TOPIC: Gas at Laredo Taco Company!Instruction: Your discussion should include the relevance of one economic/business concept from this or last week's chapters (Key Terms). Indicate the concept as a heading at the beginning of your post content area (not as part of the thread or post topic). Highlight (bold or underline) that concept whenever you apply that concept insider your discussion.
Task: Respond to the following question and, if appropriate, include your personal experience or observations as part of your answer: Last week we talked about gasoline prices around town. What do you think about the market structure of retail gasoline? Is it close to perfect competition? Do gas stations have market power (ability to affect the prices they charge)? Most gasoline is sold by convenience stores, which also sell a wide variety of other products, such as breakfast tacos at Stripes. Do you see if businesses in that market behave according to the concepts that you learned this week. You can make some observations from the gas stations near you. Explain. Keep in mind that your discussion should include the relevance of at least one economic/business concept from this or last week's chapters.
Supply Supply © 2016 by McGraw-Hill Education ‹#› 1 The Supply Curve © 2016 by McGraw-Hill Education ‹#› Suggested segue: The price system is a focal part of understanding an economy. We have stated that both sides of the market, the suppliers and the demanders, help determine the prices. Now that we’ve looked at the demand side we also need to see how the supply of products impacts markets and prices. Learning Objective: Describe the relationship between the price of a good and the quantity supplied. 2 The Law of Supply Definition: A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant. © 2016 by McGraw-Hill Education ‹#› The law of supply formalizes the idea that when a product sells more a higher price, suppliers will be more likely to produce that product. Connection to Other Material: The law of increasing opportunity costs is part of the explanation behind the law of supply: All else held constant, firms will be willing and able to produce more output only when prices rise, precisely because their opportunity cost of production is increasing. The higher the price, the higher the quantity supplied. The lower the price, the lower the quantity supplied. 3 Supply Schedule (1 of 2) PriceQuantity 4002,000 3251,750 2501,500 1751,250 1001,000 © 2016 by McGraw-Hill Education ‹#› You can think about a single firm’s desire to sell a good. For example, consider the supply schedule for producing cell phones. If the price is say, $400 dollars per phone, the firm may be willing to produce a lot of phones (in this case, lets say 2,000 phones a day). As the price gets lower, what do you expect to happen to the number of phones the company is willing to produce? What if the price were to drop to $325 dollars? $250? $175? $100? Supply Schedule Definition: A tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply. 4 Supply Schedule (2 of 2) PriceQuantity 4002,000 3251,750 2501,500 1751,250 1001,000 © 2016 by McGraw-Hill Education ‹#› We can very easily translate the supply schedule for this firm into a graph. Place price on the vertical axis and quantity on the horizontal axis. Then simply plot the various price and quantity combinations. 5 Individual Supply Curve © 2016 by McGraw-Hill Education ‹#› Just like with demand, with supply we can connect the various plotted points to give us an estimation of our supply curve. Supply Curve Definition: A graphical representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply. On this slide we can see the basic shape of a supply curve. There is a positive relationship between the price of an item and the quantity supplied. 6 Market Supply © 2016 by McGraw-Hill Education ‹#› Suggested segue: We can move from an individual firm’s supply curve to the entire market’s supply curve; the process is exactly the same as creating a market demand curve. Learning Objective: Calculate and construct a market supply curve using data provided. 7 Individual Firm’s Supply (1 of 2) Glass Corp. Supply Schedule PriceQuantity 155 103 51 © 2016 by McGraw-Hill Education ‹#› Work through an example of adding together individual supply curves to understand the creation of a market supply curve. 8 Individual Firm’s Supply (2 of 2) Tower Inc. Supply Schedule PriceQuantity 154 103 52 © 2016 by McGraw-Hill Education ‹#› 9 Multiple Firm’s Supply (1 of 3) Glass Corp. PGlass Corp. Q 155 103 51 Tower Inc. PTower Inc. Q 154 103 52 = Glass Corp. & Tower Inc. Q 9 6 3 + © 2016 by McGraw-Hill Education ‹#› This slide shows how both curves will be added together to get the quantity for both individual firms within the market. 10 Multiple Firm’s Supply (2 of 3) PriceGlass Corp. QTower Inc. QGlass Corp. and Tower Inc. Q 15129 10336 5543 © 2016 by McGraw-Hill Education ‹#› If the market is just Glass Corp. and Tower Inc., then we can take their combined supply schedules and create a market supply schedule. 11 Multiple Firm’s Supply (3 of 3) © 2016 by McGraw-Hill Education ‹#› Quiz Question-1 How does market supply differ from individual supply? Market supply is the sum of all individual suppliers. Markets are only concerned about individual suppliers. Individual suppliers do not supply the same quantities. Individual suppliers do supply the same quantities. © 2016 by McGraw-Hill Education ‹#› The correct answer is A. 13 Discussion Question (1 of 1) Discuss the differences between supply, the supply curve, and the supply schedule. © 2016 by McGraw-Hill Education ‹#› Answer: Supply refers to the definition of the Law of Supply, which states the quantities of a good, service, or resource sellers are willing and able to offer for sale at a variety of different prices over a fixed time period, everything else remaining constant. The supply curve demonstrates the various prices and quantities that are offered for sale in a graphical format. The supply schedule demonstrates the various prices and quantities that are offered for sale in a tabular format. The supply curve and schedule represent the same information, just in different formats. 