatly affect the # of products supplied </li></ul><ul><li> # of items to sell when price  </li></ul><ul><li>Inelastic (Necessity): </li></ul><ul><li>Price changes have little or no effect on # of products supplied </li></ul><ul><li>Gas is inelastic, since a price  means producers can make  $ w/ same sales (my gas tank didn’t get any smaller) :( </li></ul>
  6. 6. Price Effect vs Change in Supply <ul><li>Market Supply is the combination of all P and Q supplied </li></ul><ul><li>Various points along supply curve = Price Effect </li></ul><ul><li>A Change in Supply occurs when: </li></ul><ul><ul><li>Firms supply  Q at all P </li></ul></ul><ul><ul><li>Firms supply  Q at all P </li></ul></ul>
  7. 7. A Supply Curve Shift S 1 = Original Supply S 2 = Increase in Supply S 3 = Decrease in Supply P Q S 1 S 2 S 3
  8. 8. What Causes A Supply Shift? <ul><li>Change in Marginal Cost </li></ul><ul><li>Change in the # of Sellers </li></ul><ul><li>Change in Expectations </li></ul>
  9. 9. Shifting Supply Curves <ul><li>1) When Marginal cost  in supply </li></ul><ul><li>if # of producers  supply </li></ul><ul><li>price of cheese  supply now and in future </li></ul>

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