Supply and Demand – Supply and Equilibrium AP Economics Mr. Bernstein Module 6: Supply and Demand – Supply and Equilibrium October 2017

AP Economics Mr. 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

AP Economics Mr. Bernstein Supply Schedule and Supply Curve

AP Economics Mr. 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”

AP Economics Mr. 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

AP Economics Mr. Bernstein A Shift in Supply is different from movement along the Supply Curve!!

AP Economics Mr. Bernstein A Shift in Supply is different from movement along the S Supply Curve!!

AP Economics Mr. 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 causes an increase in supply if the firm produces both complimentary goods (production increases to take advantage of higher price of complimentary good) Technology Advances in technology increases supply

AP Economics Mr. Bernstein Supply Shifters, cont. Expectations Expectations of future price increases decreases supply today Number of producers More producers increases supply

AP Economics Mr. Bernstein Supply Shifters: T - RICE Technology Related prices (substitutes, compliments) Input prices Competition (number of producers) Expectations

AP Economics Mr. 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

AP Economics Mr. Bernstein Equilibrium: Where Supply and Demand Curves Intersect

AP Economics Mr. Bernstein Equilibrium Prices Fall When There is a Surplus

AP Economics Mr. Bernstein Equilibrium Prices Rise When There is a Shortage