14 Change in Supply (1 of 3) © 2016 by McGraw-Hill Education ‹#› Suggested segue: With the market supply schedule determined, we can now analyze the supply curve and how it can represent changes in the world around us. Learning Objective: Show how the supply curve changes in response to nonprice determinants. 15 Change in Supply (2 of 3) What happens when the price of a good drops from $5 to $3? © 2016 by McGraw-Hill Education ‹#› With what we know so far you can imagine a supply curve. On that supply curve, what happens when the price drops? 16 Change in Quantity Supplied © 2016 by McGraw-Hill Education ‹#› When the price drops the quantity producers are willing and able to create will decrease. This is what we call a change in quantity supplied. Does anything happen to the curve itself? Does it move out or get steeper? No. A price change within the market you are talking about creates a move along the curve and not a move of the curve. 17 Change in Supply (3 of 3) © 2016 by McGraw-Hill Education ‹#› We can get a change in supply if a nonprice variable changes. This is a move of the entire supply curve. 18 Increase in Supply © 2016 by McGraw-Hill Education ‹#› An increase in supply: Definition: An increase in the quantity of a good, service, or resource supplied at every price. Graphically, an increase in supply is represented by a rightward shift of the supply curve. 19 Decrease in Supply © 2016 by McGraw-Hill Education ‹#› A decrease in supply: Definition: An decrease in the quantity of a good, service, or resource supplied at every price. Graphically, a decrease in supply is represented by a leftward shift of the supply curve. 20 Increase in Supply vs. Increase in Quantity Supplied Increase in Supply Increase in Quantity Supplied © 2016 by McGraw-Hill Education ‹#› It is very important to understand the distinction between an increase in supply and an increase in quantity supplied. Increases in supply come from nonprice changes that increase the quantity supplied at every price. Increases in quantity supplied come from a raising of the price. 21 Decrease in Supply vs. Decrease in Quantity Supplied Decrease in Supply Decrease in Quantity Supplied © 2016 by McGraw-Hill Education ‹#› It is very important to keep separate the distinction between a decrease in supply and a decrease in quantity supplied. Decreases in supply come from nonprice changes that decrease the quantity supplied at every price. Decreases in quantity supplied come from a lowering of the price. 22 Quiz Question-2 Which of the following describes the relationship between price and quantity supplied? It is an inverse relationship. It is a direct relationship. Price and quantity supplied move in opposite directions. There is no concrete relationship between price and quantity supplied. © 2016 by McGraw-Hill Education ‹#› The correct answer is B. 23 Quiz Question-3 Other things remaining the same, an increase in the price of beach front condos: decreases the quantity of beach front condos supplied. increases the quantity of beach front condos supplied. decreases the supply of beach front condos. increases the supply of beach front condos. © 2016 by McGraw-Hill Education ‹#› The correct answer is B. 24 Discussion Question (2 of 2) Discuss the difference between a change in supply and a change in the quantity supplied. © 2016 by McGraw-Hill Education ‹#› Answer: A change in supply occurs when one or more of the nonprice determinants of supply change. These changes cause the supply curve to shift to the right (down) or left (up) depending on the specific changes that occur. A change in the quantity supplied is a result of a good or service’s price changing, thereby the seller decides to offer more or less for sale. If the price goes up the seller can afford to produce more even if increasing opportunity costs are involved. If the price goes down the seller may not be able to supply the same quantity as before due to the opportunity costs involved relative to the price of the good/service. 25 Determinants of Supply - Taxes and Subsidies (1 of 2) © 2016 by McGraw-Hill Education ‹#› Suggested segue: We move along the supply curve with changes in prices, but with non-price determinants we can see shifts of the supply curve. Learning Objective: Illustrate the effect of a change in taxes and subsidies on supply. 26 Nonprice Determinants of supply (1 of 3) Subsidies|Taxes One category of non-price determinants that shift the supply curve is taxes and subsidies. 27 Tax (1 of 2) Definition: A payment made to government that is the result of economic activity. Taxes are generally collected from both individuals and firms. © 2016 by McGraw-Hill Education ‹#› Taxes make it more costly to supply goods or services at each quantity, causing our supply curve to shift to the left. 28 Tax (2 of 2) © 2016 by McGraw-Hill Education ‹#› A tax on the producer is like a decrease in supply. 29 Subsidy (1 of 2) Definition: A payment made by the government that does not necessarily require an exchange of economic activity in return. Subsidies most often take the form of payments to businesses. © 2016 by McGraw-Hill Education ‹#› Subsidies make it less costly to supply goods or services at each quantity, causing our supply curve to shift to the right. 30 Subsidy (2 of 2) © 2016 by McGraw-Hill Education ‹#› A subsidy for the producer is like an increase in supply. 31 Determinants of Supply - Resources and Technology (1 of 2) © 2016 by McGraw-Hill Education ‹#› Suggested segue: The second