Supply

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MBA 1st sem Managerial Economics notes

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  • Supply

    1. 1. CASE STUDY <ul><li>Two ways to reduce the quantity of smoking demanded: </li></ul><ul><li>-- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve) </li></ul><ul><li>-- Raising the price of cigarettes through tobacco taxes (move along demand curve) </li></ul>
    2. 2. SUMMARY variable change Demand Shift Income (Normal) Rise (fall) Rise (fall) Right (left) Income (Inferior) Rise (fall) Fall (rise) Left (right) Price of substitute Rise (fall) Rise (fall) Right (left) Price of complement Rise (fall) Fall (rise) Left (right) Taste Rise (fall) Rise (fall) Right (left) Expected Price Rise (fall) Rise (fall) Right (left) Number of buyers Rise (fall) Rise (fall) Right (left)
    3. 3. SUPPLY <ul><li>Quantity supplied is the amount of a good that sellers are willing and able to sell. </li></ul><ul><li>Law of Supply </li></ul><ul><ul><li>The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises. </li></ul></ul>
    4. 4. SUPPLY SCHEDULE <ul><li>Supply Schedule </li></ul><ul><ul><li>The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. </li></ul></ul>
    5. 5. EXAMPLE OF SUPPLY SCHEDULE
    6. 6. SUPPLY CURVE <ul><li>Supply Curve </li></ul><ul><ul><li>The supply curve is the graph of the relationship between the price of a good and the quantity supplied. </li></ul></ul>
    7. 7. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price ... 2. ... increases quantity of cones supplied.
    8. 8. TWO VIEWS <ul><li>For every possible price, it shows the production rate </li></ul><ul><li>For each unit of item, it shows the minimum price that the seller is willing to accept </li></ul>
    9. 9. MARKET SUPPLY <ul><li>Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. </li></ul><ul><li>Graphically, individual supply curves are summed horizontally to obtain the market supply curve. </li></ul>
    10. 10. CHANGE IN QUANTITY SUPPLIED <ul><li>Change in Quantity Supplied </li></ul><ul><ul><li>Movement along the supply curve. </li></ul></ul><ul><ul><li>Caused by a change in price. </li></ul></ul>
    11. 11. CHANGE IN QUANTITY SUPPLIED 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C A rise in the price of ice cream cones results in a movement along the supply curve. $3.00
    12. 12. CHANGE IN SUPPLY <ul><li>Change in Supply </li></ul><ul><ul><li>A shift in the supply curve, either to the left or right. </li></ul></ul><ul><ul><li>Caused by a change in a determinant other than price. </li></ul></ul>
    13. 13. FIGURE 7 SHIFTS IN THE SUPPLY CURVE Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve, S 3 curve, Supply S 1 Supply curve, S 2
    14. 14. SHIFT IN THE SUPPLY CURVE <ul><li>Input prices </li></ul><ul><li>Technology </li></ul><ul><li>Expectations </li></ul><ul><li>Number of sellers </li></ul>
    15. 15. SUMMARY variable change Supply Shift Input (factor) price Rise (fall) Fall (rise) Left (right) Technology Rise (fall) Rise (fall) Right (left) Expected Price Rise (fall) Fall (rise) Left (right) Number of sellers Rise (fall) Rise (fall) Right (left)
    16. 16. EQUILIBRIUM <ul><li>Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. </li></ul>
    17. 17. EQUILIBRIUM PRICE AND QUANTITY <ul><li>Equilibrium Price </li></ul><ul><ul><li>The price that balances quantity supplied and quantity demanded. </li></ul></ul><ul><ul><li>On a graph, it is the price at which the supply and demand curves intersect. </li></ul></ul><ul><li>Equilibrium Quantity </li></ul><ul><ul><li>The quantity supplied and the quantity demanded at the equilibrium price. </li></ul></ul><ul><ul><li>On a graph it is the quantity at which the supply and demand curves intersect. </li></ul></ul>
    18. 18. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00
    19. 19. SURPLUS AND SHORTAGE <ul><li>Surplus </li></ul><ul><ul><li>When price > equilibrium price, then quantity supplied > quantity demanded. </li></ul></ul><ul><ul><ul><li>There is excess supply or a surplus. </li></ul></ul></ul><ul><ul><ul><li>Suppliers will lower the price to increase sales, thereby moving toward equilibrium. </li></ul></ul></ul><ul><li>Shortage </li></ul><ul><ul><li>When price < equilibrium price, then quantity demanded > the quantity supplied. </li></ul></ul><ul><ul><ul><li>There is excess demand or a shortage. </li></ul></ul></ul><ul><ul><ul><li>Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. </li></ul></ul></ul>
    20. 20. ALTERNATIVE EXAMPLE: #2 LEAD PENCILS Price Quantity demanded Quantity supplied 0.05 1000 400 0.10 800 500 0.15 600 600 0.20 400 700 0.25 200 800
    21. 21. QUICK QUIZ 1 <ul><li>Draw demand and supply curves </li></ul><ul><li>Find equilibrium price and quantity </li></ul>
    22. 22. QUICK QUIZ 2 <ul><li>How would following events shift either the demand or the supply of #2 lead pencil? </li></ul><ul><li>-- an increase in the use of standardized exams (using opscan forms) </li></ul><ul><li>-- a decrease in the price of ink pens </li></ul><ul><li>-- a start of a school year </li></ul>
    23. 23. INCREASE IN DEMAND Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3. . . . and a higher quantity sold. 2. . . . resulting in a higher price . . . 1. Hot weather increases the demand for ice cream . . . 2.00 7 New equilibrium $2.50 10
    24. 24. DECREASE IN SUPPLY Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Initial equilibrium Demand New equilibrium S 1 S 2 2. . . . resulting in a higher price of ice cream . . . 1. An increase in the price of sugar reduces the supply of ice cream. . . 3. . . . and a lower quantity sold. 2.00 7 $2.50 4
    25. 25. SUMMARY
    26. 26. DISCUSSION <ul><li>Each of the events listed below has an impact on the market for bicycles. </li></ul><ul><li>1.An increase in the price of automobile. </li></ul><ul><li>2.A decrease in incomes of consumers if bicycles are a normal good. </li></ul>
    27. 27. DISCUSSION-CONTINUED <ul><li>3.An increase in the price of steel used to make bicycle frames. </li></ul><ul><li>4.An environmental movement shifts tastes toward bicycling. </li></ul>
    28. 28. DISCUSSION-CONTINUED <ul><li>5.Consumers expect the price of bicycles to fall in the future. </li></ul><ul><li>6.A technological advance in the manufacture of bicycles. </li></ul>
    29. 29. DISCUSSION-CONTINUED <ul><li>7.A reduction in the price of bicycle helmets and shoes. </li></ul><ul><li>8.A decrease in incomes of consumers if bicycles are an inferior good. </li></ul>

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