AP Economics Mr. Bernstein Module 6: Supply and Demand – Supply and Equilibrium October 2015

AP Economics Mr. Bernstein Competitive Markets An institution which brings together buyers and sellers of particular goods or services Local, national or international Face-to-face, electronic or other impersonal Assumption: no buyer or seller so large they affect pricing Will look at markets which are not perfectly competitive later in the course 2

AP Economics Mr. Bernstein Supply Schedule and Supply Curve 3

AP Economics Mr. Bernstein Law of Supply All other things equal, as price increases the quantity supplied rises So there is an direct relationship between price and quantity supplied Plotted on a graph, the law of supply infers an upward sloping supply curve The law of diminishing returns causes the supply curves to be upward sloping Note: It will be important to distinguish between a change in the “quantity supplied” and a change in “supply” 4

AP Economics Mr. Bernstein Supply Shifters Factors which change supply other than price An increase in supply shifts the supply curve to the right A decrease in supply shifts the supply curve to the left Notice an increase in supply shifts the supply curve horizontally, not vertically 5

AP Economics Mr. Bernstein A Shift in Supply is different from movement along the Supply Curve!! 6

AP Economics Mr. Bernstein A Shift in Supply is different from movement along the S Supply Curve!! 7

AP Economics Mr. Bernstein Supply Shifters Input or Resource prices Increase in the price of inputs causes a decrease in supply Prices of related goods Increase in the price of Substitute Goods’ price causes a decrease in supply (production shifts to higher price substitute product) Increase in the price of a Compliment in Production causes an increase in supply (production increases to take advantage of higher price of complimentary good) Technology Advances in technology increases supply 8

AP Economics Mr. Bernstein Supply Shifters, cont. Expectations Expectations of future price increases decreases supply today Number of producers More producers increases supply 9

T - RICE Supply Shifters: T - RICE T T echnology R R elated prices (substitutes, compliments) I I nput prices C C ompetition (number of producers) E E xpectations AP Economics Mr. Bernstein 10

AP Economics Mr. Bernstein Equilibrium Equilibrium is the point where no buyers or sellers would be better off changing price or quantity AKA “Market-clearing” price Market prices are like a pendulum, swinging back and forth. At equilibrium, they are stable 11

AP Economics Mr. Bernstein Equilibrium: Where Supply and Demand Curves Intersect 12

AP Economics Mr. Bernstein Equilibrium Prices Fall When There is a Surplus 13

AP Economics Mr. Bernstein Equilibrium Prices Rise When There is a Shortage 14