Supply and Equilibrium Lesson 2.6

Law of Supply When Prices go up, quantity Supplied goes up When Prices go down, quantity Supplied goes down – Quantity supplied is a measure of the number of suppliers in the market, and how many products can be sold at a high price. – As the price goes higher, producers look at bigger profits, so they create more goods.

Understanding the Supply Curve The supply curve is a upward sloping curve, showing the proportional relationship between prices and quantity supplied. Price Quantity Supply

Supply Schedules and Market Schedules Just as with demand, it is possible to set up a price versus supply schedule chart, to show how much is supplied at various prices.

Shifts in the Supply Curve Changes in price changes quantity supplied, but does not move the curve. Just like with Demand, the Supply curve can move as factors other than price affect the curve. – Changes in input prices – Changes in the prices of related goods – Changes in technology – Changes in expectations – Changes in the number of producers

The Role of Prices Prices, or what someone is willing to pay for a good or service, and what a supplier is willing to provide, is a cornerstone of capitalism. This goes a long way to answering the three basic questions that an economic system: What do we make; How do we make it; Who gets it. While suppliers always want to get the maximum price for their goods (profit motive), buyers often are looking for the best deals.

Supply and Demand Market Balance – When Supply and Demand meet, the market is said to be in balance. This point at which they meet on the graph is called the Equilibrium Point. – The equilibrium point is considered very important in economics, because it is the point at which a “free market” will decide on the price of goods or the Market Clearing Price

The Equilibrium of Supply and Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

Markets Not in Equilibrium Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $

Markets Not in Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded $ Shortage