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Economics 101Chapter06

Economics 101Chapter06 - 1 Objectives for Chapter 6 Supply...

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Objectives for Chapter 6 Supply and Equilibrium At the end of chapter 6, you will be able to: 1. Define the Law of Supply 2. Differentiate Between the Causes of a Movement Along the Supply Curve and a Shift in Supply 3. Name and Explain the Four Factors that will cause the Supply of a Given Product to Shift to the Left (or to the Right). 4. Explain "equilibrium" ? Explain how the equilibrium price and quantity are determined? 5. If the price is above equilibrium, explain what will result? If the price is below equilibrium, explain what will result? 6. Explain what will happen to the price and the quantity in each of the following cases (as well as why this will happen): a. there is an increase in demand or a decrease in demand b. there is an increase in supply or a decrease in supply 7. Explain what will happen to the price and the quantity in each of the following cases, as well as why it will happen: a. both demand and supply increase c. demand increases and supply decreases b. both demand and supply decrease d. demand decreases and supply increases 1
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Chapter 6 Supply And Equilibrium (latest revision May 2006) 1. Supply In Chapter 5, we focused exclusively on the behaviors of buyers. But buyers are only half of the market. We must also consider the behaviors of sellers . Discussing sellers is somewhat easier because we can safely assume that sellers have only one motivation: to maximize their profits . Sellers will be motivated to do more of anything that increases profits and less of anything that decreases profits. Their total profits are calculated as the difference between their total revenues and their total costs of production. Let us begin with the total revenues , the money taken in from selling the product. Total revenues are calculated as the price of the product times the quantity sold . So, if we sell 100 units of the product at $10 each, our total revenues equal $1,000. If we sell 100 units at $20, our total revenues equal $2,000. Since we gain more revenues if the price is $20 than if it is $10, we would likely want to sell more units of the product. So we can conclude that as the price of the product rises (falls), the quantity supplied rises (falls). We call this statement the law of supply. (Go back and compare this statement with the law of demand.) To illustrate the law of supply, you would expect that more and more homes would be built after 1995 when the prices of homes began rising greatly. This is indeed what has occurred. You would expect electric power producers to produce more electricity after the prices doubled in the summer of 2000. And you would expect that more and more people would want to become engineers and scientists when the prices paid for these people (called the wages) rose. Again, indeed, this is what has occurred. (Does it make any sense that when the ticket prices charged for baseball and football games rose, Major League Baseball changed from 154 games to 162 games per year and the National Football League changed from 12 games to 16 games per year?) We can illustrate the law of supply with a supply schedule for homes.
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