1. Module 6
Supply & Equilibrium

2. Main Ideas
11/22/2018
Learn what the supply curve is. The difference between movements along a supply curve and changes in supply. The factors that shift a supply curve. How supply and demand curves determine a market's equilibrium price and equilibrium quantity. In the case of a shortage or surplus, how price moves the market back to equilibrium.
Duffka School of Economics

3. Key Economic Concept #1
11/22/2018
The first key concept and graph in this module is the upward sloping supply curve for good X. A movement along a supply curve shows how a change in the price of good X causes a direct change in quantity of good X supplied (a to b). A shift outward (b to c), or inward, in the entire supply curve is caused by an external factor (not the price of good X).
Duffka School of Economics

4. Key Economic Concept #2
11/22/2018
Market equilibrium. Equilibrium is a state where there is no tendency for anything to change. Consumers won’t change their buying patterns, and producers won’t change their production patterns. In other words, the market comes to equilibrium at the only price where the quantity consumers wish to buy (Qd) is equal to the quantity that producers wish to supply (Qs)
Duffka School of Economics

5. 11/22/2018
Overview
I. The Supply Curve A. The Supply Schedule and Supply Curve B. Understanding Shifts of the Supply Curve 1. Changes in input prices 2. Changes in the price of related goods or services 3. Changes in technology 4. Changes in expectations 5. Changes in the number of producers II. Supply, Demand, and Equilibrium A. Finding the Equilibrium Price and Quantity B. Why Does the Market Price Fall if it is Above the Equilibrium Price? C. Why Does the Market Price Rise if it is Below the Equilibrium Price?
Duffka School of Economics

6. I. The Supply Curve
11/22/2018
A. Supply Schedule and Supply Curve Supply is a schedule, which shows amounts of a product a producer is willing and able to produce and sell at each of a series of possible prices during a specified time period. A supply schedule portrays this in the hypothetical cans of soda example.
Duffka School of Economics

7. I. The Supply Curve
11/22/2018
The schedule shows what quantities will be offered at various prices or what price will be required to induce various quantities to be offered. The supply schedule shows that when the price is high, the quantity of sodas supplied is high. This relationship is known as the Law of Supply.
Duffka School of Economics

8. I. The Supply Curve
11/22/2018
The Law of supply is believed to hold true for most products. 1. All else equal, as the price rises, quantity supplied rises. 2. Restated: There is a direct relationship between price and quantity supplied. 3. Note the “all else equal” assumption refers to a handful of other factors that affect the supply of a good. Plot the five prices and quantities supplied in a graph. This is the supply curve of cans of soda (per week).
Duffka School of Economics

9. I. The Supply Curve
11/22/2018
Duffka School of Economics

10. I. The Supply Curve
11/22/2018
The supply curve illustrates the positive relationship between price and quantity supplied. The upward slope indicates lower quantity (horizontal axis) at lower price (vertical axis), higher quantity at higher price.
Duffka School of Economics

11. I. The Supply Curve
11/22/2018
What happens when the price falls from $3 per can to $2 per can? Quantity supplied decreases from 150 cans per week to 100 cans per week. This is a movement down the supply curve.
Duffka School of Economics

12. B. Understanding Shifts of the Supply Curve
11/22/2018
There are several “shifters” of supply or the “other things,” besides price, which affect supply. Changes in a shifter cause changes in supply. If supply has increased, it has shifted to the right. At any price, firms wish to produce more. If supply has decreased, it has shifted to the left. At any price, firms with to produce less.
Duffka School of Economics

13. B. Understanding Shifts of the Supply Curve
11/22/2018
1. Input (Resource) prices A rise in an input price will cause a decrease in supply or leftward shift in supply curve; a decrease in an input price will cause an increase in supply or rightward shift in the supply curve. An increase in the price of fertilizer would cause a decrease in supply of corn.
Duffka School of Economics

14. B. Understanding Shifts of the Supply Curve
11/22/2018
2. Prices of related goods or services If the price of a substitute production good rises, producers might shift production toward the higher priced good causing a decrease in supply of the original good. An increase in the price of soybeans may cause a farmer to decrease the supply of corn.
Duffka School of Economics

