AP Economics

Mr. Bernstein

Module 6: Supply and Demand – Supply and Equilibrium

October 2015

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AP EconomicsMr. 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

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AP EconomicsMr. Bernstein

Supply Schedule and Supply Curve

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AP EconomicsMr. 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”

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AP EconomicsMr. 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

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AP EconomicsMr. Bernstein

A Shift in Supplyis different from movement along the Supply Curve!!

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AP EconomicsMr. Bernstein

A Shift in Supply is different from movement along the S Supply Curve!!

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AP EconomicsMr. 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

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AP EconomicsMr. Bernstein

Supply Shifters, cont.• Expectations• Expectations of future price increases decreases supply

today

• Number of producers• More producers increases supply

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Supply Shifters: T - RICE• Technology

• Related prices (substitutes, compliments)

• Input prices

• Competition (number of producers)

• Expectations

AP EconomicsMr. Bernstein

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AP EconomicsMr. 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

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AP EconomicsMr. Bernstein

Equilibrium: Where Supply and Demand Curves Intersect

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AP EconomicsMr. Bernstein

Equilibrium Prices Fall When There is a Surplus

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AP EconomicsMr. Bernstein

Equilibrium Prices Rise When There is a Shortage