Download Supply and Equilibrium

Claudia Garcia-Szekely
© 2000 Claudia Garcia-Szekely
Supply
1
IN A PERFECTLY COMPETITIVE
MARKET
There are so many buyers that no buyer
has the power to affect the price.
We say that
Buyers are
price takers.
Buyers “react” to
prices
IN A PERFECTLY COMPETITIVE
MARKET
There are so many producers that no
producer has the power to affect the price.
We say that
Producers are
price takers too!
Producers also
“react” to prices
3
Irrigation
Workers
Fertilizer
Seeds
Cost
of Production
Supply
Cost
Price
Quantity Supplied
$3.25
If Price ~ $2.75
If Price ~ $2.25
If Price ~ $1.75
If Price = $1.50
Produce= 0 1
Produce= 0 1
2 3 4
2 3
Quantity
5
Increase in Costs
Cost
Price
New Quantity Supplied
Old Quantity Supplied
If Price ~ $3.25
Supply
Decrease
Supply Shifts
UP/Left
If Price ~ $2.75
If Price ~ $2.25
If Price ~ $1.75
If Price ~ $1.50
0 1
Produce= 0 1
0
2 3 4
2 3
Quantity
6
An increase in Costs,
Causes a Leftward shift in
Supply
S1
S0
Price
Q1
Supply
Decrease
Supply Shifts
UP/Left
Q0
7
Weather, Insects, Natural Disasters
S1
S0
Price
Q1
Q0
Bad weather, insect
infestation, etc.,
Causes a Leftward
shift in Supply
Supply
Decrease
Supply Shifts
UP/Left
8
Technology
More output can be produced from the
same amount of inputs An improvement in
S0
Price
Q0
Q1
S1
technology
Causes a Rightward
shift in Supply
Supply
Increase
Supply Shifts
DOWN/Right
9
Expectations
Expectation of higher
prices in the future
causes a leftward shift
in Supply today
S1
S0
Price
Producers wait to sell
at higher prices
Q1
Q0
10
Prices of other goods
Substitutes in production – goods for
which producing more of one implies
producing less of the other.
o
o
Different crops: opium and
rubber, tea and other crops.
Pork can be used to produce
bacon or sausage.
11
12
The Law of Supply
Price
True ONLY if the
cost of
production,
weather,
Technology, Prices
of related goods
and Expectations
remain the same
Supply
13
Quantity Supplied
Price
Supply
Is a point on the
Supply line
The number of units a
firm would be willing
and able to offer for
sale at a given price.
Is different for
each price
14
Price changes
Movement along
Supply
Price
Is the entire
Supply line
Supply
The complete
set of price and
quantity supplied
for a firm.
Changes in cost of
production,
weather,
Technology, Prices
of related goods
and Expectations
Shifts
15
Price Changes:
Supply Shifts
Movement Along
Cost
Technology
Weather
Expectations
Prices of
other
goods
Increase in quantity supplied
Increase in supply
Decrease in supply
Decrease in quantity
supplied
g
e
h
f
The Market Supply
3
2
1
10 30
20
50 100 200
30 50 100
Is the sum of the quantities
supplied by all the firms in
the market
3
2
1
90 170 330
Is the horizontal sum of the
individual firms’ supply
lines.
17
Market
Supply
120
100
80
60
18
?
?
?
?
Supply Shifts
Increase in quantity supplied
Increase in supply
Cost
Decrease in supply
Technology
Decrease in quantity supplied
Weather
Number of Producers
Expectations
Prices of other goods
e
h
f
19
g
Price Changes:
Demand
Shifts
Move Along
Prices of related
goods
Incomes
Number of
consumers in
the market.
Tastes and
Preferences
Expectations
Increase in demand
Increase in quantity
demanded
Decrease in quantity
demanded
Decrease in demand
c
a
b
d
Who is affected first, buyers or
sellers?
1. Increase in cost of
production
2. Increase in incomes
3. Imposition of a tax on
producers
4. Producers expect an
increase in price.
