SUPPLY DEFINED

SUPPLY SCHEDULESUPPLY SCHEDULE

$12345

P QS

CORN

Various AmountsVarious Amounts 520355060

SUPPLY DEFINED

SUPPLY SCHEDULESUPPLY SCHEDULE

$12345

P QS

CORN

Various AmountsVarious Amounts

A Series of Possible PricesA Series of Possible Prices

…a specified time period…other things being equal

520355060

How Producers or sellers behave in the

market place

How Producers or sellers behave in the

market place

• Supply is a curve or schedule that relates various quantities of an item that sellers will put in the market place at alternative prices, cp

• Therefore Supply expresses a relationship between Price and Quantity of Supply

• Supply is a curve or schedule that relates various quantities of an item that sellers will put in the market place at alternative prices, cp

• Therefore Supply expresses a relationship between Price and Quantity of Supply

LAW OF SUPPLY

• As Price Rises…

…Quantity Supplied Rises

• As Price Falls…

…Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

What is the relationshipWhat is the relationship

• Direct • Positive• Upward moving• Linear

• market supply curve is an aggregation of individual supply curves.

• Why: as price increases, sellers are willing and able to put more in the market place

• Direct • Positive• Upward moving• Linear

• market supply curve is an aggregation of individual supply curves.

• Why: as price increases, sellers are willing and able to put more in the market place

Movement or Shifts In Supply

Movement or Shifts In Supply

• Movement on Supply Curve only caused price changes: change in price=change in quantity of supply

• Movement on Supply Curve only caused price changes: change in price=change in quantity of supply

SHIFTSSHIFTS• Non-Price Determinates of supply Technology Changes

Price of Other related products (Substitutes and complements)

Cost of Factors Taxes and Subsidies Expectations: What will happen

in the futureRegulations

Market Structure: Number of firms TOFTERMS

• Non-Price Determinates of supply Technology Changes

Price of Other related products (Substitutes and complements)

Cost of Factors Taxes and Subsidies Expectations: What will happen

in the futureRegulations

Market Structure: Number of firms TOFTERMS

TOFTERMSTOFTERMS

Shift to right and leftShift to right and left

• Right = increase warning it looks lower

• Left= decrease warnig it looks higher

• Be careful Draw it

• Right = increase warning it looks lower

• Left= decrease warnig it looks higher

• Be careful Draw it

Supply versus QuanitySupply versus Quanity

• Change in quantity supply=movement

• Change in supply= shift

• Change in quantity supply=movement

• Change in supply= shift

PRICE ELASTICITY OF SUPPLYPRICE ELASTICITY OF SUPPLY

Percentage change in quantitysupplied of good X

Es=____________________Percentage change in the price of good X

Now, compare the immediatemarket period, the short-run,

and long run.

Percentage change in quantitysupplied of good X

Es=____________________Percentage change in the price of good X

Now, compare the immediatemarket period, the short-run,

and long run.

PRICE ELASTICITY OF SUPPLYPRICE ELASTICITY OF SUPPLY

• Immediate Market period

An increase indemand withoutenough time tochange supplycauses…

• Immediate Market period

An increase indemand withoutenough time tochange supplycauses…

PRICE ELASTICITY OF SUPPLY Short Run

PRICE ELASTICITY OF SUPPLY Short Run

An increase indemand withless intensitysupply usecauses...a lowerincrease in price

An increase indemand withless intensitysupply usecauses...a lowerincrease in price

PRICE ELASTICITY OF SUPPLY

Long Run

PRICE ELASTICITY OF SUPPLY

Long Run

An increase indemand in thelong run allowsgreater changecausing...

Even more elasticresponse - lessprice increase

An increase indemand in thelong run allowsgreater changecausing...

Even more elasticresponse - lessprice increase

EquilibriumEquilibrium• Where the sellers and consumers come

together• The Point at which

Quantity Demand =Quantity SupplyMarket Clearing Price

• At equilibrium the firms are happyit is possible to sell all that can produce. At that Price consumers are happy because they are getting all they demand

• Above equilibrium is excess supply, and below is excess demand.

• Where the sellers and consumers come together

• The Point at which Quantity Demand =Quantity SupplyMarket Clearing Price

• At equilibrium the firms are happyit is possible to sell all that can produce. At that Price consumers are happy because they are getting all they demand

• Above equilibrium is excess supply, and below is excess demand.