15. B. Understanding Shifts of the Supply Curve
11/22/2018
3. Technology A technological improvement means more efficient production and lower costs, so an increase in supply or rightward shift in the curve results. Genetically improved seeds will increase supply of corn.
Duffka School of Economics

16. B. Understanding Shifts of the Supply Curve
11/22/2018
4. Expectations Expectations about the future price of a product can cause producers to increase or decrease current supply. Expectations of higher corn prices (next month) may cause farmers to decrease supply to the market today.
Duffka School of Economics

17. B. Understanding Shifts of the Supply Curve
11/22/2018
5. Number of sellers Generally, the larger the number of sellers the greater the supply.
Duffka School of Economics

18. B. Understanding Shifts of the Supply Curve
11/22/2018
Input (resource) prices
Technology
Number of Sellers
Prices of related goods
Expectations
Duffka School of Economics

19. Individual Supply = Market Supply
11/22/2018
Individual Supply = Market Supply
Duffka School of Economics

20. APE U2 L2 A12 Supply Curves Part A: Figure 12.1 Supply of Greebes
11/22/2018
Part A: Figure 12.1 Supply of Greebes
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
Figure 12.2 Supply of Greebes
Part A:
Figure 12.1
Supply of Greebes
P Qty Supplied
($/Greebe) (millions) S
PRICE PER GREEBE
QUANTITY
The data for supply curve S indicates that at a P of $.25 per greebe, suppliers would be willing to offer ________ million. If the P increased to ________ suppliers would be willing to offer _________ million. Such a change would be an increase in (supply/quantity supplied). <NEXT PAGE> If the P decreased to .20 suppliers would be willing to offer _________ Change would be called (supply/ Quantity supplied).
200
.30
250
150
Duffka School of Economics

21. APE U2 L2 A12 Supply Curves
11/22/2018
Figure 12.3 New Supply of Greebes Dramatic change in raw materials…
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
Figure 12.3 Supply of Greebes
Part A:
Figure 12.3
Supply of Greebes
P Qty Supplied
($/Greebe) (millions) S1 S
PRICE PER GREEBE
QUANTITY
Comparing the new S1 curve with the original S curve, we can say that a change in the S of Greebes results in a shift of the S curve to the (left/right). Such a shift indicates that in each of the possible prices shown, suppliers are now willing to offer a (smaller/larger) quantity and at each of the possible quantities shown, suppliers are willing to accept a (higher/lower) minimum price. The cause of this supply curve shift was a(n) (increase/decrease) in prices of several of the raw materials used in making Greebes.
Duffka School of Economics

22. APE U2 L2 A12 Supply Curves
11/22/2018
Figure 12.4 New Supply of Greebes Dramatic change in the P of Silopanna…
Figure 12.2 Supply of Greebes
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
Part A:
Figure 12.4
Supply of Greebes
P Qty Supplied
($/Greebe) (millions) S S2
PRICE PER GREEBE
QUANTITY
Comparing the new S2 curve with the original S curve, we can say that a change in the S of Greebes results in a shift of the S curve to the (left/right). Such a shift indicates that in each of the possible prices shown, suppliers are now willing to offer a (smaller/larger) quantity and at each of the possible quantities shown, suppliers are willing to accept a (higher/lower) minimum price. The cause of this supply curve shift was a(n) (increase/decrease) in price of Silopanna a resource used in the production of Greebes.
Duffka School of Economics

23. APE U2 L2 A12 Supply Curves
11/22/2018
Part B: 1. Other things constant, which of the following would NOT cause a change in the long-run supply of beef? A. A decrease in the price of beef 2. “Falling oil prices have caused a sharp decrease in the supply of oil.” What statement best describes this quotation? D. Quote is incorrect: A decrease in P causes a decrease in quantity supplied, not a decrease in supply. 3. “Economic markets are lilke a slide: If S increases, the P increases… The student is confusing a change in quantity supplied with a change in supply. The student also has things backwards: If supply increases, price decreases, and that is the end of it, all things equal.
Duffka School of Economics

