Download Quantity supplied - Econ101-s13-Horn

© 2011 Thomson South-Western
RECAP: What Is a Market?
• A market is a group of buyers and sellers of a
particular good or service.
• The buyers as a group determine demand for a product
• The sellers as a group determine supply of a product
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RECAP: What Is a “Competitive Market”?
• A competitive market is a market in which:
• there are many buyers and many sellers so that;
• each has a negligible impact on the market price.
(no one is able to control the price)
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RECAP: What Is “Perfect Competition”?
• We begin by assuming we have perfect
competition:
• Products are the same
• Numerous buyers and sellers so that each has no
influence over price
• Buyers and Sellers are price takers
(no one controls the price)
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RECAP: DEMAND
• Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
• Law of Demand
– The law of demand states that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.
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Figure 1 Nicholas’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
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RECAP: Shifts in the Demand Curve vs.
Movements along the Demand Curve
• Shift in the demand curve
• When an outside factor changes the demand for a
product
• Blizzard increases the demand for snow shovels
• Movement along the demand curve
• Caused by a change in the price of the product
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Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax on sellers of icecream cones raises the
price of ice-cream
cones and results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
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Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream
Cones
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RECAP: Variables That Influence Buyers
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SUPPLY
• Quantity supplied is the amount of a good that
sellers are willing and able to sell.
• Law of Supply
– The law of supply states that, other things equal,
the quantity supplied of a good rises when the
price of the good rises.
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The Supply Curve: The Relationship
between Price and Quantity Supplied
• Supply Schedule
• The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
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Ben’s Supply Schedule
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The Supply Curve: The Relationship
between Price and Quantity Supplied
• Supply Curve
• The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
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Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
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Market Supply versus Individual Supply
• Market supply refers to the sum of all
individual supplies for all sellers of a particular
good or service.
• Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.
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Shifts in the Supply Curve vs.
Movements along the Supply Curve
• Shift in the supply curve
• When an outside factor changes the cost of making
a product
• Innovations in production of hard drives makes
computers cheaper, shifts the supply curve for computers
• Movement along the supply curve
• Caused by a change in the price of the product
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Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
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Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
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What factors shift the supply curve?
• Input Prices
• If iPhone screens became more expensive, what would happen to the
supply of iPhones?
• Technology
• If a new invention increases the pace of producing Xboxes, what will
happen to their supply?
• Expectations
• If a company producing paper believes that in a year there will be no
more demand for paper, how will they adjust their supply?
• Number of sellers
• If Boston sets a limit on the number of food trucks allowed in the city,
how will that affect the supply of food trucks?
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Table 2: Variables That Influence Sellers
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A C T I V E L E A R N I N G 2:
Supply curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Three new companies come out with a new
tax return preparation software.
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A C T I V E L E A R N I N G 2:
A. Fall in price of tax return software
Price of
tax return
software
S1
The S curve
does not shift.
Move down
along the curve
to a lower P
and lower Q.
P1
P2
Q2 Q1
Quantity of tax
return software
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A C T I V E L E A R N I N G 2:
B. Fall in cost of producing the software
Price of
tax return
software
S1
P1
S2
The S curve
shifts to the
right:
at each price,
Q increases.
Q1
Q2 Quantity of tax
return software
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A C T I V E L E A R N I N G 2:
C. Three new firms enter the market
Price of
tax return
software
S1
P1
S2
The S curve
shifts to the
right:
at each price,
Q increases.
Q1
Q2 Quantity of tax
return software
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SUPPLY AND DEMAND TOGETHER
Price of
Ice-Cream
Cone
Supply
Equilibrium!
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
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SUPPLY AND DEMAND TOGETHER
• Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
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SUPPLY AND DEMAND TOGETHER
• Equilibrium Price
– The price that balances quantity supplied and
quantity demanded.
– On a graph, it is the price at which the supply and
demand curves intersect.
• Equilibrium Quantity
– The quantity supplied and the quantity demanded
at the equilibrium price.
– On a graph it is the quantity at which the supply
and demand curves intersect.
