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Supply and the Market System

Supply and the Market System. Amount of goods and services that businesses are willing and able to produce During a certain period of time Positive Relationship – upward slope Why? Business wants to sell more when price rises (generally brings higher profits). Supply of Chocolate Cookies.

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Supply and the Market System

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  1. Supply and the Market System • Amount of goods and services that businesses are willing and able to produce • During a certain period of time • Positive Relationship – upward slope • Why? Business wants to sell more when price rises (generally brings higher profits)

  2. Supply of Chocolate Cookies

  3. Other things to consider: • Change in quantity supplied = movement along the curve resulting from a change in price (memorize this!) • Price changes first (independent variable) then quantity responds

  4. Changes in Supply • What happens when other things besides price change? • (remember, price changes cause QUANTITY SUPPLED to change) • When the cause of the change is a non-price variable, the curve will shift, causing a change in supply. (memorize this!)

  5. Example: The cost of cocoa goes up causing the curve to shift left. This is a decrease in supply!

  6. What if the cost of sugar goes down? Curve will shift to the right. This is an increase in supply!

  7. Determinants of Supply • Production Cost Changes • When production costs fall, more profit can be made at every price • It makes sense for a business to want to produce more when cost falls • When costs rise, businesses tend to produce less

  8. Determinants of Supply continued • Substitute Goods – Other products become more or less desirable. • Example: If wheat prices fall, farmers will plant more corn, increasing the supply of corn.

  9. Still more determinants of supply • Future Expectation – Fear of being unable to sell their inventories will cause producers to supply less. • Number of buyers/size of market

  10. Elasticity of Supply • The extent to which quantity changes in response to a new price (sensitivity to price) • The supply side of the market has a more difficult time adjusting to price changes because a firm’s ability to change production levels is involved. • As a result, when there is a change in price: • The immediate response is inelastic • The short term tends to be more elastic • The long run has the greatest elastisity

  11. Just to remind you…

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