Lecture 5Market 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.

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

•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.

• The Law of Supply

–Ceteris Paribus, the higher the price of a good, the greater is the quantity supplied;

And Vice Versa

• Increasing marginal (opportunity) cost

(recall lecture 2)

WHY?

The Reason for the Law

CDs (millions per month)0 1 2 3 4 5

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5MC

Marginal Cost

Pri

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doll

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Supply Schedule and Supply Curve

Supply schedules list the quantities supplied at alternative prices

Supply curves are graphs of supply schedules

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)

Supply Curve

0 2 4 6 8 10

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6Supply of CDs

a

b

c

d

e

CDs (millions per month)

Pri

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D)

A Price Increase

Quantity

Pri

ce S0

P0

P1

Q0Q1

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.

Demand

An increase in supply causes

the supply curve to

SHIFT RIGHTWARD

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Quantity

S0 S1

Increase in

supply

Demand

A decrease in supply causes

the supply curve to

SHIFT LEFTWARD

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Quantity

S0S2

Decrease in Supply

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

• Price of Productive Resources --

higher or lower?

• Technology -- better or worse?

• The Number of Suppliers -- more or fewer?

Consider the First 3 and anIncrease in Supply

• Price of Productive Resources -- lower!

• Technology -- better!

• The Number of Suppliers -- more!

Increase in Supply

Pri

ce

Quantity

S0 S1

Increase in

supply

• Price of Related Goods Produced

–Complements in Production

If the price of leather increases, what happens to the Supply of

beef?

Pri

ce

Quantity

S0 S1

Increase in

supply

Supply of Beef?

• Price of Related Goods Produced

–Substitutes in Production

If the price of shirts increases, what

happens to the supply of Dresses?

Pri

ce

Quantity

S0S2

Decrease in Supply

A Change in SupplyWHICH LEAVES….

Expected Future Prices

A Change in Supply

COLD WEATHER:

significantly reduces Florida orange crop

Concentrated Orange juice stored to take advantage of higher future price.

Pri

ce

Quantity

S0S2

Decrease in Supply

Market Equilibrium

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

0 2 4 6 8 10

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6Supply of CDs

Demand for CDs

CDs (millions per month)

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D)

• 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

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shortage

Supply of CDs

Demand for CDs

CDs (millions per month)

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doll

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D)

Market Equilibrium

0 2 3 4 5 6 8 10

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surplusSupply of CDs

Demand for CDs

CDs (millions per month)

Pri

ce (

doll

ar p

er C

D)

How Does Equilibrium ChangeWhen 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!

•What happens to price and quantity?

Example

Supply decreases and demand decreases

What happens to price and quantity?

The Effects of a Decrease in Both Demand and Supply

Quantity (millions of ? per week)0 2 4 6 8 10 12 14

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Price Constant?

Quantity Falls

Not Necessarily

The Effects of a Decrease in Both Demand and Supply

Quantity (millions of ? per week)0 2 4 6 8 10 12 14

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