1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2 Three Ways to Represent Supply 1. A Schedule 2. A Curve 3. An Equation or function

3 Supply Schedule Let’s consider the supply schedule for beer at OSU. By adding up the different quantities, we could get a schedule which might be like this. We derive a supply schedule by taking survey of all the manufactures of beer that students drink and asking them how much beer they would produce to sell to the university community in a month at various prices.

4 Supply Curve Now, the information in the table of the beer supply schedule translates directly into a supply curve. Supply Curve

5 Law of Supply - Price and quantity move in the same direction on a supply curve. -Supply function: Q S = g(p) Example: Q S = p - Supply curve is upward sloping

6 Why Supply Slopes Upward 2. In an “open economy” (i.e. where there is international trade ), a high price will induce suppliers to import product from abroad. 1. As production is expanded, producers have to turn to less efficient facilities and resources. These less efficient resources will be more expensive in that we will get less output per unit of input of these poorer resources. So producers have to be offered a higher price to coax out this more expensive production.

7 Change in Q S v.s. Change in Supply Change in Quantity Supplied: A movement along a single supply curve. P Q S P Q S1S1 A B QAQA PAPA QBQB PBPB Change in Supply: A shift of the entire supply curve due to a change in a ceteris factor. S2S2

8 Change in Supply Ceteris Paribus Factors 1. Price of Inputs 2. Technology 3. Number of Suppliers

9 Shift in Supply Curve If there is a decrease in the price of inputs which makes production cheaper, then at every price, more commodities will be forthcoming. So, the supply curve would have shifted out to the right. This means that at any price, manufacturers now be supplying more beer:

10 Shift in Supply Curve This means that manufacturers are willing to supply the same quantity of beer at a lower price: Or,

11 Change in Supply Ceteris Paribus Factors 1. Price of Inputs 2. Technology 3. Number of Suppliers

12 Equilibrium Price & Quantity Market Equilibrium equilibrium

13 Equilibrium Price & Quantity If we had supply and demand equations, we could solve them simultaneously for PE PE and QE.QE. Example:D: Q = p S: Q = P Solve: p = p p = - 10 p = 20 Q = (20) = 26 So: PE PE = 20 QE QE = 26

14 What if we get out of equilibrium? (1) If prevailing P > P E excess supply or surplus Buyers’ Market

15 What if we get out of equilibrium? (2) If prevailing P < P E excess demand or shortage Sellers’ Market

16 Comparative Static Analysis (1) Case 1: Demand Decreases 1 2 Outcome: P   Q 

17 Comparative Static Analysis (2) Case 2: Demand Increases 1 2 Outcome: P   Q 

18 Comparative Static Analysis (3) Case 3: Supply Increases 1 2 Outcome: P   Q 

19 Comparative Static Analysis (4) Case 4: Supply Decreases 1 2 Outcome: P   Q 

20 Comparative Static Analysis (5) Case 5: Both Demand & Supply Decrease 1 2 Outcome: P ?  Q 

21 Comparative Static Analysis (6) Case 6: Demand Decreases & Supply Increases 1 2 Outcome: P   Q ?

22 Comparative Static Analysis (7) Case 7: Both Demand Supply Increase 1 2 Outcome: P ?  Q 

23 Comparative Static Analysis (8) Case 8: Demand Increases & Supply Decreases 1 2 Outcome: P   Q ?

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