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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