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

2. 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

3. AP Economics Mr. Bernstein
Supply Schedule and Supply Curve

4. 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”

5. 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

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

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

8. 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

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

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

11. 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

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

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

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