CASE STUDY

• Two ways to reduce the quantity of smoking demanded:

-- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve)

-- Raising the price of cigarettes through tobacco taxes (move along demand curve)

SUMMARYvariable change Demand Shift

Income (Normal) Rise (fall)

Rise (fall) Right (left)

Income (Inferior) Rise (fall)

Fall (rise) Left (right)

Price of substitute Rise (fall)

Rise (fall) Right (left)

Price of complement

Rise (fall)

Fall (rise) Left (right)

Taste Rise (fall)

Rise (fall) Right (left)

Expected Price Rise (fall)

Rise (fall) Right (left)

Number of buyers Rise (fall)

Rise (fall) Right (left)

SUPPLY• Quantity supplied is the amount of a good

that sellers are willing and able to sell.

• Law of Supply– The law of supply states that, other things

equal, the quantity supplied of a good rises when the price of the good rises.

SUPPLY SCHEDULE• Supply Schedule

– The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

EXAMPLE OF SUPPLY SCHEDULE

SUPPLY CURVE• Supply Curve

– The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

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Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones supplied.

TWO VIEWS• For every possible price, it shows the

production rate

• For each unit of item, it shows the minimum price that the seller is willing to accept

MARKET SUPPLY• Market supply refers to the sum of all

individual supplies for all sellers of a particular good or service.

• Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

CHANGE IN QUANTITY SUPPLIED

• Change in Quantity Supplied– Movement along the supply curve.– Caused by a change in price.

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00A

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

CHANGE IN QUANTITY SUPPLIED

CHANGE IN SUPPLY• Change in Supply

– A shift in the supply curve, either to the left or right.

– Caused by a change in a determinant other than price.

FIGURE 7 SHIFTS IN THE SUPPLY CURVE

Copyright©2003 Southwestern/Thomson Learning

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2

SHIFT IN THE SUPPLY CURVE

• Input prices

• Technology

• Expectations

• Number of sellers

SUMMARYvariable change Supply Shift

Input (factor) price

Rise (fall)

Fall (rise)

Left (right)

Technology Rise (fall)

Rise (fall)

Right (left)

Expected Price

Rise (fall)

Fall (rise)

Left (right)

Number of sellers

Rise (fall)

Rise (fall)

Right (left)

EQUILIBRIUM• Equilibrium refers to a situation in which

the price has reached the level where quantity supplied equals quantity demanded.

EQUILIBRIUM PRICE AND QUANTITY

• Equilibrium Price– The price that balances quantity supplied and

quantity demanded. – On a graph, it is the price at which the supply

and demand curves intersect.

• Equilibrium Quantity– The quantity supplied and the quantity

demanded at the equilibrium price. – On a graph it is the quantity at which the

supply and demand curves intersect.

Copyright©2003 Southwestern/Thomson Learning

Price ofIce-Cream

Cone

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

SURPLUS AND SHORTAGE• Surplus

– When price > equilibrium price, then quantity supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales,

thereby moving toward equilibrium.

• Shortage– When price < equilibrium price, then quantity

demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers

chasing too few goods, thereby moving toward equilibrium.

ALTERNATIVE EXAMPLE: #2 LEAD PENCILS

Price Quantity demanded

Quantity supplied

0.05 1000 400

0.10 800 500

0.15 600 600

0.20 400 700

0.25 200 800

QUICK QUIZ 1• Draw demand and supply curves

• Find equilibrium price and quantity

QUICK QUIZ 2• How would following events shift either the

demand or the supply of #2 lead pencil?

-- an increase in the use of standardized exams (using opscan forms)

-- a decrease in the price of ink pens

-- a start of a school year

Copyright©2003 Southwestern/Thomson Learning

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Supply

Initialequilibrium

D

D

3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

2.00

7

New equilibrium$2.50

10

INCREASE IN DEMAND

Copyright©2003 Southwestern/Thomson Learning

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Demand

Newequilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.

2.00

7

$2.50

4

DECREASE IN SUPPLY

SUMMARY

DISCUSSION

• Each of the events listed below has an impact on the market for bicycles.

1.An increase in the price of automobile.2.A decrease in incomes of consumers if

bicycles are a normal good.

DISCUSSION-CONTINUED3.An increase in the price of steel used to

make bicycle frames.4.An environmental movement shifts tastes

toward bicycling.

DISCUSSION-CONTINUED5.Consumers expect the price of bicycles to

fall in the future.6.A technological advance in the

manufacture of bicycles.

DISCUSSION-CONTINUED7.A reduction in the price of bicycle helmets

and shoes.8.A decrease in incomes of consumers if

bicycles are an inferior good.