Changes

== The Law of Supply ==

== The Law of Supply ==

When solving a problem in economics, always take care to keep the "supply" and "demand" curves separate in your mind, even though they are superimposed on each other in one graph.  The "supply" curve is from the perspective of the seller, the owner, the manufacturer, the company, etc.  It is on this side that the good is produced (or obtained) and then sold to the public.  In some ways this side is more difficult for students to understand, because in real life students are almost always on the opposite side, the demand side, where the buyers are.

When solving a problem in economics, always take care to keep the "supply" and "demand" curves separate in your mind, even though they are superimposed on each other in one graph.  The "supply" curve is from the perspective of the seller, the owner, the manufacturer, the company, etc.  It is on this side that the good is produced and then sold to the public.  In some ways this side is more difficult for students to understand, because in real life students are almost always on the opposite side, the demand side, where the buyers are.

'''''Question''''': what does the price in a graph of the supply curve really represent?  The price for a supply curve is the '''''market price for the sale of his goods or services'''''.  When that '''''market''''' price increases, the supplier will produce more of his good (or provide more of his services).  For example, as the salaries of professional baseball players for their services have increased in the major leagues, more and more people have tried to become professional baseball players to benefit from the higher prices paid for the services.  The more profitable that the sale of a good becomes, the more of that good that people want to produce (or, in the case of baseball, the more of that service that players want to provide).

'''''Question''''': what does the price in a graph of the supply curve really represent?  The price for a supply curve is the '''''market price for the sale of his goods or services'''''.  When that '''''market''''' price increases, the supplier will produce more of his good (or provide more of his services).  For example, as the salaries of professional baseball players for their services have increased in the major leagues, more and more people have tried to become professional baseball players to benefit from the higher prices paid for the services.  The more profitable that the sale of a good becomes, the more of that good that people want to produce (or, in the case of baseball, the more of that service that players want to provide).

Let's take another example.  If the market price of oil is low, as in only $10 a barrel, then there is no incentive to increase the production of oil.  No one is going to want to drill for new oil wells.  It's not worth it.  It's not profitable enough.  But as the market price of oil increases to $100 a barrel, then there is much more profit to made by producing more oil.  Companies drill many new oil wells in order to sell at the high price and make more profits.  The supply of oil increases as its market price increases.

Let's take another example.  If the market price of oil is low, as in only $10 a barrel, then there is no incentive to increase the production of oil.  No one is going to want to drill for new oil wells.  It's not worth it.  It's not profitable enough.  But as the market price of oil increases to $100 a barrel, then there is much more profit to be made by producing more oil.  Companies drill many new oil wells in order to sell at the high price and make more profits.  The supply of oil increases as its market price increases.

This is the '''''Law of Supply''''':  as the market price for a good increases, the quantity supplied will increase.  This is because as the market price increases, there is an incentive to supply more of the good or service is supplied to the market.  This is why the supply curve is '''''upward sloping''''' on a graph of price and quantity.

This is the '''''Law of Supply''''':  as the market price for a good increases, the quantity supplied will increase.  This is because as the market price increases, there is an incentive to supply more of the good or service to the market.  This is why the supply curve is '''''upward sloping''''' on a graph of price and quantity.

== What Happens When the Supplier Increases His Price? ==

== What Happens When the Supplier Increases His Price? ==

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases.  But as the graph below illustrates, price controls create shortages:

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases.  But as the graph below illustrates, price controls create shortages:

[[File:Price control curves 0001.jpg|800px]]

[[File:Price control curves 0001.jpg|600px]]

When a price control causes a difference between the supply quantity and the demand quantity, it is the lower quantity that becomes the market.  The market can never be more than the lesser of the quantity in supply or quantity in demand.  Because the quantity supplied is much less than the quantity demanded, a shortage results.

When a price control causes a difference between the supply quantity and the demand quantity, it is the lower quantity that becomes the market.  The market can never be more than the lesser of the quantity in supply or quantity in demand.  Because the quantity supplied is much less than the quantity demanded, a shortage results.

==Assignment==

==Assignment==

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level in which you choose to enroll in this course:

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level at which you choose to enroll in this course:

1. Give an example of a good that has a large price elasticity, meaning that a small decrease in price causes a big increase in demand.

1. Give an example of a good that has a large price elasticity, meaning that a small decrease in price causes a big increase in demand.

6.  Give an example of a "normal" good, and an example of an "inferior" good.

6.  Give an example of a "normal" good, and an example of an "inferior" good.

7.  A "price ceiling" is a type of price control that sets the maximum price allowed by law for something (like a real ceiling).  A "price floor" is a type of price control that sets a minimum price allowed by law for something (like a real floor).  Does a price ceiling that is set below the free market price cause a surplus or a shortage?  Using the graph in this lecture, explain why a surplus or a shortage is created by a price ceiling.

7.  A "price ceiling" is a type of price control that sets the maximum price allowed by law for something (like a real ceiling).  A "price floor" is a type of price control that sets a minimum price allowed by law for something (like a real floor).  Does a price ceiling that is set below the equilibrium (free market) price cause a surplus or a shortage?  Using the graph in this lecture, explain why a surplus or a shortage is created by a price ceiling.

===Honors===

===Honors===

Write an essay of about 200-300 words total on one or more of the following topics:

Write an essay of about 200-300 words total on one or more of the following topics:

8.  Take a straight line demand curve and describe what the shape the total revenue has as a function of price.   

8.  Take a straight line demand curve and describe the shape of the total revenue curve as a function of price.   

9.  Explain price discrimination, and conclude with your view of whether it should be legal or illegal.

9.  Explain price discrimination, and conclude with your view of whether it should be legal or illegal.

12.  Describe and discuss how wealth is created in society.

12.  Describe and discuss how wealth is created in society.

[[Category:Economics lectures]]

[[Category:Economics lectures]]

{{DEFAULTSORT: Economics Lecture 03}}

{{DEFAULTSORT: Economics Lecture 03}}