Chapter 4 Part 2

Supply Quantity supplied – amount of a good that sellers are willing and able to sell Law of supply – the quantity supplied of a good rises as price rises Supply schedule – table showing relationship b/t the price and quantity supplied of a good Supply curve – graph of relationsip b/t P and Qs

Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ An increase in price increases quantity of cones supplied.

Market supply – the sum of all individual suppliers in the same market Graphically, individual supply curves are summed horizontally to obtain the market supply curve Change in Qs - Caused by a change in anything that alters the quantity supplied at each price.

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

Shifts in the S curve – Change in Supply Input Prices – when the P of an input rises, the S decreases b/c it is more expensive to produce and less profitable Technology – advances in technology can increase the supply Expectations – if the firm expects prices to rise in future, may produce less now # of sellers – if more firms enter market, S will go up

Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

S and D together Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded Occurs where the S and D curve intersect Equilibrium Price – price at intersection Equilibrium Quantity – Q at intersection

Figure 8 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 SURPLUS - When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

Figure 9 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 SHORTAGE -When price the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

Figure 9 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

Table 3: Three Steps for Analyzing Changes in Equilibrium

Figure 10 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold resulting in a higher price Hot weather increases the demand for ice cream New equilibrium $

Figure 11 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S resulting in a higher price of ice cream An increase in the price of sugar reduces the supply of ice cream and a lower quantity sold $2.50 4

Table 4: What Happens to Price and Quantity When Supply or Demand Shifts?