#AP Macroeconomics: Supply - Your Ultimate Review 🚀

Hey! Let's get you prepped for the AP Macro exam with a focused review of supply. Think of this as your cheat sheet for the night before the test. Let's make sure you're not just memorizing, but understanding.

# Unit 1: All About Supply

#What is Supply? 🤔

Supply refers to the various quantities of a good or service that firms are willing and able to produce at different price levels. It's all about what businesses are ready to offer to the market. Understanding supply is essential to grasping how market prices are determined. 🏷️

#Quantity Supplied vs. Supply

• Quantity Supplied: This is a specific amount of a good or service that's produced at a particular price. It's a single point on the supply curve.
• Supply: This is the entire relationship between price and quantity supplied. It's the whole curve, showing how much firms will offer at all possible prices.

Think of it this way: Quantity supplied is like a single dot on a graph, while supply is the entire line connecting all the dots. 📈

Here's a visual to help:

Caption: The supply curve shows the relationship between price and quantity supplied. Points A, B, and C represent different quantities supplied at different prices.

#The Law of Supply

The law of supply states that there is a direct (positive) relationship between price and quantity supplied. In simple terms:

• Price ↑, Quantity Supplied ↑ (Producers want to sell more when prices are high)
• Price ↓, Quantity Supplied ↓ (Producers will reduce production when prices drop)

It's like a natural incentive for businesses. When prices go up, they're eager to produce more; when prices go down, they cut back.

Let's look at another graph:

Caption: As the price increases from $100 to$110, the quantity supplied increases from 50 to 90, illustrating the law of supply.

#Shifting the Supply Curve: Determinants of Supply

Determinants of supply are factors that can cause the entire supply curve to shift, either to the right (increase in supply) or to the left (decrease in supply). It's not just about moving along the curve; it's about the whole curve moving.

Caption: A shift to the right indicates an increase in supply, while a shift to the left indicates a decrease.

To remember these determinants, we use the acronym R-O-T-T-E-N: 🍎

• R - Resources
• O - Other goods prices
• T - Taxes
• T - Technology
• E - Expectations of the supplier
• N - Number of competitors

Let's break down how each of these affects supply:

#Increase in Supply (Shift Right) ➡️

• R - Resources: If the cost of resources (like raw materials) decreases, supply increases ⬆️
• O - Other goods prices: If the price of other goods that a firm could produce decreases, supply of the current good increases ⬇️
• T - Taxes: Lower taxes or regulations make it cheaper to produce, increasing supply ⬇️
• T - Technology: Better technology allows for more efficient production, increasing supply ⬆️
• E - Expectations: If suppliers expect prices to fall in the future, they'll increase supply now ⬆️
• N - Number of competitors: Fewer competitors in the market mean more supply from each firm ⬇️

#Decrease in Supply (Shift Left) ⬅️

• R - Resources: If the cost of resources increases, supply decreases ⬇️

• O - Other goods prices: If the price of other goods that a firm could produce increases, supply of the current good decreases ⬆️

• T - Taxes: Higher taxes or regulations make it more expensive to produce, decreasing supply ⬆️

• T - Technology: If technology becomes outdated or less efficient, supply decreases ⬇️

• E - Expectations: If suppliers expect prices to rise in the future, they'll decrease supply now ⬇️

• N - Number of competitors: More competitors in the market mean less supply from each firm ⬆️

Practice Question

#Practice Questions

Multiple Choice:

1. Which of the following would cause a shift in the supply curve for gasoline? (A) A decrease in the price of gasoline (B) An increase in the price of crude oil (C) An increase in consumer income (D) A government subsidy for gasoline production (E) A change in consumer preferences for gasoline

2. If the price of wheat increases, what would be the likely effect on the supply of flour? (A) The supply of flour would increase. (B) The supply of flour would decrease. (C) The supply of flour would remain unchanged. (D) The demand for flour would increase. (E) The demand for flour would decrease.

Free Response Question:

Assume that the market for smartphones is perfectly competitive. The current equilibrium price is $500, and the equilibrium quantity is 1 million units. Suppose there is a significant advancement in technology that reduces the cost of producing smartphones.

(a) Draw a correctly labeled graph of the smartphone market, showing the initial equilibrium price and quantity, and then illustrating the effect of the technological advancement on the supply curve. Label the new equilibrium price and quantity.

(b) Explain how the technological advancement affects the supply of smartphones and the equilibrium price and quantity.

(c) What would be the effect of the technological advancement on consumer surplus and producer surplus?

Answer Key:

Multiple Choice:

1. (B) An increase in the price of crude oil (a resource) would decrease the supply of gasoline.
2. (B) The supply of flour would decrease. Since wheat is an input in the production of flour, an increase in wheat prices would increase the cost of production for flour and decrease supply.

Free Response Question:

(a) Graph:

• Correctly labeled axes (Price on the vertical axis, Quantity on the horizontal axis) (1 point)
• Initial downward-sloping demand curve (D1) and upward-sloping supply curve (S1) intersecting at the equilibrium point (E1) (1 point)
• A shift to the right of the supply curve (from S1 to S2) (1 point)
• New equilibrium point (E2) with lower price and higher quantity (1 point)

(b) Explanation:

• The technological advancement reduces the cost of production, leading to an increase in supply (1 point)
• This shift in supply results in a lower equilibrium price and a higher equilibrium quantity (1 point)

(c) Effect on surplus:

• Consumer surplus increases due to the lower price and higher quantity (1 point)
• Producer surplus may increase or decrease depending on the elasticity of demand, but the area of the new producer surplus should be identified correctly (1 point)

#Final Exam Focus 🎯

Okay, you've made it through the supply review! Here's what to keep in mind for the exam:

• High-Value Topics: Focus on the determinants of supply (ROTTEN) and how they shift the supply curve. Make sure you can differentiate between a change in quantity supplied and a shift in supply.

• Common Question Types: Expect multiple-choice questions that test your understanding of how changes in the determinants affect the supply curve. Also, be prepared for FRQs that ask you to analyze shifts in supply and their impact on equilibrium.

You've got this! Stay calm, take deep breaths, and trust your preparation. Go ace that exam! 💪