1. The market supply curve indicates the combined sales intentions of all market participants- the total quantities they are willing and able to sell at various prices 2. This quantity is determined by adding the supply decisions of all individual producers 3. The market supply curve is just a summary of the supply intentions of all producers 4. Market supply is an expression of sellers’ intentions- an offer to sell- not a statement of actual sales Shifts of Supply 1. Supply curves shift when the underlying determinants of supply change 2. It is important to distinguish a. Changes in quantity supplied : movements along a given supply curve b. Changes in supply : shifts of the supply curve 3. If the price of a product is the only variable changing, then we can track changes in quantity supplied along the supply curve 4. But if ceteris paribus is violated- if technology, factor costs, the profitability of producing other goods, tax rates, expectations, or the number of sellers changes- then changes in supply are illustrated by shifts of the supply curve When factor costs or availability worsen, the supply curve shifts to the left. Such leftward supply-curve shifts push prices up the market demand curve
Equilibrium 1. The price at which the quantity of a good demanded in a given time period equals the quantity supplied 2. When we put the two curves together, we see that only one price and quantity combination is compatible with the intentions of both buyers and sellers 3. Equilibrium occurs at the intersection of the supply and demand curve Market Clearing 1. An equilibrium doesn’t imply that everyone is happy with the prevailing price or quantity 2. Don’t get any- buyers are arrayed the demand curve below the equilibrium- the price they’re willing to pay is less than the equilibrium price 3. The market’s FOR WHOM answer those willing and able to pay the equilibrium price 4. Some sellers are frustrated by this market outcome- are arrayed along the supply curve above the equilibrium . Because need to paid more than the equilibrium price, they don’t actually sell anything 5. The equilibrium price and quantity reflect a compromise between buyers and sellers. No other compromise yields a quantity demanded that’s exactly equal to the quantity supplied Equilibrium Price 1. Only at equilibrium is the quantity demanded = the quantity supplied 2. Above equilibrium prices- market surplus (quantity supplied > quantity demanded) 3. Below - market shortage (quantity supplied < quantity demanded) The Invisible Hand 1. The equilibrium price isn’t determined by any single individual 2. It’s determined by the collective behavior of many buyers and sellers, each acting out his or her own demand or supply schedule
3. Like impersonal price determination- Adam Smith’s characterization of the market mechanism as “ the invisible hand ” 4. Market mechanism - The use of market prices and sales to signal desired outputs (or resource allocations) 5. The market behaves as if some unseen force (the invisible hand) were examining each individual’s supply or demand schedule and then selecting a price that assured an equilibrium Disequilibrium : Surplus and Shortage 1. Market Surplus : The amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply.