Post on 30-Dec-2015
Supply and Equilibrium
Lesson 2.6
Law of Supply
• When Prices go up, quantity Supplied goes up• When Prices go down, quantity Supplied goes
down– Quantity supplied is a measure of the number of
suppliers in the market, and how many products can be sold at a high price.
– As the price goes higher, producers look at bigger profits, so they create more goods.
Understanding the Supply Curve
• The supply curve is a upward sloping curve, showing the proportional relationship between prices and quantity supplied.
Price
Quantity
Supply
Supply Schedules and Market Schedules
• Just as with demand, it is possible to set up a price versus supply schedule chart, to show how much is supplied at various prices.
Shifts in the Supply Curve
• Changes in price changes quantity supplied, but does not move the curve.
• Just like with Demand, the Supply curve can move as factors other than price affect the curve.
– Changes in input prices– Changes in the prices of related
goods– Changes in technology– Changes in expectations– Changes in the number of producers
The Role of Prices
• Prices, or what someone is willing to pay for a good or service, and what a supplier is willing to provide, is a cornerstone of capitalism.
• This goes a long way to answering the three basic questions that an economic system: What do we make; How do we make it; Who gets it.
• While suppliers always want to get the maximum price for their goods (profit motive), buyers often are looking for the best deals.
Supply and Demand
• Market Balance– When Supply and Demand meet, the market is
said to be in balance. This point at which they meet on the graph is called the Equilibrium Point.
– The equilibrium point is considered very important in economics, because it is the point at which a “free market” will decide on the price of goods or the Market Clearing Price
The Equilibrium of Supply and DemandPrice of
Ice-CreamCone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
Markets Not in Equilibrium
Price ofIce-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantitydemanded
Quantitysupplied
Surplus
Quantity ofIce-Cream
Cones
4
$2.50
10
2.00
7
Markets Not in Equilibrium
Price ofIce-Cream
Cone
0 Quantity ofIce-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantitysupplied
Quantitydemanded
1.50
10
$2.00
74
Shortage