Supply Dilemmas

1
Supply Dilemmas
2
Aims

• To reinforce your understanding of supply
• To know the different factors that would cause a
  movement along and a shift in supply.

3
More supply
4
Different Supply curves
At a 5 price, what is the level of supply for
each of the supply curves? What do you notice
about the level of supply in each case? What
effect would an increase in price to 6 have in
both diagrams?

• Top supply curve
• Price 5
• Supply 64
• Lower supply curve
• Price 5
• Supply 46

5
Change in Price
What effect does the gradient of the curve have
on the quantity supplied? Use the words shallow,
steep, significant change and small impact. In
your answer.

• Top curve
• Price 6.8
• Supply 101 (max supply)
• Lower supply curve
• Price 7
• Supply 53

6
Applying theory

• Get Interactive!
• Now lets just test our understanding of what we
  have learned.
• Consider each of the following 'news headlines'
  below and state what type of market is being
  discussed and state what would happen to either
  the demand curve or the supply curve in each case
  and what factor is causing the change. There may
  be an effect on more than one market! Remember
  the difference between movements along and shifts
  in the curves!
• Example
• Postal workers agree 4.5 pay rise with
  employers

7
Your turn complete your worksheet.
Remember CAUSE EFFECT issues!

• California's strawberry crops hit by late frost
• Price of train travel to rise again
• Music industry to slash price of CDs by half!
• Over 65s to become biggest proportion of the
  population
• Unknown chemical in apples linked to rise in
  cancer numbers
• Microsoft angry at rise in hardware prices
• Lager prices jump following rise in duty
• Construction industry looks forward to mortgage
  rate cut

• Rise in numbers of sheep raised as health report
  praises lamb
• More of us like our vegetables organic!
• OPEC agrees to further cuts in supply
• 'No more building on greenbelt land' promises
  government
• Taxes on waste products angers industry leaders
• Growth in DVD sales supports profits for music
  retailers
• Sales campaign flops as consumers register anger
  at offensive material
• Average incomes to rise above rate of inflation
• Is this the end of the line for permed hair?

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Quiz!

• Inward?
• Outward?
• No shift ?

• How will the market demand curve for a 'normal'
  good shift in each of the following cases?
• The price of a substitute good falls.
• Population rises.

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How will the market demand curve for a 'normal'
good shift (i.e. left, right or no shift) in each
of the following cases?

• Tastes shift away from the good.
• The price of a complementary good falls.
• The good becomes more expensive.

• Inward?
• Outward?
• No shift ?

10
How will the market supply curve of a good shift
in each of the following cases?

• Costs of producing the good fall.
• Alternative products (in supply) become more
  profitable.
• The price of the good rises.
• Firms anticipate that the price of the good is
  about to fall.

• Inward?
• Outward?
• No shift ?

11
Homework.

• Mutli choice Quiz
• Try the next few pages.

12
Economics Multiple-choice Quiz

• Tom graduates from university with a degree in
  Economics and his income increases by 10,000 a
  year. Other things remaining the same, he
  decreases the quantity of donuts he buys. For
  Tom, donuts
• are an inferior good
• and tea has become complements
• are a normal good
• and toast have become substitutes
• 2. Which one of the following would be expected
  to cause an inward shift in the market demand for
  UK produced cheese?
• A rise in income - assuming that cheese is a
  normal good
• An increase in the price of cheese
• A rise in the price of a substitute for cheese
• An increase in the price of a complement to
  cheese
• 3. Chicken and fish are assumed to be
  substitutes. If the price of chicken increases,
  the demand for fish will _________
• not change but there will be a movement along the
  demand curve for fish
• increase or decrease, but there will be no change
  in the demand for chicken
• increase and the demand curve for fish will shift
  to the right
• decrease and the demand curve for fish will shift
  to the left

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• 4. All other factors held constant (ceteris
  paribus) a decrease in market demand for new cars
  will lead to
• decreased price and decreased quantity
• decreased price and no change in quantity
• increased price and decreased quantity
• increased price and increased quantity
• 5. When the price of one of the products that
  you buy increases, your purchasing power
  decreases. Thus you are likely to buy less of all
  normal goods. This is known as
• the law of diminishing marginal returns
• the real income effect
• the giffen good effect
• the substitution effect
• 6. The market demand curve for overseas cruises
  will NOT shift when there is a
• Increase in the price of land-based package
  holidays (a substitute for cruises)
• Fall in the price of a cruise in the brochures
• Successful advertising campaign
• Rise in consumers real incomes

14

• 7. According to the Law of Supply
• if the price is low, any firm will sell the
  product
• the higher the price, the lower the quantity
  supplied
• anything that is supplied will be purchased by
  consumers
• the higher the price, the larger the quantity
  supplied.
• 8. Suppose that a 20 increase in the price of
  good Y results in an increase in the consumption
  of good X of 8. This is an example of
• A shift in supply
• The substitution effect
• The real income effect
• A higher demand for all goods and services in
  general