Supply and Price Determination

1. Supply and Price Determination • Supply is the overall willingness of producers to provide a given quantity of a given good, at a given price, a given place and a given time. • Quantity Supplied – The actual amount that will be provided when price is specified. • Law of Supply – As price rises, quantity supplied will rise, as price falls, quantity supplied will fall.

2. Supply and Price Determination Supply Schedule PQs $1…………………….100 $2…………………….200 $3…………………….300

3. Change in Quantity Supplied

4. Change in Supply

5. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources.

6. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources. • ∆ in production technology.

7. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources. • ∆ in production technology. • ∆ in government regulation.

8. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources. • ∆ in production technology. • ∆ in government regulation. • ∆ in price of production substitutes.

9. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources. • ∆ in production technology. • ∆ in government regulation. • ∆ in price of production substitutes. • ∆ in producer expectations.

10. Supply and Price Determination 6 Determinants of Supply • ∆ in cost or availability of resources. • ∆ in production technology. • ∆ in government regulation. • ∆ in price of production substitutes. • ∆ in producer expectations. • ∆ in market size.

11. Supply and Price Determination Elasticity of Supply • As with Demand, there is elasticity of Supply. • The main determinant of elasticity of Supply is time. • Since the time required for suppliers to respond is the main determinant of elasticity of supply, almost all goods will have unitary elasticity of supply in the long run.

12. Supply and Price Determination In order to determine price, we must consider supply and demand at the same time. The combination of these conflicting market forces is the interaction between buyers and sellers that answers the basic questions in a market system.

13. Demand and Supply

14. Price Determination There are three possible market states that can result from the interaction of supply and demand. In a competitive market, the price and quantity should eventually settle at equilibrium.

15. Demand and Supply

16. Price Determination There are three possible market states that can result from the interaction of supply and demand. If the price is artificially held above the equilibrium level, then the market will be in surplus, because more items are produced than will be bought.

17. Demand and Supply

18. Price Determination There are three possible market states that can result from the interaction of supply and demand. If the price is artificially held below the equilibrium level, then the market will be in shortage, because more items are demanded than will be produced.

19. Price Determination If a change in any factor other than price causes the demand or supply curve to shift, then there will be a new equilibrium price and quantity. You should be able to trace these changes to identify these new results.