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AP Economics Mr. Bernstein Module 6: Supply and Demand – Supply and Equilibrium October 7, 2014 AP Economics Mr. Bernstein Competitive Markets • An institution which brings together buyers and sellers of particular goods or services • Local, national or international • Face-to-face, electronic or other impersonal • Assumption: no buyer or seller so large they affect pricing • Will look at markets which are not perfectly competitive later in the course 2 AP Economics Mr. Bernstein Supply Schedule and Supply Curve 3 AP Economics Mr. Bernstein Law of Supply • All other things equal, as price increases the quantity supplied rises • So there is an direct relationship between price and quantity supplied • Plotted on a graph, the law of supply infers an upward sloping supply curve • The law of diminishing returns causes the supply curves to be upward sloping • Note: It will be important to distinguish between a change in the “quantity supplied” and a change in “supply” 4 AP Economics Mr. Bernstein Supply Shifters • Factors which change supply other than price • An increase in supply shifts the supply curve to the right • A decrease in supply shifts the supply curve to the left • Notice an increase in supply shifts the supply curve horizontally, not vertically 5 AP Economics Mr. Bernstein A Shift in Supply is different from movement along the Supply Curve!! 6 AP Economics Mr. Bernstein A Shift in Supply is different from movement along the S Supply Curve!! 7 AP Economics Mr. Bernstein Supply Shifters • Input or Resource prices • Increase in the price of inputs causes a decrease in the quantity supplied • Prices of related goods • Increase in the price of Substitute Goods’ price causes a decrease in the quantity supplied (production shifts to higher price substitute product) • Increase in the price of a Compliment in Production causes an increase in the quantity supplied (production increases to take advantage of higher price of complimentary good) • Technology • Advances in technology increases the quantity supplied 8 AP Economics Mr. Bernstein Supply Shifters, cont. • Expectations • Expectations of future price increases decreases the quantity supplied today • Number of producers • More producers increase the quantity supplied 9 AP Economics Mr. Bernstein Supply Shifters: T - RICE • Technology • Related prices (substitutes, compliments) • Input prices • Competition (number of producers) • Expectations 10 AP Economics Mr. Bernstein Equilibrium • Equilibrium is the point where no buyers or sellers would be better off changing price or quantity • AKA “Market-clearing” price • Market prices are like a pendulum, swinging back and forth. At equilibrium, they are stable 11 AP Economics Mr. Bernstein Equilibrium: Where Supply and Demand Curves Intersect 12 AP Economics Mr. Bernstein Equilibrium Prices Fall When There is a Surplus 13 AP Economics Mr. Bernstein Equilibrium Prices Rise When There is a Shortage 14