24. APE U2 L2 A12 Supply Curves
11/22/2018
Part C: Producer Surplus The amount a seller is paid minus the seller’s cost.
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
Figure 12.5 Producer Surplus
5. A. P increases PS INCREASES
B. P decreases PS DECREASES
6. A. PS will decrease…less producers are willing to produce
P increase to .30 INCREASE
C. Do not calculate…larger & smaller. S
PRICE PER GREEBE
QUANTITY
Duffka School of Economics

25. APE U2 L2 A13 Supply Curves A B C Price Figure 13.1:
Supply of Foreign and Domestic Cars
Quantity
HEADLINE
S Shift Y/N
Inc/Dec
Curve L/R
Curve
1. Auto workers agree to Wage cuts Y
INCREASE
RIGHT C
2. New robot technology
3. Nationwide auto strike at midnight
DECREASE
LEFT A
4. New import quotas
5. Cost of steel rises
6. Auto producer shuts down
7. Buyers reject New Models N --
8. National Income rises 2%
11/22/2018
Duffka School of Economics

26. 11/22/2018
Duffka School of Economics

27. Food Prices—Increased Demand Decreased Supply
Increased demand from the developing world
Bad weather decreasing supply
11/22/2018
Duffka School of Economics

28. II. Supply, Demand, and Equilibrium
11/22/2018
One way to think about equilibrium is like a stopped pendulum. Once a pendulum has started, it should continue to swing back and forth, never stopping. If you stop it, it will never restart the swinging. That’s equilibrium in the market. There are no changes in price, quantity demand, or quantity supply. Think stability.
Duffka School of Economics

29. II. Supply, Demand, and Equilibrium
11/22/2018
II. Supply, Demand, and Equilibrium
Duffka School of Economics

30. A. Finding the Equilibrium Price and Quantity
11/22/2018
The demand half of this table that summarizes soda demand and supply at five possible prices. Note: At first, do not complete the last column of this table.
Duffka School of Economics

31. A. Finding the Equilibrium Price and Quantity
11/22/2018
The equilibrium, or market-clearing, price is the only price where Qd=Qs. At this price, there is no tendency for the price to rise or fall.
In other words, the market is in a state of balance.
P=$3 is the equilibrium price--what is happening at prices above and below $3?
Duffka School of Economics

32. B. Why Does the Market Price Fall if it is Above the Equilibrium Price?
11/22/2018
What happens to the price of many items (like sweaters) right after Christmas? Why? Because the store has too many items that went unsold prior to Christmas. In other words, they have a surplus of sweaters, and the best way to get rid of a surplus of sweaters, is to lower the price. Surplus = Qs > Qd
Duffka School of Economics

33. 11/22/2018
Market Price too high?
Duffka School of Economics

34. C. Why Does the Market Price Rise if it is Below the Equilibrium Price?
11/22/2018
Duffka School of Economics

35. C. Why Does the Market Price Rise if it is Below the Equilibrium Price?
11/22/2018
Low supply and strong demand=higher price. Shoeless Joe Jackson signed rookie card: $9,000. When you have a shortage of something, the best way to eliminate the shortage is to increase the price.
Duffka School of Economics

36. Market Price too Low?
11/22/2018
Duffka School of Economics

37. Price Controls Create Shortages or Surpluses
11/22/2018
Duffka School of Economics

38. Price and Quantity Controls
Duffka School of Economics
11/22/2018

39. Elastic and Inelastic Supply Curves
11/22/2018
Price
Soft drink market
$2.00
When the market price for soft drinks increases from $1.00 to $1.50 a six-pack, the quantity supplied to the market rises from 100 to 200 million units per week. S
$1.50
$1.00
When the market price for physician services rises from $100 to $150 an office visit, the quantity supplied rises from to 12 million visits per week.
Quantity (million 6-packs) 50
100
150
200 S
Price
$200
As soft drink supply is very sensitive to price changes, soft drink supply is described as elastic; as physician services supply is relatively insensitive to price changes, physician services supply is described as inelastic.
$150
Physician Services market
$100
Duffka School of Economics 2 4 6 8 10 12 14 16 18 20

40. Main Idea Check
11/22/2018
Learn what the supply curve is. The difference between movements along a supply curve and changes in supply. The factors that shift a supply curve. How supply and demand curves determine a market's equilibrium price and equilibrium quantity. In the case of a shortage or surplus, how price moves the market back to equilibrium.
Duffka School of Economics

