Today is Thursday, October 28, 2010.
The price of gold is $1,343 per troy
DETERMINANTS OF SUPPLY
In the first part of the course, within the context of the discussion of the
operation of the Tempe pizza market, we learned the rudiments of supply and
demand, and the determinants of supply and the determinants of demand.
We did not have the tools at that time to fully explain the operation of the
market and the individual firms supplying product to the market.
have the tools necessary to get the complete picture.
In Lecture 18, we learned that a change in a determinant of demand, such as
an increase in income, a higher price of a substitute, such as silver, or two
countries like China and India wanting to hedge against the dollar, would
cause an increase in the market demand for gold.
We traced the impact,
both in the market, and for the individual typical firm in the industry, resulting
from the increase in market demand.
The income of the consumers of gold
increased, and gold is a normal good, the price of a substitute increased, and
there was a significant change in "taste" on the part of two major countries.
The market demand curve for gold shifts to the right, driving the price of gold
up immediately in the commodity pits.
Each of the firms in the industry was
initially in long-run equilibrium, producing 7 ounces per week and earning a
The increase in demand and price led to an "excess profit"
rectangle for each existing firm.
As soon as possible, by increasing the
number of doses of K&N utilized, each firm increased its output to 8 ounces
per week to reap even more profit.
At this point, each firm was now in a
short-run equilibrium position, producing 8 ounces per week and earning
The excess profits then attracted new producers.
producers entered the industry, and hence entered the market as new
suppliers, the market supply curve shifted to the right, driving the market
equilibrium price ever lower and lower as the new production and increased
supply came on-line.
When the equilibrium market price finally fell to its
original equilibrium price of $600 per ounce, all of the original 1,000 firms
were back at their original equilibrium point, producing 7 ounces per week
and earning normal profits.
However, there was now a larger number of
Remember, one of the characteristics of competition is
Everyone knows how
much profit everyone else is making.
Publicly traded companies must publish their financial statements each
Note that this assumes that none of the determinants of supply, such as our cost functions, have changed.
This is our old friend,
Of course, a whole bunch of things could change, and often do, in