SUPPLY, equilibrium, & Price Microeconomics

What is supply? The amount of production provided over a wide range of prices The quantity of goods and services that sellers are willing and able to supply. The Tendency of suppliers to offer greater quantities for sale at higher prices.

What is the Law of Supply? If prices are high, suppliers will offer greater quantities for sale. If prices are low, suppliers will offer smaller quantities for sale. There is a DIRECT relationship between supply and price. A change in overall supply will cause the Supply curve to shift. A change in quantity supplied will move along the original curve.

Supply Schedule and Curves Slopes upward to the right to reflect the law of supply “SUPPLY=SKY” Tells Quantity offered at each and every possible price Price Quantity $30 350 25 330 20 300 15 240

CHANGE IN QUANTITY SUPPLIED Change in Quantity Supplied due to a change in Price Supply is the whole curve. Quantity Supplied is one point of production on the curve at a particular Price. Movement along the same curve.

What would cause a change in supply? Non-Price Determinants: Government Regulations/Taxes and subsidies Inputs – cost of inputs – materials used to make (Resources)/ Productivity (weather/natural disasters) Sellers – number of sellers in the market Technology GIST

Equilibrium Supply & demand together! The price at which the quantity supplied is equal to the quantity demanded (market is cleared)

equilibrium P = Price Equilibrium or Market Clearing Price Q = Quantity Equilibrium EQUILIBRIUM IS WHERE: S = D

Increase In demand Line shifts to the RIGHT D2 is the new demand curve Due to one of the determinants New Equilibrium Price increases (P2) Quantity increases (Q2)

Decrease in demand Line shifts to the LEFT D1 is the new demand curve Due to one of the determinants New Equilibrium decreases (P1) Quantity decreases (Q1)

Increase in supply Line shifts to the Right S1 is the new supply curve Due to one of the determinants New Equilibrium decreases (P1) Quantity increases (Q1)

Decrease in supply Line shifts to the Left S1 is the new supply curve Due to one of the determinants New Equilibrium increases (P1) Quantity decreases (Q1)

Price Sends signals to buyers and sellers about how much they should and would be willing and able to buy and sell.

Government involvement Sometimes the government decides to set prices instead of letting the market decide. Why might the government decide to step in? (Think of current situations.) Price Ceiling Government sets prices BELOW equilibrium Price Floor Government sets prices ABOVE equilibrium

Price ceiling The highest price that can be charged Government sets a price below the equilibrium price Creates a SHORTAGE Quantity supplied is less than quantity demanded S < D To calculate a shortage: Quantity supplied minus Quantity demanded Can you think of a current Price Ceiling?

Price floor The lowest price that can be charged Government sets a price above equilibrium price Creates a SURPLUS Quantity supplied is greater than quantity demanded S > D To calculate a surplus Quantity supplied minus Quantity demanded Can you think of a current Price Floor?

Condition in the Market Floors and ceilings Price Quantity Demanded Quantity Supplied Condition in the Market $1.00 52 10 42 – unit Shortage $2.25 35 Equilibrium $3.00 29 42 13 – unit Surplus