Lecture 3 Demand and Supply

Outline Supply Putting Demand and Supply together the supply schedule and the supply curve; The law of supply factors influencing quantity supplied; changes in supply vs. changes in quantity supplied Putting Demand and Supply together Equilibrium price and quantity

Supply What is Supply?

Supply Willingness and ability of suppliers to sell quantities of goods and services at given prices, over a given period of time Hypothetical Quantity supplied Depends on the price assume other things constant explore the relationship between price and quantity supplied

The Law of Supply When the price of a good rises, and everything else remains the same, the quantity of the good supplied will rise Ceteris paribus assumption many variables change simultaneously we assume “everything else remains the same” understand how supply reacts to price

Supply Schedule Supply schedule list of different quantities supplied at different prices, ceteris paribus Price (per bottle) Quantity Supplied (bottles per month) 1 25,000 2 40,000 3 50,000 4 60,000 5 65,000

Supply Curve Supply curve relationship between the price of a good and the quantity supplied, with all other variables held constant Each point on the curve total quantity that sellers would choose to sell at a specific price Slopes upward

The Supply Curve The Supply Curve – movement along the supply curve Number of Bottles per Month Price per Bottle When the price is Ghc2.00 per bottle, 40,000 bottles are supplied S $4.00 G At Ghc4.00 per bottle, quantity supplied is 60,000 bottles 2.00 F 40,000 60,000

Movements Along the Supply Curve A change in the price of a good causes a movement along the supply curve, ceteris paribus Graphical illustration

Shifts of the Supply Curve A change in any variable that affects supply—except for the good’s price— causes the supply curve to shift. Sell a greater quantity at any price The supply curve shifts rightward (increase in supply) Sell a smaller quantity at any price The supply curve shifts leftward (decrease in supply)

Shifts of the Supply Curve A Shift of the Supply Curve Number of Bottles per Month Price per Bottle S1 S2 $4.00 J G 60,000 80,000

Factors that Shift the Supply Curve What are some factors that would cause a shift of the supply curve?

Factors that Shift the Supply Curve Input Prices A fall in the price of an input lower cost of production increase in supply (rightward shift)

Factors that Shift the Supply Curve Price of Alternatives Other goods that a firm could produce A rise in the price for an alternative decrease in supply (leftward shift)

Factors that Shift the Supply Curve Technology What is technology? technological advances increase the supply of a good

Factors that Shift the Supply Curve Number of Firms An increase in the number of sellers increase supply Expected price An expected rise in price decrease the current supply (leftward shift)

Factors that Shift the Supply Curve Changes in Weather/Other Natural Events Favorable weather increases crop yields increases the supply (rightward shift) Unfavorable weather destroys crops, shrinks yields, decreases the supply (leftward shift)

Terminology: Change in Supply vs. Change in Quantity Supplied Change in price Movement along the supply curve Change in Supply Change in other factors, other than price Shift of entire supply curve

Movement along the Supply Curve The Supply Curve – A summary Price ↓ Move leftward along the supply curve Price ↑ Move rightward along the supply curve P P S S A B P1 P2 P2 P1 B A Q2 Q1 Q Q1 Q2 Q

Shift of Supply Curve The Supply Curve – A summary The Supply curve shifts rightward P S1 S2 Price of input ↓ Price of alternatives ↓ Number of firms ↑ Expected price ↓ Technological advance Favorable weather Q

Shift of Supply Curve The Supply Curve – A summary The Supply curve shifts leftward P S2 S1 Price of input ↑ Price of alternatives ↑ Number of firms ↓ Expected price ↑ Unfavorable weather Q

Demand and Supply Combined

Demand and Supply Together Buyers and seller willing and able to trade have different agenda Buyers: Pay the lowest price possible Sellers: Charge the highest price possible In market, there is a price where both parties willing to trade

Supply and Demand Together Equilibrium - a situation Various forces are in balance A situation in which market price has reached the level where Quantity supplied = quantity demanded Supply and demand curves intersect

Supply and Demand Equilibrium price and quantity once achieved - remain constant until either the demand curve or supply curve shifts

Demand Schedule Price of Coke (Ghc) Quantity Demanded (bottles per month) Quantity Supplied (bottles per month) 1 75,000 25,000 2 60,000 40,000 3 50,000 4 5 35,000 65,000

