1. Lecture 5 Market Supply And Market Equilibrium
Supply: Quantity Supplied and
Changes in Supply
Demand and Supply Equilibrium

2. Supply If a firm supplies a good or service, the firm
Has the resources and technology to produce it,
Can profit from producing it, and
Has made a definite plan to produce it and sell it. 38

3. What determines selling plans?
The price of the good
The prices of resources used to produce the good
Technology
The number of suppliers
The prices of related goods produced
Expected future prices 40

4. The relationship between the amount supplied of a good and the good’s price Quantity Supplied
The relationship between the amount supplied of a good and everything else Changes in Supply

5. Supply
The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. 39

6. The Law of Supply
Ceteris Paribus, the higher the price of a good, the greater is the quantity supplied;
And Vice Versa 41

7. Increasing marginal (opportunity) cost (recall lecture 2)
WHY?
The Reason for the Law
Increasing marginal (opportunity) cost
(recall lecture 2) 12

8. Marginal Cost Price (dollar per CD) 5 4 3 2 1 0 1 2 3 4 5MC 5 4
Price (dollar per CD) 3 2 1
CDs (millions per month)

9. Supply Schedule and Supply Curve
Supply schedules list the quantities
supplied at alternative prices
Supply curves are graphs of supply
schedules 13

10. Supply Schedule a 1 0 b 2 3 c 3 4 d 4 5 e 5 6 Price Quantity
(dollars per CD) (millions of CDs per week)
a 1 0
b 2 3
c 3 4
d 4 5
e 5 6
Instructor Notes:
The table shows the supply schedule of tapes. For example, at $2 a tape, 3 million tapes a week are supplied; at $5 a tape, 6 million tapes a week are supplied. 43

11. Supply Curve Price (dollar per CD) e d c b a 6 Supply of CDs 5 4 3 2 1
Instructor Notes:
1) The supply curve shows the relationship between the quantity supplied and price, everything else remaining the same.
2) The supply curve usually slopes upward: As the price of a good increases, so does the quantity supplied.
3) A supply curve can be read in two ways. For a given price, it tells us the quantity that producers plan to sell.
4) And for a given quantity, it tells us the minimum price that producers are willing to accept for that quantity. b 1 a
CDs (millions per month) 46

12. A Price Increase S0
Price P1 P0 Q0 Q1
Quantity 31

13. Supply A Change in Supply
When any factor that influences selling plans changes, other than the price of the good, there is a
change in supply. 47

14. An increase in supply causes
Demand
An increase in supply causes
the supply curve to
SHIFT RIGHTWARD 18

15. Price
Increase in
supply S0 S1
Quantity 35

16. A decrease in supply causes
Demand
A decrease in supply causes
the supply curve to
SHIFT LEFTWARD 18

17. Price
Decrease in
Supply S0 S2
Quantity 35

18. Changes in Supply Are Caused by
The prices of resources used to produce the good
Technology
The number of suppliers
The prices of related goods produced
Expected future prices 40

19. Consider the First 3 and an
Increase in Supply
Price of Productive Resources -- higher or lower?
Technology -- better or worse?
The Number of Suppliers -- more or fewer? 48

20. Increase in Supply Price of Productive Resources -- lower!
Technology -- better!
The Number of Suppliers -- more! 48

21. Price
Increase in
supply S0 S1
Quantity 35

22. Price of Related Goods Produced Complements in Production
If the price of leather increases, what happens to the Supply of beef? 48

23. Supply of Beef?
Price
Increase in
supply S0 S1
Quantity 35

24. Price of Related Goods Produced Substitutes in Production
If the price of shirts increases, what
happens to the supply of Dresses? 48

25. Price
Decrease in
Supply S0 S2
Quantity 35

26. Expected Future Prices
WHICH LEAVES….
Expected Future Prices
A Change in Supply 48

27. A Change in Supply COLD WEATHER:
significantly reduces Florida orange crop
Concentrated Orange juice stored to take advantage of higher future price. 48

28. Price
Decrease in
Supply S0 S2
Quantity 35

29. Market Equilibrium Market Equilibrium Put them together to consider
Having Now Considered
Demand and Supply
Put them together to consider
Market Equilibrium

30. Market Equilibrium
Equilibrium price: price at which quantity demanded equals quantity supplied.
Equilibrium quantity: quantity bought and sold at the equilibrium price.

31. Market Equilibrium at the intersection of demand & supply curves6
Supply of CDs
Price (dollar per CD) 5 4 3 2
Demand
for CDs 1
CDs (millions per month) 46

32. Shortages and Surpluses generate the pressures for the emergence of the equilibrium price
price too low creates a
Shortage: price will be forced up
price too high creates a
Surplus: price will be forced down

33. Market Equilibrium Price (dollar per CD) shortage 6 Supply of CDs 5 43 2
Demand
for CDs
shortage 1
CDs (millions per month) 46

34. Market Equilibrium Price (dollar per CD) surplus 6 Supply of CDs 5 4 32
Demand
for CDs 1
CDs (millions per month) 46

35. How Does Equilibrium Change When Demand and Supply change
What happens to price and quantity?
How Does Equilibrium Change
When Demand and Supply change
There are 8 Combinations of Changes
Rule 1: Compare the initial equilibrium point to the new one!
Rule 2: Analytical tools are your friends,
USE THEM! 3

36. Example
Supply decreases and demand decreases
What happens to price and quantity?

37. The Effects of a Decrease in Both Demand and Supply6 5
Price (dollar per ?) 4
Price Constant? 3
Not Necessarily
Instructor Notes:
1) The new supply curve intersects the new demand curve at $3 a tape, the same price as before, but the quantity increases to 8 million tapes a week.
2) These increases in demand and supply increase the quantity but leave the price unchanged. 2
Quantity Falls 1
Quantity (millions of ? per week) 52

38. The Effects of a Decrease in Both Demand and Supply6 5
Price (dollar per ?) 4 3
Instructor Notes:
1) The new supply curve intersects the new demand curve at $3 a tape, the same price as before, but the quantity increases to 8 million tapes a week.
2) These increases in demand and supply increase the quantity but leave the price unchanged. 2 1
Quantity (millions of ? per week) 52