1. Supply and Equilibrium

2. Supply
Quantity supplied is the amount of a good that sellers are willing and able to sell. 25

3. Law of Supply
The law of supply states that there is a direct (positive) relationship between price and quantity supplied. 28

4. Supply Schedule
The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. 29

5. Supply Curve
The supply curve is the upward-sloping line relating price to quantity supplied… 29

6. Supply Schedule 29

7. Supply Curve
Price of Ice-Cream Cone
$3.00
2.50
2.00
1.50
1.00
0.50
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 29

8. Market Supply
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

9. Determinants of Supply
R – Resource Costs/Prices
O—Other goods’ prices (substitutes in production)
T—Taxes and Subsidies
T—Technology Changes
E—Expectations of Suppliers (price changes anticipated
N—Number of Suppliers 27

10. Change in Quantity Supplied versus Change in Supply
Movement along the supply curve.
Caused by a change in the market price of the product. 30

11. Change in Quantity Supplied
Price of Ice-Cream Cone S C
$3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of Ice-Cream Cones 1 5 30

12. Change in Quantity Supplied versus Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than price. 30

13. Change in Supply Decrease in Supply Increase in Supply S3
Price of Ice-Cream Cone S1 S2
Decrease in Supply
Increase in Supply
Quantity of Ice-Cream Cones 30

14. Supply and Demand In Balance
Equilibrium Price
The price that balances supply and demand—hence, it is referred to as the market-clearing price. On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity that balances supply and demand (market clearing quantity). On a graph it is the quantity at which the supply and demand curves intersect. 36

15. Supply and Demand Together
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

16. Equilibrium of Supply and Demand
Price of Ice-Cream Cone
Supply
$3.00
Demand
Equilibrium
2.50
2.00
1.50
1.00
0.50
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

17. The Beauty of Equilibrium
Equilibrium means there is ideal allocation of resources. The market is cleared. If it is not, there is either a surplus or shortage which are both inefficient

18. Excess Supply Surplus Supply $3.00 2.50 2.00 1.50 1.00 0.50 Demand 1 2
Price of Ice-Cream Cone
Supply
Surplus
$3.00
2.50
2.00
1.50
1.00
0.50
Demand
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12 30

19. Surplus book
When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

20. Excess Demand Shortage Supply Demand Price of Ice-Cream Cone $2.00
$1.50
Shortage
Demand 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of
Ice-Cream Cones 37

21. Shortage
When the price is below the equilibrium price, the quantity demanded exceeds 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.

22. Three Steps To Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity. 45

23. How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream... D2
Supply
$2.50
New equilibrium
2. ...resulting
in a higher
price...
2.00
Initial
equilibrium D1 7 10
Quantity of
Ice-Cream Cones
3. ...and a higher
quantity sold. 46

24. How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream
Cone
1. An earthquake reduces
the supply of ice cream... S2 S1
New
equilibrium
$2.50
2. ...resulting
in a higher
price...
2.00
Initial equilibrium
Demand 1 2 3 4 7 8 9 10 11 12 13
Quantity of
Ice-Cream Cones
3. ...and a lower
quantity sold. 46

25. What Happens to Price and Quantity When Supply or Demand Shifts?

26. Homework: All of 14

37. Example 1
1. “Gold is valuable because so many people hunt for it.” True, false or uncertain, and why?

38. False. Gold is valuable because of supply and demand
False. Gold is valuable because of supply and demand. People search for gold because it is valuable.
There is a fairly small quantity supplied and a high quantity demanded for gold. The price of
something does not depend solely on the cost of production.

39. Example 2
Recently the price of beef rose. Use graphs to show that the increase in price could be consistent with the following:
(A) The quantity of beef consumed falls.

40. (B)The quantity of beef consumed rises.
(C) The quantity of beef consumed stays the same.

41. T – Tastes and Preferences
R – prices of Related Goods (substitutes and complements)
I – Income of Buyers
B – number of Buyers
E – Expectations of the future
A newspaper headline says, “The Coldest Winter in 20 Years Brings Record Prices for Heating Oil.”
(A) Using a graph of home heating oil, show and explain how price changed.
(B)What other factors could cause the price of heating oil to increase?
R – Resource Costs/Prices
O—Other goods’ prices (substitutes in production)
T—Taxes and Subsidies
T—Technology Changes
E—Expectations of Suppliers (price changes anticipated
N—Number of Suppliers

42. Activities 13 and 16! ;)
13 is due tomorrow;
16 is due Wednesday