Download Supply and Demand: Price and Quantity Determination in

The Economics
Department, UMR
Presents:
Supply and Demand:
Price and Quantity
Determination in
Competitive Markets
Starring
u
Demand
u
Supply
Equilibrium and
Disequilibrium
u
Featuring
uThe Law of Demand
uD = D(PINTE)
uThe Tendency of Supply
uS = S(PENT)
uEquilibrium/Disequilibrium
In Three Parts
Demand
u Supply (current show)
u Equilibrium/Disequilibrium
u
Part 2
What is Supply?
u It is the relationship between
quantity supplied and price, c.
p., within a specific period.
u Or, it is the relationship
between necessary
compensation and willingness
of offer something of value
Individual vs.
Market Supply
u Market supply is the
horizontal sum of individual
supplies
u As with demand, it is market
supply that commands our
interest
But Start with Individual
Supply
u Consider your supply of
hours worked for me this
semester (This is called
“Quantity Supplied, qs”)
u We will first look at this
information in a table called a
“Supply Schedule”
Your Supply Schedule
Supply Schedule - a table showing the relationship
between the price of a good and the quantity supplied
per period, ceteris paribus. Price is the wage per hour
and the quantity supplied is hours per weeks.
Price of Work per
hour ($)
Quantity Supplied
per semester
Your Supply Schedule
P ($)
qs
$2.00
0
Note: You are not willing to work for me at $2/hr
Your Supply Schedule
P ($)
qs
$2.00
0
$5.15
7
But you are willing to work 7 hours for me at
minimum wage
Your Supply Schedule
P ($)
qs
$2.00
0
$5.15
7
$8.00
15
10
And 15 hours at $8.00
Tendency of Supply
The price of a product, or necessary
compensation (WTA) tends to be
directly related to the quantity
supplied, c.p.
u Quantity Supplied - the amount of a
good, service, or activity offered by a
person or firm at a particular price.
u While demand typically refers to
consumers, supply typically refers to
firms, and the item of interest is Market
Supply
u
Supply Schedules and
Curves
u Just like we were able to construct a
Demand Schedule and Demand
Curve, we will do the same for
Supply
u Supply Curve - a graph of the
supply schedule showing the
relationship between the price of a
good and the quantity supplied per
period, c.p.
Individual Supply Curve
P($)
Note: ALWAYS label your axes!
qs per week
Individual Supply Curve
P($)
12.00
8.00
6.00
5.15
2.00
0
5
10
15
qs per week
Individual Supply Curve
P($)
12.00
8.00
6.00
5.15
2.00
0
C
B
A
5
7
10
15
qs per week
Individual Supply Curve
P($)
12.00
8.00
6.00
5.15
2.00
0
C
s
B
A
5
7
10
15
qs per week
Market Supply Curve
u The Supply curve we just
drew was the Supply of
work by one person.
u We want an aggregate
measure of the price,
quantity Supplied
relationship--a market
Supply
Two Views of Supply
u WTA - Minimum
willingness to accept for a
given unit of a good
(marginal WTA) or for a
number of units of a good
u The Tendency of Supply
v P,
Qs relationship
WTA and the
Tendency of Supply
P
S
$20
$15
The min. WTA for the 23rd
unit is $15. The quantity
supplied at $20 is 33 units
per period. Note the entry
price of $8. No one is
supplying until $8 when 10
are offered.
$8
D
10
23
33
Qs/t
Market Supply Schedule
u Market Supply Schedule - a
table showing the relationship
between the price of a good
and the total quantity
Supplied by all sellers in the
market per period, c.p.
Market Supply Schedule
u Market Supply is obtained
by summing horizontally the
quantity Supplied by each
person at each price
Market Supply Schedule
P($)
5
Mary’s
qs
3
10
5
15
7
Market Supply Schedule
P($)
5
Mary’s John’s
qs
qs
3
5
10
5
8
15
7
10
Market Supply Schedule
P($)
5
Mary’s John’s
qs
qs
3
5
Ling’s
qs
4
10
5
8
5
15
7
10
6
Market Supply Schedule
P($)
5
Mary’s John’s
qs
qs
3
5
Ling’s Market
qs
Qs
4
12
10
5
8
5
18
15
7
10
6
23
Supply Curve
P
$15
$10
S
$3
Qs/t
12
18
23
Change in S vs. Change in
Qs
Change in Supply - a change in a factor
that effects Supply other than the price of
the good, thus there is a change in quantity
Supplied at EVERY price.
u Change in Quantity Supplied - a
movement along a given Supply curve-due
only to a change in the price of the good
itself
u
Change in Supply
u Increase in Supply - Supply
curve shifts to the right (or
down - a decrease in WTA)
u Decrease in Supply - Supply
curve shifts to the left (or up an increase in WTA)
Increase in Supply
P
S
S’
Note that an increase in supply is a
downward shift reflecting a decrease
in the minimum compensation
necessary
Qs/t
Increase in Qs
P($)
B
S
A
Qs/t
Behind the Supply Curve
uA
Supply curve is drawn under
the assumption of ceteris paribus all other important factors
remaining unchanged
uFactors to be considered may be
remembered by S= S(PENT)
Factors affecting market
Supply, PENT
uP =
Prices
u E = expectations about
future prices and market
conditions
u N = number of sellers
u T = technology
Price of Other Items
uThe price of resources
uThe price of goods that
could be supplied
Price of other items
that could be produced
u What would happen to the Supply
of small cars if the price of big cars
increased?
v
The Supply of small cars would probably fall since
it would be more profitable to produce big cars.
u There is a negative relationship
between the Supply for a good and
the price of items the seller could
offer.
Price of Resources
u An increase in the price of a
resource used in production
will decrease the Supply of
the good
u And a decrease in the price
of a resource will increase
the Supply of the good
Expectations
u If we were to hear a new
story about how people are
turning off beef would you
expect beef suppliers to
think about “The Other
White Meat”?
Number of Sellers
u A positive relationship - the greater
the number of sellers, the larger the
total quantity supplied of the good at
a given price. Supply increases, or
the supply curve shifts to the right.
u Likewise, if there are fewer sellers in
the market there is less quantity
supplied at every price, so supply
has decreased.
Technology
u Improvement in technology
lowers costs
u Lower cost of production
increases Supply
Supply Reminders
Supply curves usually slope upward
and to the right.
u Changes in only the price of a good
cause changes in the quantity supplied.
u That only supply factor that cannot
cause a change in the supply of a good
is a change in its own price.
u
u PENT factors may alone or jointly
change the supply of a good.
The End
Continue to:
Equilibrium
and
Disequilibrium