Transcript Supply and Market Equilibrium

Supply and Market
Equilibrium
How Supply and Demand Rule the World

The schedule or curve that shows the
amount of a product that a producer will
make available for sale at a series of
prices.
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Specified period
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Supply curve is always upward sloping
Supply
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As prices rise, the quantity supplied will
rise; as prices fall, the quantity supplied
will fall.
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Why? What does this have to do with the
concept of scarce resources and law of
increasing opportunity costs? What does
this have to do with logic?
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This is the opposite of the law of demand.
Law of Supply
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Other factors (aside from price) will affect
supply.
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Once again, like with demand, these
changes will shift the supply curve.
Determinants of Supply
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Resource Prices: cost of production
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Technology: efficiency
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Taxes and Subsidies: cost of doing business
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Prices of Other Goods: substitution in production
(soccer balls versus basketballs)
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Expected Prices: human behavior (can cause an
increase or decrease in current supply)
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Number of Sellers: similar to number of consumers
Determinants of Supply
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Just like demand, there is a distinction
between the phrases a change in supply and
a change in the quantity supplied.
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A change in quantity supplied is a movement
along the supply curve caused by a change in
price.
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A change in the supply is a shift in the
supply curve caused by a change in one of
the determinants of supply.
Changes in Supply
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1. Other things constant, which of the
following would not cause a change in the
long run supply of beef?
A. A decrease in the price of beef.
 B. A decrease in the price of cattle feed.
 C. An increase in the price of cattle feed.
 D. An increase in the cost of transporting
cattle to market.
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A Question of Supply
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A
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A change in the long run supply of beef is
related to a change in the supply curve.
This is caused by a change in a supply
determinant, not a change in price.
Answers B,C,and D are all related to a
change in a determinant, while A is the
only answer that is a change in price.
Question 1
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2. “Falling oil prices have caused a sharp decrease in
the supply of oil.” Speaking precisely, choose the
statement that best describes this quotation.
A. The quote is correct-a decrease in price always
causes a decrease in “supply”.
 B. The quote is incorrect-a decrease in price always
causes an increase in the “supply”.
 C. The quote is incorrect-a decrease in price always
causes an increase in the “quantity supplied”.
 D. The quote is incorrect-a decrease in price causes
a decrease in the “quantity supplied”.
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2nd Question
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D
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A fall in prices will cause a change in the
quantity supplied, not a change in supply.
D is thus the correct answer to the
question.
Question 2
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Assuming a free market, how are prices
set? Who determines what the price of a
good is?
A. The producer of the good
 B. The purchaser of the good
 C. The government
 D. None of the above
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Putting It Together
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If it is not the producer, the consumer or the
government that sets prices, who determines
the price of a product?
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The market?
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What does that mean?

Hint: Why have we talked about supply
curves and demand curves?
Pricing
So, how is the final price of a good
determined?

The market price will be determined by
where the supply curve and the demand
curve intersect.

This is the place where the intentions of the
buyers and the intentions of the sellers will
intersect.
Market Equilibrium
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Price ($)
Supply
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P1
Eq P
Demand
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Q1
Quantity
Equilibrium

This is the quantity supplied and
demanded at the equilibrium price in a
competitive market.
Why does this make logical sense?
 What would happen if the markets were
not at equilibrium?
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Equilibrium Quantity
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“Adam Smith’s laws of the market…show us
how the drive of individual self-interest in an
environment of similarly motivated
individuals will result in competition; and
they further demonstrate how competition
will result in the provision of those goods that
society wants, in the quantities that society
desires, and at the prices that society is
prepared to pay.”

The Worldly Philosophers, by Robert
Heilbroner; page 55
Adam Smith’s View
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“The regulator is competition, the conflict
of the self-interested actors on the
marketplace. … A man who permits his
self-interest to run away with him will find
that competitors have slipped in to take
his trade away.”
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Page 55
View Continued
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What will happen to the Equilibrium Price and Equilibrium
Quantity if…
For each of the following changes, please draw a graph showing
the new equilibrium price and new equilibrium quantity given the
changes outlined below. Each change is a separate case. For
each case, first determine if this is a change that will impact
demand or supply. Then determine how it will impact that item
and draw the appropriate change.
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The preference for a product increases
The cost of a resource used in production goes down
The national income decreases
The price of a substitute good goes down
Taxes go up for businesses
Changes in Demand, Supply and
Equilibrium
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I will draw four scenarios on the board. Each will show a
change in either the supply or demand for jelly beans.
After each change outlined below, fill in the blank with the
letter of the graph that best illustrates the situation.
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1. The price of sugar increases. _____
2. The price of bubble gum, a close substitute for jelly
beans, increases. ____
3. A machine is invented that makes jelly beans at a lower
cost. _____
4. The price of soda, a complimentary good for jelly
beans, goes up. _____
5. Widespread prosperity allows people to buy more jelly
beans. _____
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Shifts in Demand and Supply
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Use the information below to determine
how this information would affect various
markets:
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Cancer researchers have reported that
hair dyes may be a cause of cancer.
Individuals who dye their hair may
increase their risk of lymphoma by 50%.
News Story
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How would the story on the previous slide
impact the following markets: Hair Dye;
Wigs; Plastic Gloves; Beauticians?
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Draw a demand and supply curve prior to
this story and then show the impact this
story has on the market.
Impact on Supply, Demand and
Prices
Hair Dye
 Plastic Gloves
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Wigs
Beauticians
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S
Price
D
Quantity
News Story Markets
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Complete the In-Class Exercise
In Class Exercise