Equilibrium Price per Bottle S E Ghc3.00 1.00 D 50,000 Number of Bottles per Month Price per Bottle S E Ghc3.00 1.00 D 50,000

Excess Demand Price lower than equilibrium price Excess Demand The amount by which quantity demanded exceeds quantity supplied - at a given price Buyers compete with each other to get more of the good than is available The price will rise Equilibrium is reached

Excess Demand Excess Demand Causes Price to Rise Number of Bottles per Month Price per Bottle 2. causes the price to rise . . . S 3. shrinking the excess demand until price reaches its equilibrium value of Ghc3.00 E Ghc3.00 H J 1.00 Excess Demand D 25,000 50,000 75,000 1. At a price of Ghc1.00 per Bottle, an excess demand of 50,000 bottles . . .

Excess Supply The amount by which quantity supplied exceeds quantity demanded - at a given price Sellers compete with each other to sell more than buyers want The price will fall Equilibrium is reached

Excess Supply Excess Supply Causes Price to Fall 1. At a price of Ghc5.00 per bottle an excess supply of 30,000 bottles . . . 3. shrinking the excess supply . . . Number of Bottles per Month Price per Bottle S Excess Supply Ghc5.00 L K 4. until price reaches its equilibrium value of Ghc3.00 E 3.00 D 2. causes the price to drop… 35,000 50,000 65,000

Markets Not in Equilibrium Price Supply Surplus Supply Price Demand Demand $2.50 4 Quantity demanded 10 Quantity supplied 2.00 $2.00 7 7 1.50 4 Quantity supplied Shortage 10 Quantity demanded Quantity Quantity (a) Excess Supply (b) Excess demand

Supply and Demand Together Law of supply and demand The price of any good adjusts To bring the quantity supplied and the quantity demanded for that good into balance In most markets Surpluses and shortages are temporary

What happens when things Change? Three steps to analyzing changes in equilibrium Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves Decide whether the curve shifts to the right or to the left Use the supply-and-demand diagram Compare the initial and the new equilibrium Effects on equilibrium price and quantity

What Happens When Things Change Income rises normal good What curve shifts? What direction? (Take-home exercise: repeat analysis for inferior good)

What Happens When Things Change Income rises normal good the demand increases (rightward shift of the demand curve) Rightward movement along the supply curve Equilibrium price rises Equilibrium quantity rises

Income rises, causing an increase in D A Shift in Demand and a New Equilibrium Number of Bottles of Coke per Period Price per Bottle 4. equilibrium price increases 3. to a new equilibrium S 2. moves us along the supply curve… Ghc4.00 E' 1. An increase in demand . . . 3.00 E D2 D1 5. equilibrium quantity increases too 50,000 60,000

What Happens When Things Change Increase in minimum wage What curve shifts? In what direction?

What Happens When Things Change Increase in minimum wage Increase in input costs will shift the supply curve decrease in supply (the supply curve shifts leftward) Equilibrium price rises Equilibrium quantity falls

Bad weather hits, decreasing the S A Shift of Supply and a New Equilibrium Number of Bottles Price per Bottle S2 S1 $5.00 E' 3.00 E D 35,000 50,000

Both Curves Shift Just one curve shifts (D or S) we can determine the direction that BOTH equilibrium price AND quantity will move Both curves shift (D and S) we can determine the direction that EITHER equilibrium price OR equilibrium quantity will move direction of the other – which curve shifts by more

Income rises and Minimum wage rises A Shift in Both Curves and a New Equilibrium Number of Bottles Price per Bottle S2 S1 $6.00 E' 3.00 E D2 D1

What Happens to Price and Quantity When Supply or Demand Shifts?

Take-home Questions (1) Consider the market for mini-vans. For each of the events listed below, identify which of the determinants of demand or supply are affected. Also indicate whether demand increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans People decide to have more children A strike by steelworkers raises steel price Engineers develop new automated machinery for the production of minivans The price of sports utility vehicles (SUVs) rises A stock-market crash lowers people’s wealth

Take-home questions (2) Over the past 20years, technological advances have reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters?

Next Class Elasticity of Demand and Supply