5. Fear of unemployment
6. A frost (bad weather)
7. Increase in the number
of buyers
8. Fear of contaminated
product
9. A new technology
which increases
productivity.
10.Increase in price
a. Increase in
demand
b. Increase in
quantity
demanded
c.
c
a
Decrease in
quantity
demanded
b
d
d. Decrease in
demand
e. Increase in
quantity supplied
f.
g
e
h
Increase in supply
g. Decrease in
supply
h. Decrease in
quantity supplied
f
1. High prices of grain have increased costs for dairy
farmers and beef producers. How would this affect the
market for beef and milk?
The effect of this event would best
be represented by arrow ______
which shows (an increase/a
decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a change in
(price/incomes/tastes and
preferences/number of
consumers/cost, environmental
conditions, prices of other goods,
expectations,
technology)____________
24
2. A sharp increase in the price of beef leads many
consumers to switch from beef to chicken. How will this
affect the market for chicken in these countries?
The effect of this event would best
be represented by arrow ______
which shows (an increase/a
decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a change
in (price/incomes/tastes and
preferences/number of
consumers/cost, environmental
conditions, prices of other goods,
expectations,
technology)____________
25
3. The price of oil falls. How would this affect the freight
and shipping industry?
The effect of this event would
best be represented by arrow
______ which shows (an
increase/a decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a change
in (price/incomes/tastes and
preferences/number of
consumers/cost, environmental
conditions, prices of other goods,
expectations,
technology)____________
26
4. The price of coffee decreases to record low levels. How
would this drop in coffee prices affect the market for
coffee?
The effect of this event would
best be represented by arrow
______ which shows (an
increase/a decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a change
in (price/incomes/tastes and
preferences/number of
consumers/cost, environmental
conditions, prices of other
goods, expectations,
technology)____________
27
5. Farmers can easily switch from growing coffee to growing
Coca. The price of coffee decreases to record low levels.
How would this drop in coffee prices affect the market for
coca?
The effect of this event would best
be represented by arrow ______
which shows (an increase/a
decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a change in
(price/incomes/tastes and
preferences/number of
consumers/cost, environmental
conditions, prices of other goods,
expectations,
technology)____________
28
6. A successful “buy American” campaign shifts consumers’
preferences towards clothes made in America. How would
this affect the garment industry in the U.S.?
The effect of this event would
best be represented by arrow
______ which shows (an
increase/a decrease) _______in
(Demand/Quantity Demanded/
Supply/Quantity Supplied)
__________________. This
change was caused by a
change in (price/incomes/tastes
and preferences/number of
consumers/cost, environmental
conditions, prices of other
goods, expectations,
technology)____________
29
Consider the market for Coffee
P
Want to sell
Supply
$3.50
Excess Supply
$2.50
$1.50
EQUILIBRIUM
Excess Demand
Want
Demand
to buy
30
0
25
35
45
Effect of a
Shortage
Shortages occur
becauseSupply
the price
is “too” low
Po
Demand
Shortage
20
30
Quantity
Supplied
Quantity
Demanded
50
31
Qs increases
from 30
units to 60
units
Q supplied
increases
S
90
Shortage
Qd drops
from 120
units to 60
units
Q demanded
decreases Shortage eliminated
buyers bid
price up
P1
Po
+30
-60
D
30 60
120
Quantity
Quantity
Q
Q Supplied=Q
Supplied=Q demanded
demanded
Supplied
Demanded
A Surplus
Supply
Po
A surplus occurs
because the price
is “too” high
Surplus
Quantity
Demanded
Demand
Quantity
Supplied
33
The Effect of a
Surplus
Supply
Po
Surplus
Sellers bid
price
down
P1
Demand
Quantity
Quantity
Q
Supplied=Q demanded
Demanded
Supplied
Q demanded
increases
Q supplied
decreases
Surplus eliminated
Market Equilibrium
When the quantity firms want to sell
is equal to quantity consumers want
to purchase.
At equilibrium, there is no reason for
the market price to change.
