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SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts CORN P QS $1 2 3 4 5 5 20 35 50 60 SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts CORN P QS $1 A Series of Possible Prices 2 3 4 5 5 20 35 50 60 …a specified time period …other things being equal How Producers or sellers behave in the market place • Supply is a curve or schedule that relates various quantities of an item that sellers will put in the market place at alternative prices, cp • Therefore Supply expresses a relationship between Price and Quantity of Supply LAW OF SUPPLY A direct relationship exists between price and quantity supplied • As Price Rises… …Quantity Supplied Rises • As Price Falls… …Quantity Supplied Falls What is the relationship • • • • Direct Positive Upward moving Linear • market supply curve is an aggregation of individual supply curves. • Why: as price increases, sellers are willing and able to put more in the market place Movement or Shifts In Supply • Movement on Supply Curve only caused price changes: change in price=change in quantity of supply SHIFTS • Non-Price Determinates of supply Technology Changes Price of Other related products (Substitutes and complements) Cost of Factors Taxes and Subsidies Expectations: What will happen in the future Regulations TOFTERMS Shift to right and left • Right = increase warning it looks lower • Left= decrease warnig it looks higher • Be careful Draw it Supply versus Quanity • Change in quantity supply=movement • Change in supply= shift PRICE ELASTICITY OF SUPPLY Percentage change in quantity supplied of good X Es=____________________ Percentage change in the price of good X Now, compare the immediate market period, the short-run, and long run. PRICE ELASTICITY OF SUPPLY • Immediate Market period An increase in demand without enough time to change supply causes… PRICE ELASTICITY OF SUPPLY Short Run An increase in demand with less intensity supply use causes...a lower increase in price PRICE ELASTICITY OF SUPPLY Long Run An increase in demand in the long run allows greater change causing... Even more elastic response - less price increase Equilibrium • Where the sellers and consumers come together • The Point at which Quantity Demand =Quantity Supply Market Clearing Price • At equilibrium the firms are happy it is possible to sell all that can produce. At that Price consumers are happy because they are getting all they demand • Above equilibrium is excess supply, and below is excess demand. The Determination of Price • Equilibrium price and output • response to shortages and surpluses • significance of “equilibrium” • Demand and supply curves • effect of price being above equilibrium • surplus price falls The Determination of Price • effect of price being below equilibrium • shortage price rises • Effects of shifts in the demand curve • movement along S curve and new D curve • rise in demand (rightward shift) P rises • fall in demand (leftward shift) P falls • Effects of shifts in the supply curve • movement along D curve and new S curve • rise in supply (rightward shift) P falls • fall in supply (leftward shift) P rises OH NO!!!! What if both shift? A WHOLE LOT OF TIRES AND TOFTERMS • If changes in both demand and supply are increases: price relatively the same but increase in Quantity • If changes in both demand and supply are decreases: price relatively the same but decrease in Quantity Now if the shifts are opposite • Demand increase (right) and supply decrease (left) • Then the price always increases and quantity is same • Demand decreases (left) and supply increases (right) • Then price decreases and quantity is same Problems What if the price is above The market equilibrium or below the market euilibrium? Shortages or Surpluses Market place must adjust Market must adjust • To elimitate shortages and surpluses • Shifts in demand and supply cause the market equilibrium price to change and quantity to change. • Demand decreases (left): both the price and quantity decrease • Demand increases (right): both the price and quantity increase • Supply decreases (Left): price increases and quantity decreases • Supply increases (right): price decreases and the quantity increases MARKET EQUILIBRIUM • • • • • • Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Complex Cases Multiple Shifts… • Supply Increases; Demand Decreases • Prices Decrease • Quantity Indeterminate • Supply Decreases; Demand Increases • Price Increases • Quantity Indeterminate Complex Cases Multiple Shifts… • Supply Increases; Demand Increases • Prices Indeterminate • Quantity Increases • Supply Decreases; Demand Decreases • Price Indeterminate • Quantity Decreases Government Set Prices • Price Ceilings • Shortages • Rationing Problem • Black Markets • Rent Controls • Price Floors • Surpluses Government Set Prices • Price Ceilings • Shortages • Rationing Problem • Black Markets • Rent Controls • Price Floors • Surpluses Problems to think about • Explain why supply curve has a positive slope • Explain why an increase in number of producers in a market causes the market supply curve to shift right • Assume the widget market is in quilibrium. Then the JAPANESE producers begin exporting widgets to the US. Analyze the effect of the imports on the price of widgets the quantity exchanged and the quantity produced in the US. Price Ceilings and Floors Excise taxes
