Transcript Chapter 4b

Market Supply and the Law of
Supply

The market supply
curve is positively
sloped, reflecting the
law of supply. The
higher the price, the
larger the quantity
supplied, ceteris
paribus.
Supply
Curve
Supply
schedule
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Market Equilibrium


Market equilibrium is a
situation in which, at the
current market price,
quantity supplied equals
quantity demanded.
When the market is in
equilibrium, there is no
tendency for the price to
increase or decrease.
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Shortage: excess quantity
demanded

Shortage: A situation in
which consumers are
willing to buy more than
producers are willing to
sell. It occurs when
market price is lower
than equilibrium price.
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Surplus: excess quantity supplied

Surplus: A situation in
which producers are
willing to sell more than
consumers are willing to
buy. It occurs when
market price is above
equilibrium price.
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Equilibrium and Disequilibria
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A Change in Demand


A change in demand
is caused by a
change in something
other than the price
of the good, which
causes a shift of the
entire demand curve.
An increase in
demand results in
higher quantity
demanded at each
price level.
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Shifting the Demand Curve

Changes in
determinants of
demand other than
price cause the
demand curve to
shift.

A rightward shift
shows an increase
in demand and a
leftward shift a
decrease in
demand.
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Causes of an Increase in Demand

An increase in
income



An increase in
the price of a
substitute good
Higher preference
for the good in
question

An increase in
the number of
consumers
An expectation of
higher future
prices

Lower taxes
imposed on the
consumers of the
good in question
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Causes of an Decrease in Demand

A decrease in
income



A decrease in
the price of a
substitute good
Less preference
for the good in
question

A decrease in
the number of
consumers
An expectation of
lower future
prices

Higher taxes
imposed on the
good in question
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Normal and Inferior Goods

A normal good is a good for which the
demand increases as real income rises.

An inferior good is a good for which
demand decreases as real income rises.

For normal goods, the law of demand makes
sense because the substitution and income
effects reinforce each other. Lower prices
result in higher quantity demanded.
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Normal and Inferior Goods

For inferior goods, the substitution and
income effects conflict with each other,
blurring the law of demand.

The substitution effect tends to increase
consumption while the income effect tends
to decrease it. The law of demand is
correct only as long as the substitution
effect outweighs the income effect.
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A Change in Quantity Supplied

A change in quantity
supplied is caused by a
change in the price of the
good, which causes a
movement along the
supply curve.
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Economics: Principles and Tools, 2/e
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A Change in Supply


A change in supply is
caused by a change in
something other than the
price of the good, which
causes a shift of the entire
supply curve.
An increase in supply
results in higher quantity
supplied at each price
level.
© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
13
Shifting the Supply Curve

Changes in
determinants of
supply other than
price cause the
supply curve to shift.

A rightward shift
shows an increase in
supply and a leftward
shift a decrease in
supply.
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Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
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Causes of an Increase in Supply

A decrease in the
cost of inputs

A technological
improvement

An increase in
the number of
producers
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
Lower future
prices than
anticipated

Lower taxes
imposed on the
producers of the
good in question
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
15
Causes of an Decrease in Supply

An increase in
the cost of
inputs

Higher future
prices than
anticipated

A loss of
technology


A decrease in
the number of
producers
Higher taxes
imposed on the
producers of the
good in question
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Market Effects of Simultaneous
Changes in Supply and Demand

When the magnitude
of an increase in
demand is smaller
than the magnitude
of an increase in
supply, equilibrium
quantity increases
and market price
decreases.
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Economics: Principles and Tools, 2/e
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Market Effects of Simultaneous
Changes in Supply and Demand

When the magnitude
of an increase in
demand is larger
than the magnitude
of an increase in
supply, equilibrium
quantity increases
and market price
increases.
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Applications of Supply and
Demand
Market Effects of an
Increase in Demand
An increase in demand
causes a shortage at
the original price.
To eliminate the
shortage, price
increases from $0.60
to $0.70.
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Applications of Supply and
Demand
Market Effects of an
Antismoking Campaign
A decrease in the
demand for cigarettes
would result in lower
cigarette prices
produced and sold, at
a lower price.
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Applications of Supply and
Demand
Effects of Technological
Innovations on the Market
for Personal Computers
Technological
innovations decrease
production costs,
shifting the supply
curve to the right.
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Applications of Supply and
Demand
Effects of Bad Weather
on the Coffee Market
Bad weather
decreases the supply
of coffee beans,
shifting the supply
curve to the left.
Price increases and
quantity exchanged
decreases.
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Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
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