35
From the Individual demand curves to
Market demand:
P
P
DA
P
DC
DB
$3.50
$3.50
$3.50
$1.50
$1.50
$1.50
8
4
P
$3.50
Qd
0
3
Qd
4
9
Qd
Market Demand = Horizontal Sum
of Individual Demands
$1.50
0
8
20
Qd
Consider the market for
Coca.
S
Price
Government
fumigates
Colombian coca
fields
What will happen to the
equilibrium price and
quantity?
P0
D
0
Q0
37
quantity
Increase?
Shift
oraffected
move
Decrease?
along?
Who is
first?
S1
S0 S
Pe Qe
Supply shifts left
P1
A decrease in Supply (Shift)
and
decrease inappears
quantity
Aashortage
demanded (Move up
due to drop in supply
along)
P0
Shortage
D0
0
Q1 Q 0
Price increases due
to shortage
Quantity exchanged
decrease
Consider the market for
Coca
S
The U.S.
Government
puts into effect
a campaign to
reduce
consumption
P0
D
39
Q0
Increase?
Decrease?
Shift
oraffected
move
along?
Who is
first?
Surplus
P0
D Pe Qe
S
A decrease in
Quantity Demand shifts left
Supplied
P1
A surplus appears
A decrease in
Demand and
D1
0
Q1
Q0
Price decreases
Quantity exchanged
D
D00decreases
Consider the
market for coffee.
S
Unusually good
weather
increases the
size of the
crop
P0
D
41
Q0
Unusually Good Weather
S
Pe Qe
S0and an
An increase in Supply
S1 Supply shifts right
increase in quantity demanded
Surplus
P0
A surplus appears
Price decreases
P1
Quantity exchanged
increases
D0
0
Q0 Q 1
42
Consider the market for corn.
S
An increase in
production of
Ethanol (which is
made from corn)
P0
D
43
Q0
Increase Demand for corn
D Pe Qe
S
P1
Demand shifts right
P0
A shortage
An increaseappears
in
Shortage
Demand and an
Price
increases
increase
in quantity
supplied
Quantity exchanged
increases
D
D00
Q0
Q1
D1
S
P? Q
P Q
S0
S0
P1
S1
Surplus
P0
P0
Effect on price
indeterminate
P1
D0
Q0
Q1
P Q
D
Quantity
increases
Shortage
D0
Q0
Q1
D1
S
P
P? Q
Q
S
P
D
Surplus
Q
S
P0
P1
P1
Effect on
P0
price
indeterminate
Quantity
decreases
Shortage
D
Q1
Q0
D1
Q1
Q0
D0
48
P
S
P Q?
Q
S0
Price
S1
Surplus
decreases
P0
P
D
Surplus
S
P0
P1
Effect on
quantity is
indeterminate
P1
D1
D0
0
Q
Q0
Q1
0
Q1
Q0
D0
49
S
P Q? D
P Q
S
Price
increases
P0
P1
Shortage
Effect on
quantity is
indeterminate
Shortage
D
Q1
Q0
Q
S0
P0
P1
P
Q0 Q1
D1
50
Fix the problem: Unemployment
(Workers supply
labor) S0
W0
Unemployment
Surplus
W1
Surplus results
when the price
is too high
To eliminate
unemployment: remove
Minimum Wage, so
wages fall to
equilibrium.
(Firms demand labor)
D0
Firms willFirms
hire this
will hire
This
thismany workers
many workers
many @
workers
W0 want
@ Wto1 work @ W0
This many workers
want to work @ W1
51
The meaning of Equilibrium
Wage
Unemployed
1500
$8
S
Minimum Wage
How many
additional jobs
were created?
