Download THE LAW OF SUPPLY - Oregon State University

Supply Curve
A curve showing the relationship
between price and quantity that
producers are willing to sell during a
particular time period
THE LAW OF SUPPLY
The higher the price,
the larger the
quantity supplied.
SUPPLY
SCHEDULE
Price / Pound
$$$
$0.40 $060
Quantity Demanded
(Pounds / Day)
$080
10,000 20,000 30,000
SUPPLY
$1.00
Price
per
Pound
of
Apples
$$$
$0.80
$0.60
$0.40
SUPPLY
CURVE
$0.20
10
20
30
Thousands of Pounds of Apples per day
What Causes Supply Curve To Shift
(Change in relationship of price and Quantity)
• Change (increase or decrease) in
cost of production -- inputs;
• Increase (or decrease) in the
number of producers.
• Change (increase or decrease) in
tax rates.
• State of production technology.
INCREASE IN SUPPLY
SUPPLY
$1.00
Price
per
Pound
of
Apples
$$$
$0.80
$0.60
RIGHTWARD
SHIFT
$0.40
$0.20
10
16
20
26
30
Thousands of Pounds of Apples per day
DECREASE IN SUPPLY
SUPPLY
$1.00
Price
per
Pound
of
Apples
$$$
$0.80
$0.60
LEFTWARD
SHIFT
$0.40
$0.20
10
13
20
23
30
Thousands of Pounds of Apples per day
SUPPLY
(Smaller quantity
Lesser for the same price)
Supply
$1.00
Price
per
Pound
of
Apples
$$$
$0.80
Greater
Supply
(Greater quantity
for the same
price)
$0.60
$0.40
$0.20
10
20
30
Thousands of Pounds of Apples per day
MARKET EQUILIBRIUM
The quantity of a product demanded is
exactly equal to the quantity supplied.
There is no pressure to change price.
$1.00
Price
per
Pound
of
Apples
$$$
DEMAND
SUPPLY
$0.80
Market
Equilibrium
$0.60
$0.40
$0.20
10
20
30
Thousands of Pounds of Apples per day
SHORTAGE
• Occurs when the market price is below
the equilibrium price.
• Consumers are willing to buy more of the
product, at this lower price, than
producers are willing to sell.
$1.00
Price
per
Pound
of
Apples
$$$
DEMAND
SUPPLY
$0.80
Market
Equilibrium
$0.60
shortage
$0.40
$0.20
10
20
26 30
Thousands of Pounds of Apples per day
SURPLUS
• Occurs if market price exceeds
equilibrium price.
• Producers are willing to sell more, at this
higher price, than consumers are willing
to buy.
MARKET EFFECTS OF CHANGES
IN DEMAND
• An increase in market demand (i.e., a
rightward shift in the demand curve)
results in a higher equilibrium price and
higher equilibrium quantity.
• A decrease in market demand (i.e., a
leftward shift in the demand curve)
results in a lower equilibrium price and
lower equilibrium quantity.
DEMAND
New Equilibrium
$1.00
Price
per
Pound
of
Apples
$$$
SUPPLY
$0.80
$0.65
Rightward
Demand Shift
$0.60
$0.40
$0.20
original
equilibrium
25
D2
D1
14
20
26
32
38
Thousands of Pounds of Apples per day
$1.00
Price
per
Pound
of
Apples
$$$
Leftward Shift
DEMAND
New Market
Equilibrium
$0.80
SUPPLY
Original
Market
Equilibrium
$0.60
$0.52
$0.40
$0.20
D2
10
16 20
D1
30
Thousands of Pounds of Apples per day
MARKET EFFECTS OF CHANGES
IN SUPPLY
• An increase in market supply (i.e., a
rightward shift in the supply curve)
results in a lower equilibrium price and
higher equilibrium quantity.
• A decrease in market supply (i.e., a
leftward shift in the supply curve) results
in a higher equilibrium price and lower
equilibrium quantity.
$1.00
Price
per
Pound
of
Apples
$$$
Original
Market
DEMAND Equilibrium
SUPPLY
$0.80
rightward
supply
shift
S1
$0.60
S2
$0.45
$0.40
New
Market
Equilibrium
$0.20
10
30
2
4 Apples per day
Thousands of Pounds of
20
New Market Equilibrium
$1.00
Price
per
Pound
of
Apples
$$$
DEMAND
S2
SUPPLY
$0.80
$0.70
$0.60
S1
leftward
supply
shift
Original
Market
Equilibrium
$0.40
$0.20
10
18 20
30
Thousands of Pounds of Apples per day