Download Name Section 2 Module 6: Supply and Demand: Supply and

Name ________________________
Section 2
Module 6: Supply and Demand: Supply and Equilibrium
Lecture Note
Pump Primer
Correctly draw and label a supply and demand curve at equilibrium.
Student learning objectives:





Learn what the supply curve is.
The difference between movements along a supply curve and changes in supply.
The factors that shift a supply curve.
How supply and demand curves determine a market's equilibrium price and equilibrium
quantity.
In the case of a shortage or surplus, how price moves the market back to equilibrium.
Key Economic Concepts for This Module:

The first key concept and graph in this module is the upward
sloping supply curve for good X. A movement along a supply
curve shows how a change in the price of good X causes a
direct change in quantity of good X supplied (a to b). A shift
outward (b to c), or inward, in the entire supply curve is caused
by an external factor (not the price of good X).

The second key concept, and graph, in this module is market
equilibrium. Stress to the students that equilibrium is a state
where there is no tendency for anything to change. Consumers
won’t change their buying patterns, and producers won’t change
their production patterns. In other words, the market comes to
equilibrium at the only price where the quantity consumers wish
to buy (Qd) is equal to the quantity that producers wish to
supply (Qs).
Introduction
The purpose of this module is to introduce the supply half of the model and to bring demand and supply
together to illustrate the concept of equilibrium in the competitive market.
The Supply Schedule

____________ is a schedule, which shows amounts of a product a producer is willing and able to
produce and sell at each of a series of possible prices during a specified time period.

A supply schedule portrays this in the hypothetical example.

The schedule shows what quantities will be offered at various prices or what price will be
required to induce various quantities to be offered.
Supply Curve

The supply curve illustrates the positive relationship between price and quantity supplied.

The upward slope indicates ______________ quantity (horizontal axis) at _____________ price
(vertical axis), higher quantity at higher price.

The supply schedule shows that when the price is __________, the quantity of supplied is
__________. This relationship is known as the Law of Supply.
The Law of supply is believed to hold true for most products.
1. All else equal, as the price rises, quantity supplied rises.
2. Restated: There is a direct relationship between price and
quantity supplied.
3. Note the “all else equal” assumption refers to a handful of
other factors that affect the supply of a good. These will be
covered shortly.

The example shows what happens when the price falls from
$3 per can to $2 per can. Quantity supplied decreases from 150 cans per week to 100 cans per
week. This is a movement down the supply curve.
Understanding Shifts of the Supply Curve
There are several “shifters” of supply or the “other things,” besides price, which affect supply.
Changes in a shifter cause changes in supply.
 If supply has increased, it has shifted to the _________. At any price, firms wish to produce
___________.
 If supply has decreased, it has shifted to the _________. At any price, firms with to produce
___________.
1. Input (Resource) ____________
A rise in an input price will cause a decrease in supply or leftward shift in supply curve; a decrease
in an input price will cause an increase in supply or rightward shift in the supply curve. An
increase in the price of fertilizer would cause a decrease in supply of corn.
2. Prices of ____________ goods or services
If the price of a substitute production good rises, producers might shift production toward the
higher priced good causing a decrease in supply of the original good. An increase in the price of
soybeans may cause a farmer to decrease the supply of corn.
3. ____________________
A technological improvement means more efficient production and lower costs, so an increase in
supply or rightward shift in the curve results. Genetically improved seeds will increase supply of
corn.
4. _____________________
Expectations about the future price of a product can cause producers to increase or decrease
current supply. Expectations of higher corn prices (next month) may cause farmers to decrease
supply to the market today.
5. Number of _______________
Generally, the larger the number of sellers the greater the supply.
2
Supply, Demand, and Equilibrium

One way to think about equilibrium is like a stopped pendulum. Once a pendulum has started, it
should continue to swing back and forth, never stopping. If you stop it, it will never restart the
swinging. That’s equilibrium in the market. There are no changes in price, quantity demand, or
quantity supply. Think stability.
Finding the Equilibrium Price and Quantity

The equilibrium, or market-clearing, price is the only price where quantity supplied = quantity
demand (Qd=Qs). At this price, there is no tendency for the price to rise or fall. In other words,
the market is in a state of balance.
Why Does the Market Price Fall if it is Above the Equilibrium Price?
 What happens to the price of many items (like sweaters) right after Christmas?

Why?_________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Surplus = Qs – Qd

When the surplus is gone, there is no reason to further decrease the price.
Why Does the Market Price Rise if it is Below the Equilibrium Price?
 Imagine an auction where there is only one thing up for sale (like a valuable painting) and many
people who wish to buy it.
o What happens? The auctioneer begins to raise the price and the number of bidders begins
to fall. Eventually all but one bidder has been eliminated because the price got so high
that all others dropped out.

When you have a shortage of something, the best way to eliminate the shortage is to increase the
price.

Shortage = Qd – Qs
Complete the last column of the following chart.
Price per
soda
Quantity
Demanded
per week
Quantity
Supplied
per week
$5
4
3
2
1
50
100
150
200
250
250
200
150
100
50
Surplus or
Shortage =
3
Make Sure You Understand: Shifts of the Supply Curve
1. Changes in input prices
2. Changes in the price of related goods or services
3. Changes in technology
4. Changes in expectations
5. Changes in the number of producers
Common Student Difficulties:
 Students are very often confused by the movement along a supply curve and how it differs from a shift
in the entire supply curve.
 The precise use of language is important. Correct: “A decrease in the price of trucks causes a decrease
in the quantity of trucks supplied.” Incorrect: “A decrease in the price of trucks causes a decrease in
the supply of trucks.”
 When we say, “supply has increased,” we need to understand that this is an increase in quantity
(horizontal), not increase in price (vertical).
4