The Determination of PriceThe Determination of Price

• Equilibrium price and output• response to shortages and surpluses

• significance of “equilibrium”

• Demand and supply curves• effect of price being above

equilibrium• surplus price falls

• Equilibrium price and output• response to shortages and surpluses

• significance of “equilibrium”

• Demand and supply curves• effect of price being above

equilibrium• surplus price falls

The Determination of PriceThe Determination of Price

• effect of price being below equilibrium

• shortage price rises

• effect of price being below equilibrium

• shortage price rises

• Effects of shifts in the demand curve

• movement along S curve and new D curve

• rise in demand (rightward shift) P rises

• fall in demand (leftward shift) P falls

• Effects of shifts in the demand curve

• movement along S curve and new D curve

• rise in demand (rightward shift) P rises

• fall in demand (leftward shift) P falls

• Effects of shifts in the supply curve

• movement along D curve and new S curve

• rise in supply (rightward shift) P falls• fall in supply (leftward shift) P rises

• Effects of shifts in the supply curve

• movement along D curve and new S curve

• rise in supply (rightward shift) P falls• fall in supply (leftward shift) P rises

OH NO!!!! What if both shift?

A WHOLE LOT OF TIRES AND TOFTERMS

OH NO!!!! What if both shift?

A WHOLE LOT OF TIRES AND TOFTERMS

• If changes in both demand and supply are increases: price relatively the same but increase in Quantity

• If changes in both demand and supply are decreases: price relatively the same but decrease in Quantity

• If changes in both demand and supply are increases: price relatively the same but increase in Quantity

• If changes in both demand and supply are decreases: price relatively the same but decrease in Quantity

Now if the shifts are opposite

Now if the shifts are opposite

• Demand increase (right) and supply decrease (left)

• Then the price always increases and quantity is same

• Demand decreases (left) and supply increases (right)

• Then price decreases and quantity is same

• Demand increase (right) and supply decrease (left)

• Then the price always increases and quantity is same

• Demand decreases (left) and supply increases (right)

• Then price decreases and quantity is same

ProblemsProblems

What if the price is above The market equilibrium or below the market euilibrium?

Shortages or Surpluses

Market place must adjust

Market must adjustMarket must adjust• To elimitate shortages and surpluses

• Shifts in demand and supply cause the market equilibrium price to change and quantity to change.

• Demand decreases (left): both the price and quantity decrease

• Demand increases (right): both the price and quantity increase

• Supply decreases (Left): price increases and quantity decreases

• Supply increases (right): price decreases and the quantity increases

• To elimitate shortages and surpluses

• Shifts in demand and supply cause the market equilibrium price to change and quantity to change.

• Demand decreases (left): both the price and quantity decrease

• Demand increases (right): both the price and quantity increase

• Supply decreases (Left): price increases and quantity decreases

• Supply increases (right): price decreases and the quantity increases

MARKET EQUILIBRIUM

• Equilibrium Price & Quantity• Rationing Function of Prices• Changes in Demand•Changes in Quantity Demanded

• Changes in Supply• Changes in Quantity Supplied

Complex Cases• Supply Increases; Demand Decreases• Prices Decrease• Quantity Indeterminate

• Supply Decreases; Demand Increases• Price Increases• Quantity Indeterminate

• Supply Increases; Demand Decreases• Prices Decrease• Quantity Indeterminate

• Supply Decreases; Demand Increases• Price Increases• Quantity Indeterminate

Multiple Shifts…

Complex Cases• Supply Increases; Demand Increases• Prices Indeterminate• Quantity Increases

• Supply Decreases; Demand Decreases• Price Indeterminate• Quantity Decreases

• Supply Increases; Demand Increases• Prices Indeterminate• Quantity Increases

• Supply Decreases; Demand Decreases• Price Indeterminate• Quantity Decreases

Multiple Shifts…

Government Set Prices

• Price Ceilings•Shortages•Rationing Problem•Black Markets•Rent Controls

• Price Floors•Surpluses

• Price Ceilings•Shortages•Rationing Problem•Black Markets•Rent Controls

• Price Floors•Surpluses

Government Set Prices

• Price Ceilings•Shortages•Rationing Problem•Black Markets•Rent Controls

• Price Floors•Surpluses

• Price Ceilings•Shortages•Rationing Problem•Black Markets•Rent Controls

• Price Floors•Surpluses

Problems to think aboutProblems to think about• Explain why supply curve has a positive

slope• Explain why an increase in number of

producers in a market causes the market supply curve to shift right

• Assume the widget market is in quilibrium. Then the JAPANESE producers begin exporting widgets to the US. Analyze the effect of the imports on the price of widgets the quantity exchanged and the quantity produced in the US.

• Explain why supply curve has a positive slope

• Explain why an increase in number of producers in a market causes the market supply curve to shift right

• Assume the widget market is in quilibrium. Then the JAPANESE producers begin exporting widgets to the US. Analyze the effect of the imports on the price of widgets the quantity exchanged and the quantity produced in the US.

Price Ceilings and FloorsPrice Ceilings and Floors

Excise taxesExcise taxes