EC4101:Demand, Supply and Price 2 Topic 3 (2)

Supply and Price Determination

Summary: Demand, Supply and Price 2

Supply and Law of Supply Supply Schedule and Curve Factors influencing Supply Change in Quantity Supplied .V. Change in Supply Summary: Supply side of Market Price Determination - Equilibrium Price and Quantity
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Supply and Law of Supply

Supply refers to:
willingness and ability of firms to produce for sale (a) quantities of a good (b) at different prices (c) during a specific time period

Law of Supply: Positive P-Q Relationship

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Why does a higher price lead to a greater quantity supplied?

Opportunity for increased profits

Higher output involves increasing opportunity costs (incentive)

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Supply Schedule and Curve

P-Q Combinations Minimum Price - Zero Production below Positive Slope - Increasing Costs Higher Price - Incentive to produce higher quantities
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Table 1: Supply Schedule for CDs

Price (s) Quantity Quantity (000s per (000s per week) week) (one supplier) (all suppliers)

10 11 12 13 14 15

0.5 1.2 1.8 2.5 4.0

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24 50 80 112 145 180

6

6.0

Figure 1: Supply Curve

P 14

13

8 0

S
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112

145

Supply Curve and Equation

S1

P
4
If Q=0, P=2

S1

If P=0, Q= -2/4

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P=a+bQ a = intercept (on P axis) b = slope (+) Example: P = 2 + 4Q Draw Supply Curve
8

Equations of Supply Curves when Supply Increases

P Supply Curve (SS) is P = 4 + 6Q Increase in Supply 10 Curve to (S1S1) is P = 2 + 6Q 4 S More units of the good are supplied 2 S1 over the relevant price range
0 EC4101-11(3-2)/ EC4911 1

S
S1

1.33
9

Figure 2: Fixed Supply Curve

P S
Supply curve of tickets for next U2 Concert/ Munster V Leinster Game

S 50,000

Q
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Factors Influencing Supply

Prices of Factors of Production Prices of Other Goods supplied
Substitutes in Production Complements in production

Expected Future Prices Number of Suppliers Technology Change Taxes, Subsidies, Regulations EC4101-11(3-2)/ EC4911

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Change in Quantity Supplied .V. Change in Supply

Movement Along the Supply Curve (Change in Qs at a different Price on the Curve) Change in Supply (Change in Qs at all Prices = Movement of entire Supply Curve)
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Figure 4: Movement along the Supply Curve

P
P2 Increase in Quantity Supplied P1

Q2 Q1 EC4101-11(3-2)/ EC4911

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Figure 3: An Increase in Supply

P S

S1
P1

S S1 0
Q1 Q2
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Figure 5: Decrease in Supply

P
S1 S

P1

S1
S

Q2

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Q1

15

Example: Impact of Tax Imposed on the Supply of a Good (Mobile Phone)

P
72
70 68 St b a St

S 0
70 80 90

Supply Curve before the Tax is imposed = SS Government imposes a tax of 2 per unit on the supplier What is the effect on the Supply of Mobile Phones? Draw new supply curve.

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Summary: Supply Side of Market

Quantity supplied at different prices during a specific time period Law of supply refers to the positive P-Q relationship: Qs increases as P increases When P changes, ceteris paribus, there is a change in the Qs and a movement along the supply curve When there is a change in the factors influencing supply, the supply curve shifts to the right or left Distinguish change in quantity supplied and change in supply
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Market Equilibrium
Demand and supply interact to determine price

Price Determination: Equilibrium Price & Quantity

Demand and Supply Interact to Determine Price and Quantities Exchanged Why Equilibrium? Shortages and Surpluses (and their reduction or elimination)
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Table 2: Demand and Supply Schedules for CDs

Price (s per Quantity CD) Demanded (000s) Quantity Supplied (000s) Shortage (-); Surplus (+) (000s)

1 2 3 4 5 6

9 6 4 3 2 1

0 3 4 5 6 7

-9 -3 0 +2 +4 +6
20

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P
6

Figure 6: Market Equilibrium

D S

5
4

Surplus

3
2

Equilibrium

1 S
0 3

Shortage

D
Q
21

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Market Equilibrium
No surplus or shortage exists - the market clears Opposing forces of buyers and sellers are balanced At the equilibrium price, Qs = Qd Positions above or below the equilibrium price lead to behavioural changes by producers and consumers which lead to a return to E (=stable equilibrium)
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