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Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
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SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded
is equal to the quantity supplied!
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WHAT HAPPENS WHEN MARKETS ARE NOT IN
EQUILLIBRIUM?
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
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What happens when markets are not in
equilibrium?
• Surplus
• When price > equilibrium price, then
quantity supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
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Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Cone
Supply
1.50
Shortage
Demand
0
4
Quantity
supplied
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
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What happens when markets are not in
equilibrium?
• Shortage
• When price < equilibrium price, then
quantity demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
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How do we get to Equilibrium?
• Law of supply and demand
• The claim that the price of any good adjusts to bring
the quantity supplied and the quantity demanded for
that good into balance.
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Figure 10 How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
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Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
0
4
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
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Table 3: Three Steps for Analyzing Changes in Equilibrium
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Three Steps to Analyzing Changes in
Equilibrium
• Shifts in Curves versus Movements along
Curves
• A shift in the supply curve is called a change in supply.
• A movement along a fixed supply curve is called a
change in quantity supplied.
• A shift in the demand curve is called a change in
demand.
• A movement along a fixed demand curve is called a
change in quantity demanded.
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A C T I V E L E A R N I N G 3:
Changes in supply and demand
Use the three-step method to analyze the effects of
each event on the equilibrium price and quantity of
music downloads.
Event A:
A fall in the price of compact discs
Event B:
Sellers of music downloads negotiate a
reduction in the royalties they must pay for
each song they sell.
Event C:
Events A and B both occur.
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A C T I V E L E A R N I N G 3:
A. Fall in price of CDs
P
The market for
music downloads
S1
STEPS
1. D curve shifts
P1
2. D shifts left
P2
3. P and Q both
fall.
D2
Q2 Q1
D1
Q
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A C T I V E L E A R N I N G 3:
B. Fall in cost of royalties
(royalties are part
of sellers’ costs)
P
The market for
music downloads
S1
STEPS
1. S curve shifts
P1
2. S shifts right
P2
S2
3. P falls,
Q rises.
D1
Q1 Q2
Q
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A C T I V E L E A R N I N G 3:
C. Fall in price of CDs
AND Fall in cost of royalties
STEPS
1. Both curves shift (see parts A & B).
2. D shifts left, S shifts right.
3. P unambiguously falls.
Effect on Q is ambiguous:
The fall in demand reduces Q,
the increase in supply increases Q.
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A C T I V E L E A R N I N G 3:
A&B
P
The market for
music downloads
S1
STEPS
1. D & S curve shifts
P1
2. D shifts left
S shifts right
P2
3. P definitely falls,
Q? ambiguous
S2
D2
Q1
D1
Q
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A C T I V E L E A R N I N G 3:
A&B
P
The market for
music downloads
S1 S2
STEPS
1. D & S curve shifts
P1
2. D shifts left
S shifts right
P2
3. P definitely falls,
Q? ambiguous
D2
Q1
D1
Q
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CONCLUSION:
How Prices Allocate Resources
• One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
• In market economies, prices adjust to balance
supply and demand.
• These equilibrium prices are the signals that
guide economic decisions and thereby allocate
scarce resources.
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Summary
• Economists use the model of supply and
demand to analyze competitive markets.
• In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.
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Summary
• The demand curve shows how the quantity of a
good depends upon the price.
– According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the demand
curve slopes downward.
– In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and the
number of buyers.
– If one of these factors changes, the demand curve shifts.
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Summary
• The supply curve shows how the quantity of a
good supplied depends upon the price.
– According to the law of supply, as the price of a good rises,
the quantity supplied rises. Therefore, the supply curve
slopes upward.
– In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
– If one of these factors changes, the supply curve shifts.
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Summary
• Market equilibrium is determined by the
intersection of the supply and demand curves.
• At the equilibrium price, the quantity
demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally
drives markets toward their equilibrium.
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Summary
• To analyze how any event influences a market,
we use the supply-and-demand diagram to
examine how the event affects the equilibrium
price and quantity.
• In market economics, prices are the signals
that guide economic decisions and thereby
allocate resources.
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