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Supply and Market Equilibrium How Supply and Demand Rule the World The schedule or curve that shows the amount of a product that a producer will make available for sale at a series of prices. Specified period Supply curve is always upward sloping Supply As prices rise, the quantity supplied will rise; as prices fall, the quantity supplied will fall. Why? What does this have to do with the concept of scarce resources and law of increasing opportunity costs? What does this have to do with logic? This is the opposite of the law of demand. Law of Supply Other factors (aside from price) will affect supply. Once again, like with demand, these changes will shift the supply curve. Determinants of Supply Resource Prices: cost of production Technology: efficiency Taxes and Subsidies: cost of doing business Prices of Other Goods: substitution in production (soccer balls versus basketballs) Expected Prices: human behavior (can cause an increase or decrease in current supply) Number of Sellers: similar to number of consumers Determinants of Supply Just like demand, there is a distinction between the phrases a change in supply and a change in the quantity supplied. A change in quantity supplied is a movement along the supply curve caused by a change in price. A change in the supply is a shift in the supply curve caused by a change in one of the determinants of supply. Changes in Supply 1. Other things constant, which of the following would not cause a change in the long run supply of beef? A. A decrease in the price of beef. B. A decrease in the price of cattle feed. C. An increase in the price of cattle feed. D. An increase in the cost of transporting cattle to market. A Question of Supply A A change in the long run supply of beef is related to a change in the supply curve. This is caused by a change in a supply determinant, not a change in price. Answers B,C,and D are all related to a change in a determinant, while A is the only answer that is a change in price. Question 1 2. “Falling oil prices have caused a sharp decrease in the supply of oil.” Speaking precisely, choose the statement that best describes this quotation. A. The quote is correct-a decrease in price always causes a decrease in “supply”. B. The quote is incorrect-a decrease in price always causes an increase in the “supply”. C. The quote is incorrect-a decrease in price always causes an increase in the “quantity supplied”. D. The quote is incorrect-a decrease in price causes a decrease in the “quantity supplied”. 2nd Question D A fall in prices will cause a change in the quantity supplied, not a change in supply. D is thus the correct answer to the question. Question 2 Assuming a free market, how are prices set? Who determines what the price of a good is? A. The producer of the good B. The purchaser of the good C. The government D. None of the above Putting It Together If it is not the producer, the consumer or the government that sets prices, who determines the price of a product? The market? What does that mean? Hint: Why have we talked about supply curves and demand curves? Pricing So, how is the final price of a good determined? The market price will be determined by where the supply curve and the demand curve intersect. This is the place where the intentions of the buyers and the intentions of the sellers will intersect. Market Equilibrium Price ($) Supply P1 Eq P Demand Q1 Quantity Equilibrium This is the quantity supplied and demanded at the equilibrium price in a competitive market. Why does this make logical sense? What would happen if the markets were not at equilibrium? Equilibrium Quantity “Adam Smith’s laws of the market…show us how the drive of individual self-interest in an environment of similarly motivated individuals will result in competition; and they further demonstrate how competition will result in the provision of those goods that society wants, in the quantities that society desires, and at the prices that society is prepared to pay.” The Worldly Philosophers, by Robert Heilbroner; page 55 Adam Smith’s View “The regulator is competition, the conflict of the self-interested actors on the marketplace. … A man who permits his self-interest to run away with him will find that competitors have slipped in to take his trade away.” Page 55 View Continued What will happen to the Equilibrium Price and Equilibrium Quantity if… For each of the following changes, please draw a graph showing the new equilibrium price and new equilibrium quantity given the changes outlined below. Each change is a separate case. For each case, first determine if this is a change that will impact demand or supply. Then determine how it will impact that item and draw the appropriate change. The preference for a product increases The cost of a resource used in production goes down The national income decreases The price of a substitute good goes down Taxes go up for businesses Changes in Demand, Supply and Equilibrium I will draw four scenarios on the board. Each will show a change in either the supply or demand for jelly beans. After each change outlined below, fill in the blank with the letter of the graph that best illustrates the situation. 1. The price of sugar increases. _____ 2. The price of bubble gum, a close substitute for jelly beans, increases. ____ 3. A machine is invented that makes jelly beans at a lower cost. _____ 4. The price of soda, a complimentary good for jelly beans, goes up. _____ 5. Widespread prosperity allows people to buy more jelly beans. _____ Shifts in Demand and Supply Use the information below to determine how this information would affect various markets: Cancer researchers have reported that hair dyes may be a cause of cancer. Individuals who dye their hair may increase their risk of lymphoma by 50%. News Story How would the story on the previous slide impact the following markets: Hair Dye; Wigs; Plastic Gloves; Beauticians? Draw a demand and supply curve prior to this story and then show the impact this story has on the market. Impact on Supply, Demand and Prices Hair Dye Plastic Gloves Wigs Beauticians S Price D Quantity News Story Markets Complete the In-Class Exercise In Class Exercise
