Chapter 4 Part 2

1. Chapter 4 Part 2

2. Supply • Quantity supplied – amount of a good that sellers are willing and able to sell • Law of supply – the quantity supplied of a good rises as price rises • Supply schedule – table showing relationship b/t the price and quantity supplied of a good • Supply curve – graph of relationsip b/t P and Qs

3. 1. An increase in price ... 2. ... increases quantity of cones supplied. Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 0.50 Quantity of 0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream Cones

4. Market supply – the sum of all individual suppliers in the same market • Graphically, individual supply curves are summed horizontally to obtain the market supply curve • Change in Qs - Caused by a change in anything that alters the quantity supplied at each price.

5. $3.00 0 Change in Quantity Supplied Price of Ice-Cream Cone S C A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 Quantity of Ice-Cream Cones 0 1 5

6. Shifts in the S curve – Change in Supply • Input Prices – when the P of an input rises, the S decreases b/c it is more expensive to produce and less profitable • Technology – advances in technology can increase the supply • Expectations – if the firm expects prices to rise in future, may produce less now • # of sellers – if more firms enter market, S will go up

7. Supply curve, S 3 Supply curve, S 1 Supply curve, S Decrease 2 in supply Increase in supply 0 Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of 0 Ice-Cream Cones

8. S and D together • Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded • Occurs where the S and D curve intersect • Equilibrium Price – price at intersection • Equilibrium Quantity – Q at intersection

9. Supply Equilibrium Equilibrium price $2.00 Demand Equilibrium quantity Figure 8 The Equilibrium of Supply and Demand Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones

10. Markets not in Equilibrium • 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.

11. Supply Surplus $2.50 2.00 Demand 4 7 10 Quantity Quantity demanded supplied Figure 9 Markets Not in Equilibrium (a) Excess Supply Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones

12. Markets not in 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.

13. Supply $2.00 1.50 Shortage Demand 4 7 10 Quantity Quantity supplied demanded Figure 9 Markets Not in Equilibrium (b) Excess Demand Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones

14. Table 3: Three Steps for Analyzing Changes in Equilibrium

15. 1. Hot weather increases the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting Initial in a higher equilibrium price . . . D D 7 10 3. . . . and a higher quantity sold. Figure 10 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of 0 Ice-Cream Cones

16. 1. An increase in the price of sugar reduces the supply of ice cream. . . S2 S1 New equilibrium $2.50 2.00 2. . . . resulting in a higher price of ice cream . . . Demand 4 7 3. . . . and a lower quantity sold. Figure 11 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Initial equilibrium Quantity of 0 Ice-Cream Cones

17. Table 4: What Happens to Price and Quantity When Supply or Demand Shifts?