WEEK 3 ASSIGMENT ECO 252-02 W

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Running head: LAW OF SUPPLY AND THE DETERMINANTS OF SUPPLY WEEK III ASSIGMENT Lucas M. Maccarini Principles of Macroeconomics Instructor: Ryan Kearns September 4 2020 Coastal Carolina Community College ECO 252-02 W

LAW OF SUPPLY 2 2.3 Law of supply and the determinants of supply Introduction: Supply is a schedule or a curve representing the direct relationship between the price of a good and the quantity firms will supply in a particular period of time. A good’s supply is determined by several factors. Obviously, price is an important factor in determining how much of a good firms will supply. But in order for supply itself to change, a change in one of the non-price determinants of supply must occur. The table below shows the daily supply of natural gas in the United States at a range of prices.

LAW OF SUPPLY 3 Questions: 1. Plot the data in the supply schedule above in the graph below (add labels and values appropriate to a market diagram): 2. Describe the relationship between the price of natural and the quantity supplied: A direct relationship between price and the quantity supplied can be observed. Therefore, at higher prices more natural gas is supplied. 3. How does the law of increasing marginal costs (opportunity cost) help explain the relationship? When more natural gas is extracted it becomes more expensive because the resource (natural gas) begin to become scarce. Therefore, the output of additional gas diminish as more is produced.

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LAW OF SUPPLY 4 4. What is the law of supply? The law of supply can be defined as the direct relationship between a good’s price and the quantity supplied. 5. Fill in the blanks: The data in the supply schedule and curve above indicates that at a price of $8, 600 million cubic yards of natural gas will be supplied each year . Other things constant, if the price increases to $10 , the quantity supplied will increase to 750 cubic yards of natural gas per year. Such a change would represent an increase in quantity supplied . If the price decreased to $6, suppliers would be willing to produce 450 million cy per year. Such a change would represent a decrease in quantity supplied . 6. Now assume that due to the implementation of a higher minimum wage, the costs of employing workers at natural gas facilities increases. This represents a change in the ceteris paribus condition which underlies the original supply schedule above. Due to the higher wage costs, the supply of natural gas will decrease by 50 million cubic yards at each of the prices in the original table. Fill in the supply schedule below showing the effect of the new minimum wage on the yearly supply of natural gas.

LAW OF SUPPLY 5 7. On the supply curve diagram you drew for #1, draw a new supply curve showing the effect of the new minimum wage. Label the new supply curve S1 and answer the questions that follow. a. Comparing the new supply curve with the original curve, we can say that minimum wage has caused supply to shift to the left . b. Such a shift in supply indicates that at each of the possible prices shown, firms are now willing to produce a smaller quantity of natural gas than before. The cause of this change was an increase in the costs of production. 8. Changes in costs of production are not the only factor that can cause the supply of a good to change. Assume that in an effort to reduce its dependence on foreign oil, the United States government reduces the tax rate that natural gas producers have to pay. This leads to an increase in the supply of natural gas at each of the prices in the original supply schedule by 75 natural gas. Fill in the supply schedule below showing the effect of the lower tax rate the yearly supply of natural gas.

LAW OF SUPPLY 6 9. On the supply curve diagram you drew for #1, draw a new supply curve showing the effect of the tax cut. Label the new supply curve S2 and answer the questions that follow. a. Comparing the new supply curve with the original curve, we can say that tax cut has caused supply to shift to the right . b. Such a shift in supply indicates that at each of the possible prices shown, firms are now willing to produce a greater quantity of natural gas than before. The cause of this change was an decreases in taxes. 10. Changes in wage costs and tax rates are just two of the non-price determinants of supply. Below, brainstorm and clearly explain other possible factors that could cause supply of natural gas to increase and decrease. a. A change in the level of government subsidies (subsidies are payments from the government to producers of a particular good): i. Would cause supply of natural gas to increase: If an increase of subsides to natural gas producers occurs. ii. Would cause supply of natural gas to decrease: If the government cut or decrease the level of subsides to natural gas producers. b. A change in technology: i. Would cause supply of natural gas to increase: An improvement or development of new technology employed in natural gas extraction. ii. Would cause supply of natural gas to decrease: Deteriorated (lack of maintenance) and obsolete technology and infrastructure.

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LAW OF SUPPLY 7 c. A change in the price of other goods that firms could produce with the same resources: i. Would cause supply of natural gas to increase: A decrease in demand for other resources due to price increase will focus Firm’s resources towards natural gas production. Therefore, increasing the supply levels. ii. Would cause supply of natural gas to decrease: An increase in the demand for oil or groundwater. d. A change in producers’ expectations of future prices: i. Would cause supply of natural gas to increase: If the producers predict an increase in gas value they will supply more. ii. Would cause supply of natural gas to decrease: If a decrease on natural gas prices is expected, then producers will decrease the supply levels. e. A change in producers’ expectations of future consumer incomes: i. Would cause supply of natural gas to increase: A projected higher income in gas consumers would lead producers to increase their supply levels. ii. Would cause supply of natural gas to decrease: In the contrary if lower incomes are predicted for gas consumers producers will decrease their output. f. A change in the costs of raw materials: i. Would cause supply of natural gas to increase: Lower raw materials costs will allow producers to extract more natural gas without increasing their costs.

LAW OF SUPPLY 8 ii. Would cause supply of natural gas to decrease: In the other hand, higher raw material costs will force producers to decrease their extraction levels. g. A change in government regulation of the industry: i. Would cause supply of natural gas to increase: A less regulated industry usually translate into higher production and supply levels. ii. Would cause supply of natural gas to decrease: On the contrary, a more regulated industry usually delivers lower levels of production and supply.

LAW OF SUPPLY 9 References O'Sullivan, A., Sheffrin, S. M., & Perez, S. J. (2020). 4. In Macroeconomics: Principles, applications, and tools . New York, NY: Pearson. Course Lectures part 3 and 4 provided by Professor Kearns

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