What is the Law of Supply? MODULE 6 SUPPLY AND EQUILIBRIUM

SUPPLY SCHEDULE It is the table that shows the quantity of a good producers are willing to produce at different prices. Quantity supplied shows how much of a good or service producers are willing to sell at some specific price. SUPPLY SCHEDULE FOR COFFEE BEANS Price of coffee beans (per pound) Quantity of coffee beans (billions of pounds) $ $ $ $ $1.009 $.757 $.505

SUPPLY CURVE A graph that shows the relationship between quantity supplied and price. The graph shows the law of supply as price goes up the quantity supplied increases. Price of Coffee Beans (per lb.) Quantity of Coffee Beans

Shifts of the Supply Curve Change in quantity supplied Result from a change in price. Chang in supply Is a shift in the supply curve which changes the quantity supplied at any given price. WHAT CAUSES THE SUPPLY CURVE TO SHIFT 1. Change in input prices The cost of the resources that are used in production of finished goods increase or decrease. This makes the production of the final good more costly for those who produce and sell it. Producers are less willing to supply the final good at any given price.

2. Changes in Technology Means all the methods people can use to turn inputs into useful goods and services. Better technology which reduces the cost of production that is letting a producer spend less on inputs yet produce the same output. 3. Changes in Expectations When suppliers have some choice about when they put their good up for sale, changes in the expected future price of the good can lead a supplier to supply less or more of the good today. Price now vs expected price in the future.

4. Change in the Price of Related Goods and Services A single producer often produces a mix of goods rather than a single product. When a producer sells several products, the quantity of any good it is willing to supply at any given price depends on the prices of its other produced goods. Substitutes in production Gasoline and heating oil Complements in production Crude oil and natural gas 5. Change in the number of Producers As the number of producers increases so will supply As the number of producers decreases so will supply

EQUILIBRIUM In competitive markets the interaction of supply and demand tends to move toward what economists call equilibrium This helps us understand the price at which a good or service is bought and sold as well as the quantity transacted of the good or service A competitive market is in equilibrium when the price has moved to a level at which the quantity of a good demanded equals the quantity of that good supplied. Equilibrium price Equilibrium quantity

Why does the market price fall if it is above the equilibrium price? There would be more of the good than consumers wanted to buy. The difference is the surplus that is known as the excess supply This surplus means that producers will be unable to find consumers for their products at that price level. That surplus is an incentive for those producers to lower the price in order to find consumers The result of this price cutting will push the prevailing price down until it reaches the equilibrium price Price will fall when there is a surplus that is whenever the market price is above its equilibrium level.

Why does the market price rise if it is below the equilibrium price? There will be more consumers who cannot find the good or service they want. This will lead to a shortage also known as an excess in demand. With a shortage the consumers who want to buy a good cannot find producers that are willing to sell the good at the current price. Result is consumers will either offer more than the prevailing price of the sellers will see that they can charge a higher price. This will drive up the prevailing price to the equilibrium price.