$6
$4
600
D
Number of
300 900
900$11,520
1800 WAY below
workers
poverty line
$15,360 Below poverty line: $15,730 (2)
Fix the problem: Unemployment
(Workers supply
labor) S0
W0
Unemployment
Surplus
(Firms demand labor)
D0
Firms will hire this Firms
This many
workers
will hire
this
many workers @ W0many
wantworkers
to work @
@W
W0
0
This many workers
want to work @ W0
53
Fix the problem
Illegal drugs
S1
P1
Decrease Supply: Use tax
payer money to reduce entry
Higher prices/profit
Incentive for more firms to
S0 come into the market:
Rightward shift in Supply
Lower prices/profit
Incentive for firms to exit
the market: Leftward
shift in Supply
P0
P1
D1
Q1
Q1
Q0
D0
Decrease Demand
54
Fix the problem
Obesity: reduce consumption of sugary drinks
S1 Decrease Supply
Higher prices/profit
Incentive for more
S0
firms to come into
the market
P1
P0
Lower prices/profit
Incentive for firms
to exit the market
P1
D1
Q1
Q1
Q0
D0
Decrease Demand
55
Ch. 5 (pp. 94-96)
PRODUCER AND CONSUMER SURPLUS
56
Unit 1 is
worth at
least $11 to
consumer
$11
Unit 2 is
Unit 10th is
worth at
worth at
least $10 to least $1 to
consumer
consumer
If the price is $11 the consumer
would buy one unit
If the price is $10 the consumer
would buy TWO units
If the price is $1 the consumer
would buy 10 units
$10
$1
D
1
2
10
57
Market Demand: Value to
Consumers
The distance to
the Demand curve
is: Value consumers
place on that unit
$11
$10
$1
D
1
2
10
58
Market Supply: Cost of
production
Cost
Price
Quantity Supplied
$3.25
$2.75
The distance to the
Supply curve tells us
how much it costs to
produce each unit.
$2.25
$1.75
1
2 3
4
59
Optimum Output Level
S (cost)
$10
Cost $10
$1
Cost $1
1st
D (Value given by consumer)
100th
Optimum Output Level
S (cost)
Value to consumer Cost Greater than
Greater than Cost Value to consumer
We should not produce
We should produce all units units the consumer does
the consumer values not value enough to pay
Optimum Output level = Equilibrium Quantity
enough to pay the cost of the cost of bringing
bringing them to market them to market
Willingness to Pay
Willingness to pay
$10 for one unit
10
$8 for the second unit
8
$6 for the third unit
6
$24
$24
D
1
2
3
Long Distance Service
Consumer
Surplus = 81
– 63= 18
0.55
If the price is $0.35
60*0.35=$21
60*0.45=$27
0.35
$81
60*0.55=$33
0.45
Consumer
Actually
pays $0.35
x 180 = $63
60 120 180
Minutes
D
63
Consumer Surplus
Willingness to pay
The area below the demand curve and above
the price the consumer pays
Consumer
Consumer
surplus
= Area
surplus
of triangle
If the price is $0.35
Consumer
actually
pays =
0.35*180
180 minutes
1 Minute intervals
D
64
Consumer surplus in a Perfectly Competitive
market: The area below the demand curve
and above the price the consumer
pays
Consumer
Surplus
Supply = Cost
5
D
Q = 4000
Units of output, Q
Producer Surplus ~ Profit
Producer
Surplus = 18 – 12 = 6
S = Cost
If The market price is $6
6
PS = 6
4
TR = $6*3
=$18
Cost=12
2
The area above the supply
curve and below the price the
producer receives
66
1
2
3
Producer Surplus under
Perfect Competition
The area above the supply curve
and below the price the producer
receives
10
CS
Supply = Cost
5
PS
PS
2
D
4000
Consumer surplus in a Perfectly Competitive
market:
10
