Lecture 5 Market Supply And Market Equilibrium Supply: Quantity Supplied and Changes in Supply Demand and Supply Equilibrium

Supply If a firm supplies a good or service, the firm Has the resources and technology to produce it, Can profit from producing it, and Has made a definite plan to produce it and sell it. 38

What determines selling plans? The price of the good The prices of resources used to produce the good Technology The number of suppliers The prices of related goods produced Expected future prices 40

The relationship between the amount supplied of a good and the good’s price Quantity Supplied The relationship between the amount supplied of a good and everything else Changes in Supply

Supply The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. 39

The Law of Supply Ceteris Paribus, the higher the price of a good, the greater is the quantity supplied; And Vice Versa 41

Increasing marginal (opportunity) cost (recall lecture 2) WHY? The Reason for the Law Increasing marginal (opportunity) cost (recall lecture 2) 12

Marginal Cost Price (dollar per CD) 5 4 3 2 1 0 1 2 3 4 5 MC 5 4 Price (dollar per CD) 3 2 1 0 1 2 3 4 5 CDs (millions per month)

Supply Schedule and Supply Curve Supply schedules list the quantities supplied at alternative prices Supply curves are graphs of supply schedules 13

Supply Schedule a 1 0 b 2 3 c 3 4 d 4 5 e 5 6 Price Quantity (dollars per CD) (millions of CDs per week) a 1 0 b 2 3 c 3 4 d 4 5 e 5 6 Instructor Notes: The table shows the supply schedule of tapes. For example, at $2 a tape, 3 million tapes a week are supplied; at $5 a tape, 6 million tapes a week are supplied. 43

Supply Curve Price (dollar per CD) e d c b a 6 Supply of CDs 5 4 3 2 1 Instructor Notes: 1) The supply curve shows the relationship between the quantity supplied and price, everything else remaining the same. 2) The supply curve usually slopes upward: As the price of a good increases, so does the quantity supplied. 3) A supply curve can be read in two ways. For a given price, it tells us the quantity that producers plan to sell. 4) And for a given quantity, it tells us the minimum price that producers are willing to accept for that quantity. b 1 a 0 2 4 6 8 10 CDs (millions per month) 46

A Price Increase S0 Price P1 P0 Q0 Q1 Quantity 31

Supply A Change in Supply When any factor that influences selling plans changes, other than the price of the good, there is a change in supply. 47

An increase in supply causes Demand An increase in supply causes the supply curve to SHIFT RIGHTWARD 18

Price Increase in supply S0 S1 Quantity 35

A decrease in supply causes Demand A decrease in supply causes the supply curve to SHIFT LEFTWARD 18

Price Decrease in Supply S0 S2 Quantity 35

Changes in Supply Are Caused by The prices of resources used to produce the good Technology The number of suppliers The prices of related goods produced Expected future prices 40

Consider the First 3 and an Increase in Supply Price of Productive Resources -- higher or lower? Technology -- better or worse? The Number of Suppliers -- more or fewer? 48

Increase in Supply Price of Productive Resources -- lower! Technology -- better! The Number of Suppliers -- more! 48

Price Increase in supply S0 S1 Quantity 35

Price of Related Goods Produced Complements in Production If the price of leather increases, what happens to the Supply of beef? 48

Supply of Beef? Price Increase in supply S0 S1 Quantity 35

Price of Related Goods Produced Substitutes in Production If the price of shirts increases, what happens to the supply of Dresses? 48

Price Decrease in Supply S0 S2 Quantity 35

Expected Future Prices WHICH LEAVES…. Expected Future Prices A Change in Supply 48

A Change in Supply COLD WEATHER: significantly reduces Florida orange crop Concentrated Orange juice stored to take advantage of higher future price. 48

Price Decrease in Supply S0 S2 Quantity 35

Market Equilibrium Market Equilibrium Put them together to consider Having Now Considered Demand and Supply Put them together to consider Market Equilibrium

Market Equilibrium Equilibrium price: price at which quantity demanded equals quantity supplied. Equilibrium quantity: quantity bought and sold at the equilibrium price.

Market Equilibrium at the intersection of demand & supply curves 6 Supply of CDs Price (dollar per CD) 5 4 3 2 Demand for CDs 1 0 2 4 6 8 10 CDs (millions per month) 46

Shortages and Surpluses generate the pressures for the emergence of the equilibrium price price too low creates a Shortage: price will be forced up price too high creates a Surplus: price will be forced down

Market Equilibrium Price (dollar per CD) shortage 6 Supply of CDs 5 4 3 2 Demand for CDs shortage 1 0 2 3 4 6 8 10 CDs (millions per month) 46

Market Equilibrium Price (dollar per CD) surplus 6 Supply of CDs 5 4 3 2 Demand for CDs 1 0 2 3 4 5 6 8 10 CDs (millions per month) 46

How Does Equilibrium Change When Demand and Supply change What happens to price and quantity? How Does Equilibrium Change When Demand and Supply change There are 8 Combinations of Changes Rule 1: Compare the initial equilibrium point to the new one! Rule 2: Analytical tools are your friends, USE THEM! 3

Example Supply decreases and demand decreases What happens to price and quantity?

The Effects of a Decrease in Both Demand and Supply 6 5 Price (dollar per ?) 4 Price Constant? 3 Not Necessarily Instructor Notes: 1) The new supply curve intersects the new demand curve at $3 a tape, the same price as before, but the quantity increases to 8 million tapes a week. 2) These increases in demand and supply increase the quantity but leave the price unchanged. 2 Quantity Falls 1 0 2 4 6 8 10 12 14 Quantity (millions of ? per week) 52

The Effects of a Decrease in Both Demand and Supply 6 5 Price (dollar per ?) 4 3 Instructor Notes: 1) The new supply curve intersects the new demand curve at $3 a tape, the same price as before, but the quantity increases to 8 million tapes a week. 2) These increases in demand and supply increase the quantity but leave the price unchanged. 2 1 0 2 4 6 8 10 12 14 Quantity (millions of ? per week) 52