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Supply and Equilibrium
Supply
Quantity supplied is the amount of a good that sellers are willing and able
to sell.
Law of Supply
The law of supply states that there is a direct (positive) relationship between
price and quantity supplied.
Supply Schedule
The supply schedule is a table that shows the relationship between the price of the good and the quantity
supplied.
Supply Curve
The supply curve is the upward-sloping line relating price to quantity
supplied…
Supply Schedule
Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5
Supply Curve
$3.002.502.00
1.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Price Quantity$0.00 00.50 01.00 11.50 22.00 32.50 43.00 5
Market Supply
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
Determinants of Supply
R – Resource Costs/PricesO—Other goods’ prices (substitutes in
production)T—Taxes and SubsidiesT—Technology ChangesE—Expectations of Suppliers (price
changes anticipatedN—Number of Suppliers
Change in Quantity Supplied versus Change in Supply
Change in Quantity Supplied Movement along the supply curve. Caused by a change in the market price of
the product.
Change in Quantity Supplied
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S
1.00A
C$3.00
A rise in the price of ice cream cones results in a movement along the supply curve.
Change in Quantity Supplied versus Change in Supply
Change in Supply A shift in the supply curve, either to the left
or right. Caused by a change in a determinant other
than price.
Change in Supply
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
S1 S2
S3
Increase in Supply
Decrease in Supply
Supply and Demand In Balance
Equilibrium Price The price that balances supply and demand—
hence, it is referred to as the market-clearing price. On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity The quantity that balances supply and
demand (market clearing quantity). On a graph it is the quantity at which the supply and demand curves intersect.
Supply and Demand Together
Price Quantity$0.00 00.50 01.00 11.50 42.00 72.50 103.00 13
Price Quantity$0.00 190.50 161.00 131.50 102.00 72.50 43.00 1
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied!
Supply
Demand
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
Equilibrium of Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.002.502.00
1.501.00
0.50
Equilibrium
The Beauty of Equilibrium
• Equilibrium means there is ideal allocation of resources. The market is cleared. If it is not, there is either a surplus or shortage which are both inefficient
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
21 3 4 5 6 7 8 9 10 12110
$3.002.50
2.00
1.501.00
0.50
Supply
Demand
Surplus
Excess Supply
Surplus book
When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
Excess Demand
Quantity ofIce-Cream Cones
Price ofIce-Cream
Cone
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Supply
Demand
$1.50
Shortage
Shortage
When the price is below the equilibrium price, the quantity demanded exceeds the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
Three Steps To Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity.
How an Increase in Demand Affects the Equilibrium
Price ofIce-Cream
Cone
2.00
0 7 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
D1
1. Hot weather increasesthe demand for ice cream...
D2
2. ...resultingin a higherprice...
$2.50
103. ...and a higherquantity sold.
New equilibrium
S2
How a Decrease in Supply Affects the Equilibrium
Price ofIce-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. An earthquake reducesthe supply of ice cream...
Newequilibrium
2. ...resultingin a higherprice...
$2.50
3. ...and a lowerquantity sold.
What Happens to Price and Quantity When Supply or Demand Shifts?
No Change In Supply
An Increase In Supply
A Decrease In Supply
No Change In Demand
P same Q same
P down Q up
P up Q down
An Increase In Demand
P up Q up
P ambiguous Q up
P up Q ambiguous
A Decrease In Demand
P down Q down
P down Q ambiguous
P ambiguous Q down
Homework:All of 14
Example 1
1. “Gold is valuable because so many people hunt for it.” True, false or uncertain, and why?
False. Gold is valuable because of supply and demand. People search for gold because it is valuable.There is a fairly small quantity supplied and a high quantity demanded for gold. The price ofsomething does not depend solely on the cost of production.
Example 2Recently the price of beef rose. Use graphs to show that the increase in price could be consistent with the following:
(A) The quantity of beef consumed falls.
(B)The quantity of beef consumed rises.
(C) The quantity of beef consumed stays the same.
A newspaper headline says, “The Coldest Winter in 20 Years Brings Record Prices for Heating Oil.”(A) Using a graph of home heating oil, show and explain how price changed.
(B)What other factors could cause the price of heating oil to increase?
T – Tastes and Preferences R – prices of Related
Goods (substitutes and complements)
I – Income of BuyersB – number of BuyersE – Expectations of the
future
R – Resource Costs/PricesO—Other goods’ prices (substitutes in production)T—Taxes and SubsidiesT—Technology ChangesE—Expectations of Suppliers (price changes anticipatedN—Number of Suppliers
Activities 13 and 16!
;)
13 is due tomorrow;16 is due Wednesday
