Download Supply and market equlibium

What is supply?

Supply is the amount of a product that
producers are willing and able to offer for
sale at all prices

To analyze supply, we use a…


Supply Schedule – a table that lists the
quantities supplied at different prices in a
market
Supply Curve – a graph of the supply schedule
Supply Schedule for Painting
Services
Price per Room
$ 80
100
120
140
160
Number I Would Paint
0
1
2
3
4
Supply Curve for Painting
Services
$200
180
160
140
120
100
80
60
40
20
0
1
2
3
Rooms Painted per Week
4
5
Law of Supply

Law says

If prices are high = quantity
supplied increases

If prices are low = quantity
supplied decreases

Price and quantity supplied have a
direct relationship

Quantity Supplied
 amount of a good or service that
producers are willing and able to
offer for sale at a specific price
What can cause supply to
change?

Week 1: I try to sell 10 pretzels at $0.75.

Week 2: I try to sell 20 pretzels at $1.00
each.

The PRICE increase of pretzels caused my
supply to change.

This is called a CHANGE IN QUANTITY
SUPPLIED!
Change in Quantity Supplied
$200

Shown by
movement along
the supply curve

PRICE changes
always cause
changes in Qs!!
180
160
140
B
120
100
A
80
60
40
20
0
1
2
3
Rooms Painted per Week
4
5
What can cause supply to
change?

Week 1: I try to sell 10 pretzels at $0.75.

Week 2: I try to sell 30 pretzels at $0.75.

This time PRICE did NOT change.

Task! Provide a reason for my supply change.

Any of these reasons cause a CHANGE IN SUPPLY
(not the Qs at one specific price). In this case the Qs
at all prices will change!
Increase in Supply
S1
Quantity Supplied
Increase in Supply –
Curve Shift to the Right
S1
Quantity Supplied
S2
Decrease in Supply
S1
Quantity Supplied
Decrease in Supply – Curve
Shift to the Left
S1
Quantity Supplied
S1
Supply Shifters

Number of
Producers/Sellers


Cost of Inputs



Input costs refer to
costs of production
Increasing or
decreasing costs will
impact supply
Productivity

The more productive
workers are or the
more efficiently
businesses use
resources then supply
increases!

Technology


When more businesses
enter the market =
supply increases or
vice-versa
New technology
usually shifts curve to
the right
Natural Disasters or
International Events


Hurricanes, floods,
wildfires decrease
supply
Wars and revolutions
Supply shifters continued…

Government Policy

Increased regulations
restrict supply
 Relaxed regulations
increase supply


Tax on the manufacture
or sale of a good =
decreases supply
Subsidy (cash payment to
producers) = increases
supply
• Producer Expectations
•Anticipation of future events
can affect supply curve
•1. Producers think prices will
go up = decrease supply
NOW
•2. Producers think prices will
go down = increase supply
NOW
Reminders

PRICE is NOT a supply shifter. When price
changes, there is movement along the curve.

A change in supply, caused by factors other
than the price of a particular good, is when
the curve shifts.


Shift to right = increase in supply
Shift to left = decrease in supply

The federal government begins offering large
subsidies on the development and production
of alternative fuel vehicles. What will this do
to the market for alternative fuel vehicles?

The federal government lifts its ban on animal
cloning. Scientists develop a super-cow. This
new breed of cow is four times larger than a
regular cow. What will this do to the market
for cow manure?

Ten additional hair salons open in
Doylestown Borough. What will this do to the
market for hair extensions and hair cuts in
Doylestown Borough?

Leather sofa workers are now allowed to sit
in their finished couches during breaks,
lunch, etc. Because they are so well rested,
workers can produce double the couches in
the same amount of work time. What will this
do to the market for leather couches?
Elasticity of Supply

Supply elasticity measures the sensitivity of
producers to a change in price


Small increase in price leads to large change in
quantity supplied = elastic
Small increase in price leads to little change in
quantity supplied = inelastic
Supply & Demand Interaction

In a perfectly competitive market, supply & demand
work together to determine prices.

The interaction usually creates 3 scenarios:



Equilibrium
Shortage
Surplus
Market Equilibrium

Equilibrium – point at which quantity supplied
= quantity demanded


IN OTHER WORDS: Qd
= Qs
Price in equilibrium is the equilibrium price
and the quantity in equilibrium is the
equilibrium quantity
Market Equilibrium

Price equilibrium
can be found where
the supply curve
intersects the
demand curve
Market Equilibrium
Price
0
Quantity
Market Equilibrium
Price
S
D
0
Quantity
Market Equilibrium
Price
S
A
P1
D
0
Q1
Quantity
Market Equilibrium
Price
S
A
P1
Equilibrium
D
0
Q1
Quantity
Market Equilibrium
Price
S
Equilibrium
Price
A
P1
Equilibrium
D
0
Q1
Quantity
Market Equilibrium
Price
The equilibrium price is
also known as the
“market-clearing” price.
At this price, both
consumers and
producers are satisfied.
S
Equilibrium
Price
A
P1
Equilibrium
Equilibrium
Quantity
0
Q1
D
Quantity
Equilibrium Changes

