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.

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

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.

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

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

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

10. Supply Schedule
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

11. Price (dollar per CD)
Supply Curve
6
Supply of CDs
5
e
4
d
3
c
2
1
0
b
a
2
4
6
8
10
CDs (millions per month)

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

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.

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

15. Price
Increase in
supply
S0
S1
Quantity

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

17. Price
Decrease in
Supply
S2
S0
Quantity

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

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?

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

21. Price
Increase in
supply
S0
S1
Quantity

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

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

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

25. Price
Decrease in
Supply
S2
S0
Quantity

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

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

28. Price
Decrease in
Supply
S2
S0
Quantity

29. Market Equilibrium
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. Price (dollar per CD)
Market Equilibrium at the intersection
of demand & supply curves
6
Supply of CDs
5
4
3
2
Demand
for CDs
1
0
2
4
6
8
10
CDs (millions per month)

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. Price (dollar per CD)
Market Equilibrium
6
Supply of CDs
5
4
3
2
shortage
1
0
Demand
for CDs
2
3
4
6
8
10
CDs (millions per month)

34. Price (dollar per CD)
Market Equilibrium
6
surplus
5
Supply of CDs
4
3
2
Demand
for CDs
1
0
2
3
4
5 6
8
10
CDs (millions per month)

35. 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!

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

37. Price (dollar per ?)
The Effects of a Decrease in Both
Demand and Supply
6
5
4
Price Constant?
Not Necessarily
Quantity Falls
3
2
1
0
2
4
6
8
10
12
14
Quantity (millions of ? per week)

38. Price (dollar per ?)
The Effects of a Decrease in Both
Demand and Supply
6
5
4
3
2
1
0
2
4
6
8
10
12
14
Quantity (millions of ? per week)