Triangle Area = Base x Height x ½
Triangle Area = 4000 x (10-5) x 1/2
Supply = Cost
5
CS =
Triangle Area
2
D
68
Q = 4000
Producer Surplus under
Perfect Competition
Triangle Area = Base x Height x ½
Triangle Area = 4000 x (5-2) x 1/2
10
Supply/Cost
5
PS =
Triangle
Area
2
D
4000
69
Perfect Competition
CS
The area below Demand and
above the price the
consumer pays
S
Pe
PS
The area above the supply
D price
curve and below the
the producer receives
Qe
Q
Optimum Output level = Equilibrium Quantity
Area below Demand and above
=
20
x
(25-11)
x
1/2
the price the consumer pays
25
Area above supply and
below the price the
producer
S receives = 20 x (11- 4) x 1/2
11
4
Optimum
Quantity = 20
D
All these prices
are prohibited
When the market is not allowed
to clear
Can’t
2,000
charge
more than
$1,000
1,000
S
CS
Prevents price
from reaching
equilibrium
PS
Price Ceiling
D
Qs =1000
3,000
Shortage
Qd =5000
Q
Price Ceiling: Consumers May
CS: Area below
Win or Lose
Demand
Above Price
Gain to consumer
Loss to Consumer
7,300
3,900
CS
CS at
equilibrium
after
ceiling
S
2,200
1000
D
300
600
900
Price Ceiling: Producers Lose
7,300
Loss to Producer
PS: Area below
Price
Above Supply
3,900
PS at equilibrium
2,200
S
PS
1000
D
300
600
900
Price Ceiling ~ subsidy to Consumers
and a tax to Producers
Gain to consumer
Loss to Producer
S
S
CS
3,900
3,900
Welfare Loss
PS
2,200 PS
2,200
D
D
300
600
300
Quantity Bought/Sold
600
Price Ceiling
S
CS
Pe=2
1
CS
PS
Welfare
Loss
PS
D
2000
4000
76
Q
$10
S
CS
$6
PS
$4
$2
D
20
40
77
Q
When the market is not allowed to
clear
4
All these prices
are prohibited
Must pay
at least
8
Surplus
CS
S
Price Floor
Prevents price
from reaching
equilibrium
PS
D
Qd =20,000
40,000
Surplus
Qs =60,000
Q
Price Floor: Consumers Lose
8
Loss to Consumer
CS
CS
S
4
D
20
40
79
Price Floor: Producers May
PS: Area below
Win or Lose
Gain to Producer
Price
Above Supply
Loss to ProducerS
8
4
PS PS
D
20
40
Price Floor ~ subsidy to
Producers and a Tax to Consumers
3
Gain to
Producer
Loss to
Consumer
CS
S
CS
Tax
S
3
Subsidy
2
2
PS
D
D
2
4
2
4
Loss of Surplus to Society
3
Loss to
Consumer
CS
Loss to
Producer
S
3
2
2
S
PS
PS
D
D
2
4
2
Quantity Bought/Sold
4
Welfare Loss from Price Floor
5
P=2
S
CS
PS
Welfare
Loss
PS
D
4
83
Q
Welfare Loss from Price Floor
$10
$8
S
CS
$6
$4
$2
D
84
30
50
Q
©2001,2002Claudia GarciaSzekely
Government imposes a Price Ceiling at $6
Calculate: CS,PS and WL.
85
©2001,2002Claudia GarciaSzekely
Government imposes a Price Ceiling at $6
Calculate: CS,PS and WL.
86
Subsidy to
Tax to Producer
Old
Consumer
PS
©2001,2002Claudia GarciaSzekely
Government imposes a Price Ceiling
at $ Calculate the equivalent
tax/subsidy
87
©2001,2002Claudia GarciaSzekely
Government imposes a Price Floor at $12
Calculate: CS,PS and WL.
88
Government imposes a Price Floor at $12
Calculate: CS,PS and WL.
PS
WL
©2001,2002Claudia GarciaSzekely
CS
89
(12-6)*16
PS
©2001,2002Claudia GarciaSzekely
Government imposes a Price Floor
at $ Calculate: CS,PS and WL.
90
Government imposes a Price Floor at
$ Calculate equivalent Tax/subsidy
Old
Subsidy
Tax to to
Consumer
Producer
CS
New
PS
WL
©2001,2002Claudia GarciaSzekely
New
CS
91
Consumer
Surplus=
Producer
Surplus=
Welfare Loss=
Tax to:
Subsidy to:
Tax/Subsidy =