1. Chapter 3 Part II Demand and Supply Hossain: MSMC

2. Supply  Supply comes from suppliers or producers  Supply is sellers willingness and ability to sell goods and services at different prices  It is a relationship between two variables:  Price  Quantity supplied at that price  This relationship can be expressed using a supply schedule of price and quantity supplied Hossain: MSMC2

3. Supply Schedule Supply schedule for Coffee at the Jazzman Hossain: MSMC3 PriceQuantity Supplied (per day) 0.50300 1.00350 1.50400 2.00450 2.50500 3.00550

4. Supply Curve Hossain: MSMC4 Price S 0 250 300 350 400 450 500 550 3.00 2.50 2.00 1.50 1.00 0.50 0 PriceQuantity Supplied 0.50300 1.00350 1.50400 2.00450 2.50500 3.00550 Quantity Supplied (per day)

5. The Law of Supply  Simply says that the relationship between  Price and  Quantity Supplied at that price  Is positive, ceteris paribus.  Some call this relationship as  Direct relationship Hossain: MSMC5

6. The Law of Supply  The positive relationship means two things:  When Price Quantity Supplied 6Hossain: MSMC Quantity Supplied

7. The Law of Supply In the Coffee example, when Price is rising, Quantity Supplied is rising Hossain: MSMC7 PriceQuantity Supplied (per day) 0.50300 1.00350 1.50400 2.00450 2.50500 3.00550

8. The Law of Supply  Because of the law of supply, when price changes quantity supplied must change in the same direction  Graphically, this produces a upward sloping supply curve  Also called positively sloping supply curve Hossain: MSMC8

9. Change in Quantity Supplied  Change is Quantity Supplied is a direct consequence of the Law of Supply  Because of the Law of Supply, when Price changes (rises or falls), Quantity Supplied changes in the same direction  This generates a movement along a same supply curve  This is known as Change in Quantity Supplied  This happens only when Price Changes Hossain: MSMC9 Change in Quantity Supplied

10. Change in Supply  Note Carefully, Change in Supply is different from Change is Quantity Supplied  Happens when assumption is relaxed  Happens when we allow other factors to affect the Price and Quantity Supplied relationship  These other factors can be countless, unlike the Change in Quantity Supplied, which happens for only one reason Hossain: MSMC10 Ceteris Paribus

11. Change in Supply  Change in supply can be of two types:  Increase in Supply  De  Increase in Supply shifts the supply curve to the ______  Decrease in Supply shifts the supply curve to the _____ Hossain: MSMC11 Decrease in Supply Increase in Supply Decrease in Supply right left

12. Change in Supply  There are many ways ceteris paribus can be relaxed  These are commonly called  Some of the supply shifters are: Hossain: MSMC12 Natural Events Technology Price of inputs Sellers’ Expectation Return from alternative output Number of Sellers Supply Shifters

13. Supply Shifter: Technology Assume that Jazzman introduced a high tech, self serve and on demand coffee maker that reduced cost of coffee production Hossain: MSMC13 PriceQuantity Supplied (before new technology) 0.50300 1.00350 1.50400 2.00450 2.50500 3.00550 Quantity Supplied (with new technology) 350 400 450 500 550 600

14. Supply Shift Hossain: MSMC14 Price S0S0 0 250 300 350 400 450 500 550 3.00 2.50 2.00 1.50 1.00 0.50 0 PriceQuantity Supplied Before 0.50300 1.00350 1.50400 2.00450 2.50500 3.00550 Quantity Supplied (per day) Quantity Supplied After 300 350 400 450 500 550 S1S1 In a supply shift, quantity supplied changes for all possible prices

15. Changes in Price Versus Changes in Supply A reduction in supply Supply curve Shifts the supply curve to the right Shifts the supply curve to the left An increase in supply Price Quantity Supplied

16. Equilibrium Price and Quantity  The Equilibrium price is the price at which  Demanders’ and Suppliers’ willingness and abilities match  Quantity Demanded by the buyers is exactly same as Quantity Supplied by the Sellers  Therefore, it is the Market Clearing price Q D = Q s  The Equilibrium quantity is the quantity demanded and supplied at the equilibrium price.

17. Equilibrium Price and Quantity  The Equilibrium quantity is the quantity demanded and supplied at the equilibrium price  A Surplus is the amount by which the quantity supplied exceeds the quantity demanded at the current price  A Shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price

18. S S D D The Determination of Equilibrium Price and Quantity Equilibrium price and quantity At a price of $8 per pound, 35 million pounds of coffee are supplied At a price of $8 per pound, 15 million pounds of coffee are demanded Surplus at P = $8 At a price of $4 per pound, 35 million pounds of coffee are demanded At a price of $4 per pound, 15 million pounds of coffee are supplied Shortage at P = $4

19. Shifts in Demand and Supply S1S1 S1S1 D1D1 D1D1 D2D2 D2D2 D2D2 D2D2

20. Shifts in Demand and Supply S1S1 S1S1 D1D1 D1D1 S2S2 S2S2 S2S2 S2S2

21. Simultaneous Decreases in Demand and Supply S1S1 S1S1 D1D1 D1D1 S2S2 S2S2 D2D2 D2D2

22. Simultaneous Decreases in Demand and Supply S1S1 S1S1 D1D1 D1D1 S2S2 S2S2 D2D2 D2D2

23. Simultaneous Decreases in Demand and Supply S1S1 S1S1 D1D1 D1D1 S2S2 S2S2 D2D2 D2D2

24. Simultaneous Shifts in Demand and Supply Shift in Supply Shift in DemandSS D P* Q* D P* Q*

25. The Circular Flow Model  The circular flow model is a model shows how markets work and how they are related to each other  Product markets are markets in which firms supply goods and services demanded by households  Factor markets are markets in which households supply factors of production – labor, capital, and natural resources – demanded by firms

26. D S Price Payments to firms for goods and services Textile workers Demand goods and services Product markets Supply goods and services Demand factors And supply factors Factors markets Firms Households D S Price Blue jeans D S Price Haircuts D S Price Apartments D S Price Barbers D S Price Apartment buildings Demand and Supply: The Circular Flow Model Wages paid to household for labor