41. In Class Activity
11/22/2018
Deriving a Supply Curve While it is very easy for people to imagine themselves as consumers (demanders), it’s difficult for most people to imagine themselves as producers (suppliers), so the supply curve is less intuitive. If you’ve ever had a job you have been a supplier: of labor. Pick a job that involves a high degree of manual labor (raking leaves, eg). Write down how many hours you are willing to rake leaves at the following hourly wage rates: $16.00, $12.00, $10.00, $8.00, $6.00. Repeat for a job that involves very little manual labor (a cashier, eg). Again, ask students to write down how many hours they are willing to work at the cash register at the following hourly wage rates: $16.00, $12.00, $10.00, $8.00, $6.00. Add up the hours at each wage, and derive the upward-sloping supply curve. A few students may choose to work fewer hours as the wage rises, but generally the overall response produces an upward sloping supply curve.
Duffka School of Economics

42. Practice MC Question #1
11/22/2018
Which of the following will decrease the supply of good “X”? a. There is a technological advance that affects the production of all goods. b. The price of good “X” falls. c. The price of good “Y” (which consumers regard as a substitute for good “X”) decreases. d. The wages of workers producing good “X” increase. e. The demand for good “X” decreases.
Duffka School of Economics

43. Practice MC Question # 2
11/22/2018
An increase in the demand for steak will lead to an increase in which of the following? a. the supply of steak b. the supply of hamburger (a substitute in production) c. the supply of chicken (a substitute in consumption) d. the supply of leather (a complement in production) e. the demand for leather
Duffka School of Economics

44. Practice MC Question # 3
11/22/2018
A technological advance in textbook production will lead to which of the following? a. a decrease in textbook supply b. an increase in textbook demand c. an increase in textbook supply d. a movement along the supply curve for textbooks e. an increase in textbook prices
Duffka School of Economics

45. Practice MC Question # 4
11/22/2018
4. Which of the following is true at equilibrium? a. The supply schedule is identical to the demand schedule at every price. b. The quantity demanded is the same as the quantity supplied. c. The quantity is zero. d. Every consumer who enjoys the good can consume it. e. Producers could not make any more of the product regardless of the price.
Duffka School of Economics

46. Practice MC Question # 5
11/22/2018
The market price of a good will tend to rise if a. demand decreases. b. supply increases. c. it is above the equilibrium price. d. it is below the equilibrium price. e. demand shifts to the left.
Duffka School of Economics

47. Free Response 1
11/22/2018
Draw a correctly labeled graph showing the market for oranges in equilibrium. Show on your graph how a hurricane that destroys large numbers of orange groves in Florida will affect supply and demand, if at all.
Duffka School of Economics

48. Free Response 2
11/22/2018
Draw a correctly labeled graph showing the market for tomatoes in equilibrium. Label the equilibrium price “PE” and the equilibrium quantity“QE.” On your graph, draw a horizontal line indicating a price, labeled “PC”,that would lead to a shortage of tomatoes. Label the size of the shortage on your graph.
Duffka School of Economics

49. Free Response 2
11/22/2018
Draw a correctly labeled graph showing the market for tomatoes in equilibrium. Label the equilibrium price “PE” and the equilibrium quantity“QE.” On your graph, draw a horizontal line indicating a price, labeled “PC”,that would lead to a shortage of tomatoes. Label the size of the shortage on your graph.
1 point: Graph with the vertical axis labeled “Price” or “P” and the horizontal axis labeled “Quantity” or “Q”
1 point: Downward sloping demand curve labeled “Demand” or “D”
1 point: Upward sloping supply curve labeled “Supply” or “S”
1 point: Equilibrium price “PE” labeled on the vertical axis and quantity “QE”labeled on the horizontal axis at the intersection of the supply and demand curves
1 point: Price line at a price “PC” below the equilibrium price
1 point: Correct indication of the shortage, which is the horizontal distance between the quantity demanded and the quantity supplied at the height of PC
Duffka School of Economics

50. 11/22/2018
Duffka School of Economics