If demand increases…


P _______ & Q _______
If demand decreases…

P _______ & Q _______
An Increase in Demand
S1
A
P1
D1
0
Q1
Quantity
An Increase in Demand
S1
A (Original Market Equilibrium)
P1
D1
0
Q1
D2
Quantity
An Increase in Demand
S1
B
A
P1
D1
0
Q1
D2
Quantity
An Increase in Demand
S1
B
P2
A
P1
D1
0
Q1
Q2
D2
Quantity
An Increase in Demand
S1
B(New Market Equilibrium)
P2
A
P1
D1
0
Q1
Q2
D2
Quantity
Equilibrium Changes

If supply increases…


P _______ & Q _______
If supply decreases…

P _______ & Q _______
An Increase in Supply
Price
S1
A (original market equilibrium)
P1
D1
0
Q1
Quantity
An Increase in Supply
Price
S1
S2
A
P1
D1
0
Q1
Quantity
An Increase in Supply
Price
S1
S2
A
P1
P2
B (New Market Equilibrium)
D1
0
Q1
Q2
Quantity
What happens when the price
isn’t “right”?

When prices are set
above or below the
equilibrium price,
disequilibrium occurs
and results in…


shortages
surpluses
Shortage

Shortage – is a situation in which the quantity
demanded is greater than the quantity
supplied at a given price


IN OTHER WORDS: Qd > Qs
Shortage can also be called “Excess
Demand”

When price is below the equilibrium price, there is
a shortage and the price tends to rise towards
equilibrium
Excess Demand
Price
S
Equilibrium
Equilibrium Price P1
D
0
Quantity
Excess Demand
Price
S
A
Equilibrium Price P1
Price below P0
Equilibrium Price
Equilibrium
D
0
Quantity
Excess Demand
Price
S
A
Equilibrium Price P1
Price below P0
Equilibrium Price
Equilibrium
D
0
Qs 0
Quantity
Excess Demand
Price
S
A
Equilibrium Price P1
Equilibrium
Price below P0
Equilibrium Price
D
0
Qs 0
Qd0
Quantity
Surplus explained by Michael
Scott
Surplus

Surplus– is a situation in which the quantity
supplied is greater than the quantity
demanded at a given price

IN OTHER WORDS: Qd < Qs

Surplus can also be called “Excess Supply”

When price is above the equilibrium price, there is
a surplus and the price tends to fall towards
equilibrium
Excess Supply
Price
S
Equilibrium
Equilibrium Price P1
D
0
Quantity
Excess Supply
Price
S
Price above
Equilibrium Price P2
Equilibrium
Equilibrium Price P1
D
0
Quantity
Excess Supply
Price
S
Price above
Equilibrium Price P2
Equilibrium
Equilibrium Price P1
D
0
Qd2
Quantity
Excess Supply
Price
S
Price above
Equilibrium Price P2
Equilibrium
Equilibrium Price P1
D
0
Qd2
Qs2
Quantity
What Roles Do Prices Play in a
Modern Mixed Economy?

Purpose

Prices help consumers understand the costs
of their decisions and help producers make
production decisions.

Prices provide an incentive for firms and workers to produce.

Prices give markets flexibility to respond to changing conditions.

Prices guide scarce resources to their most efficient uses.
Prices

Up until now, we have assumed that the
market is competitive and that prices, along
with quantities offered for sale, are allowed to
fluctuate

Is this a good thing? Why?

Would there ever be a time when prices would
need to be controlled? Why?

Price Controls

Governments
implement price
controls when prices
are considered
unfairly high for
consumers or unfairly
low for producers
Price Floor – minimum
legal price




Prevents prices from going
too low
Usually results in an excess
of supply = surplus
Ex: Minimum Wage
Price Ceiling – maximum
legal price



Prevents prices from going
too high
Usually results in an excess
of demand = shortage
Ex. Rent Control
Price Ceiling = Shortage
Price
S
A
Equilibrium Price P1
Price Below
Equilibrium Price
(Price Ceiling)
Equilibrium
P0
D
0
Quantity
Price Ceiling = Shortage
Price
S
A
Equilibrium Price P1
Price below P0
Equilibrium Price
Equilibrium
D
0
Qs 0
Quantity
Price Ceiling = Shortage
Price
S
A
Equilibrium Price P1
Equilibrium
Price below P0
Equilibrium Price
D
0
Qs 0
Qd0
Quantity
Price Floor = Surplus
Price
S
Price Above
Equilibrium Price P2
(Price Floor)
Equilibrium
Equilibrium Price P1
D
0
Quantity
Price Floor = Surplus
Price
S
Price above
Equilibrium Price P2
Equilibrium
Equilibrium Price P1
D
0
Qd2
Quantity
Price Floor = Surplus
Price
S
Price above
Equilibrium Price P2
Equilibrium
Equilibrium Price P1
D
0
Qd2
Qs2
Quantity
Government Intervention
Cause
To achieve social
goals, the
government fixes
prices.
Effect
Prices cannot adjust
to their equilibrium
levels.
Analyzing How Events Impact Markets

1. Does this event change the price of the good or service that is in
question?
 If so, it is a change in Qd or Qs (movement along curve).
 The factor is always PRICE.

2. Does the event affect demand or supply?
 Look for key words in the scenario to point you in the right
direction.

3. Does the event shift the selected curve to the right (increase) or to
the left (decrease)?

4. Which factor/shifter caused the change to the market.

5. How have equilibrium price and quantity changed?