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Market Supply and the Law of Supply The market supply curve is positively sloped, reflecting the law of supply. The higher the price, the larger the quantity supplied, ceteris paribus. Supply Curve Supply schedule © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 1 Market Equilibrium Market equilibrium is a situation in which, at the current market price, quantity supplied equals quantity demanded. When the market is in equilibrium, there is no tendency for the price to increase or decrease. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 2 Shortage: excess quantity demanded Shortage: A situation in which consumers are willing to buy more than producers are willing to sell. It occurs when market price is lower than equilibrium price. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 3 Surplus: excess quantity supplied Surplus: A situation in which producers are willing to sell more than consumers are willing to buy. It occurs when market price is above equilibrium price. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 4 Equilibrium and Disequilibria © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 5 A Change in Demand A change in demand is caused by a change in something other than the price of the good, which causes a shift of the entire demand curve. An increase in demand results in higher quantity demanded at each price level. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 6 Shifting the Demand Curve Changes in determinants of demand other than price cause the demand curve to shift. A rightward shift shows an increase in demand and a leftward shift a decrease in demand. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 7 Causes of an Increase in Demand An increase in income An increase in the price of a substitute good Higher preference for the good in question An increase in the number of consumers An expectation of higher future prices Lower taxes imposed on the consumers of the good in question © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 8 Causes of an Decrease in Demand A decrease in income A decrease in the price of a substitute good Less preference for the good in question A decrease in the number of consumers An expectation of lower future prices Higher taxes imposed on the good in question © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 9 Normal and Inferior Goods A normal good is a good for which the demand increases as real income rises. An inferior good is a good for which demand decreases as real income rises. For normal goods, the law of demand makes sense because the substitution and income effects reinforce each other. Lower prices result in higher quantity demanded. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 10 Normal and Inferior Goods For inferior goods, the substitution and income effects conflict with each other, blurring the law of demand. The substitution effect tends to increase consumption while the income effect tends to decrease it. The law of demand is correct only as long as the substitution effect outweighs the income effect. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 11 A Change in Quantity Supplied A change in quantity supplied is caused by a change in the price of the good, which causes a movement along the supply curve. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 12 A Change in Supply A change in supply is caused by a change in something other than the price of the good, which causes a shift of the entire supply curve. An increase in supply results in higher quantity supplied at each price level. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 13 Shifting the Supply Curve Changes in determinants of supply other than price cause the supply curve to shift. A rightward shift shows an increase in supply and a leftward shift a decrease in supply. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 14 Causes of an Increase in Supply A decrease in the cost of inputs A technological improvement An increase in the number of producers © 2001 Prentice Hall Business Publishing Lower future prices than anticipated Lower taxes imposed on the producers of the good in question Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 15 Causes of an Decrease in Supply An increase in the cost of inputs Higher future prices than anticipated A loss of technology A decrease in the number of producers Higher taxes imposed on the producers of the good in question © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 16 Market Effects of Simultaneous Changes in Supply and Demand When the magnitude of an increase in demand is smaller than the magnitude of an increase in supply, equilibrium quantity increases and market price decreases. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 17 Market Effects of Simultaneous Changes in Supply and Demand When the magnitude of an increase in demand is larger than the magnitude of an increase in supply, equilibrium quantity increases and market price increases. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 18 Applications of Supply and Demand Market Effects of an Increase in Demand An increase in demand causes a shortage at the original price. To eliminate the shortage, price increases from $0.60 to $0.70. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 19 Applications of Supply and Demand Market Effects of an Antismoking Campaign A decrease in the demand for cigarettes would result in lower cigarette prices produced and sold, at a lower price. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 20 Applications of Supply and Demand Effects of Technological Innovations on the Market for Personal Computers Technological innovations decrease production costs, shifting the supply curve to the right. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 21 Applications of Supply and Demand Effects of Bad Weather on the Coffee Market Bad weather decreases the supply of coffee beans, shifting the supply curve to the left. Price increases and quantity exchanged decreases. © 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin 22