1. 1 Supply – Quantity Supplied Quantity supplied number of units of a good all sellers in the market would choose to sell over some time period given their constraints –Implies a choice the quantity that firms choose to sell maximizing profit given their constraints

2. 2 Supply – Quantity Supplied Quantity supplied –Is Hypothetical quantity firms would sell given the price of the good and all other constraints –Depends on the price assume other things constant explore the relationship between price and quantity supplied

3. 3 The Law of Supply When the price of a good rises, and everything else remains the same, the quantity of the good supplied will rise Ceteris paribus assumption many variables change simultaneously we must understand each variable separately –we assume “everything else remains the same” understand how supply reacts to price

4. 4 Supply Schedule and Supply Curve Supply schedule list of different quantities supplied at different prices, ceteris paribus Supply curve –relationship between the price of a good and the quantity supplied, with all other variables held constant –Each point on the curve total quantity that sellers would choose to sell at a specific price –Slopes upward - Law of Supply

5. 5 The Supply Curve F G 2.00 S 40,00060,000 $4.00 Number of Bottles per Month Price per Bottle Figure 5 The Supply Curve – movement along the supply curve When the price is $2.00 per bottle, 40,000 bottles are supplied At $4.00 per bottle, quantity supplied is 60,000 bottles

6. 6 Movements Along the Supply Curve a change in the price of a good causes a movement along the supply curve, ceteris paribus In Figure 5 –a rise in price - move rightward along the demand curve (from F to G) –a fall in price - move leftward along the demand curve (from G to F)

7. 7 Shifts of the Supply Curve a change in any variable that affects supply—except for the good’s price— causes the supply curve to shift. –Sell a greater quantity at any price The supply curve shifts rightward (increase in supply) –Sell a smaller quantity at any price The supply curve shifts leftward (decrease in supply)

8. 8 Shifts of the Supply Curve S2S2 G J S1S1 60,000 $4.00 80,000 Number of Bottles per Month Price per Bottle Figure 6 A Shift of the Supply Curve A decrease in transportation costs shifts the supply curve for maple syrup from S 1 to S 2. At each price, more bottles are supplied after the shift.

9. 9 Factors that Shift the Supply Curve 1.Input Prices –A fall in the price of an input lower cost of production increase in supply (rightward shift) 2.Price of Alternatives –Other goods that a firm could produce –A rise in the price for an alternative decrease in supply (leftward shift)

10. 10 Factors that Shift the Supply Curve 3.Technology –technological advances increase the supply of a good 4.Number of Firms –An increase in the number of sellers increase supply 5.Expected price –An expected rise in price decrease the current supply (leftward shift)

11. 11 Factors that Shift the Supply Curve 6.Changes in Weather/Other Natural Events –Favorable weather increases crop yields increases the supply (rightward shift) –Unfavorable weather destroys crops, shrinks yields, decreases the supply (leftward shift)

12. 12 The Supply Curve Figure 7 The Supply Curve – A summary Q P P1P1 A B P2P2 Q1Q1 Q2Q2 Q P P2P2 B A P1P1 Q2Q2 Q1Q1 a)Price ↓ Move leftward along the supply curve b)Price ↑ Move rightward along the supply curve SS

13. 13 The Supply Curve Figure 7 The Supply Curve – A summary c)The Supply curve shifts rightward Q PS1S1 S2S2 Price of input ↓ Price of alternatives ↓ Number of firms ↑ Expected price ↓ Technological advance Favorable weather

14. 14 The Supply Curve Figure 7 The Supply Curve – A summary d) The Supply curve shifts leftward Q P S2S2 S1S1 Price of input ↑ Price of alternatives ↑ Number of firms ↓ Expected price ↑ Unfavorable weather

15. 15 Supply and Demand Equilibrium –both P and Q have settled into a state of rest Equilibrium price and quantity –once achieved - remain constant –until either the demand curve or supply curve shifts

16. 16 Excess Demand the amount by which quantity demanded exceeds quantity supplied - at a given price –Buyers compete with each other to get more of the good than is available –The price will rise –Equilibrium is reached

17. 17 Excess Demand E H J 1.00 $3.00 D S 50,00075,00025,000 Number of Bottles per Month Price per Bottle Figure 8 Excess Demand Causes Price to Rise Excess Demand 1. At a price of $1.00 per Bottle, an excess demand of 50,000 bottles... 2. causes the price to rise... 3. shrinking the excess demand until price reaches its equilibrium value of $3.00

18. 18 Excess Supply the amount by which quantity supplied exceeds quantity demanded - at a given price –Sellers compete with each other to sell more than buyers want –The price will fall –Equilibrium is reached

19. 19 Excess Supply K L E 3.00 D S $5.00 50,00035,00065,000 Excess Supply Number of Bottles per Month Price per Bottle Figure 9 Excess Supply Causes Price to Fall 1. At a price of $5.00 per bottle an excess supply of 30,000 bottles... 2. causes the price to drop… 3. shrinking the excess supply... 4. until price reaches its equilibrium value of $3.00

20. 20 What Happens When Things Change Income rises normal good the demand increases (rightward shift of the demand curve) –Rightward movement along the supply curve –Equilibrium price rises –Equilibrium quantity rises

21. 21 Income rises, causing an increase in D E E' 3.00 D1D1 D2D2 S $4.00 50,00060,000 Number of Bottles of Maple Syrup per Period Price per Bottle Figure 10 A Shift in Demand and a New Equilibrium 1. An increase in demand... 2. moves us along the supply curve… 3. to a new equilibrium 4. equilibrium price increases 5. equilibrium quantity increases too

22. 22 What Happens When Things Change An Ice Storm Hits –Weather changes will shift the supply curve decrease in supply (the supply curve shifts leftward) –Equilibrium price rises –Equilibrium quantity falls

23. 23 Bad weather hits, decreasing the S E' E3.00 D $5.00 50,00035,000 S2S2 S1S1 Number of Bottles Price per Bottle Figure 11 A Shift of Supply and a New Equilibrium

24. 24 Both Curves Shift Just one curve shifts (D or S) –we can determine the direction that BOTH equilibrium price AND quantity will move Both curves shift (D and S) –we can determine the direction that EITHER equilibrium price OR equilibrium quantity will move –direction of the other – which curve shifts by more

25. 25 Income rises and Bad weather hits E' E3.00 D1D1 $6.00 S2S2 S1S1 Number of Bottles Price per Bottle Figure 12 A Shift in Both Curves and a New Equilibrium D2D2

26. 26 The Three Step Process Step 1—Characterize the Market markets - problem analyzed identify the decision makers Step 2—Find the Equilibrium conditions for equilibrium method - determine equilibrium Step 3—What Happens When Things Change how events/government polices change market equilibrium

27. 27 Avian Flu in Early 2006 In Europe – people were buying substantially less chicken In the United States – people were buying more chicken Use the three step process

28. 28 Avian Flu in Early 2006 Figure 13 The European Market for Chicken B A 0.14 D 2005 $0.42 Q1Q1 Q2Q2 S 2006 S 2005 Quantity of Chicken Price per pound D 2006

29. 29 Avian Flu in Early 2006 Figure 14 The U.S. Market for Chicken B A 0.14 D 2006 $0.42 Q1Q1 Q2Q2 S 2005 S 2006 Quantity of Chicken Price per pound D 2005