- when input prices rise → production becomes less profitable → firms produce less - if input rise substantially, a firm might shut down & produce no output at all 2) technology - advance of technology reduces cost of producing output → raises supply 3) expectations - if price is expected to rise in future, firms will put some of its current production into storage & supply less to market today 4) # of sellers - as # of sellers increase → market supply increases Change in Supply VS Change in Quantity Supplied ➢ increase in supply: supply curve shifts to right ➢ increase in quantity supplied: movement along supply curve ➢ decrease in supply: supply curve shifts to left ➢ decrease in quantity supplied: movement along supply curve Summary: Variables that Influence Sellers Exercise Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios? 1) Retailers cut the price of software. - supply curve doesn’t shift - there is a movement along supply curve to a point w lower P & lower Q 2) A technological advance allows software to be produced at lower cost. - supply curve shifts to right - at each price, quantity supplied increases
3) Professional tax return preparers raise the price of services. - shifts the demand curve for tax preparation software, not the supply curve Market Equilibrium ➢ equilibrium: a situation in which the price has reached the level where quantity supplied equals quantity demanded ➢ equilibrium price: price that balances quantity supplied & quantity demanded ➢ equilibrium quantity: quantity supplied & quantity demanded at equilibrium price Equilibrium Price Equilibrium Quantity What if the Market is Not in Equilibrium? ➢ law of supply & demand: price of good adjusts to bring the quantity supplied & quantity demanded into balance ➢ two situations: ○ excess supply (surplus) ○ excess demand (shortage)
Excess Supply ➢ surplus: when quantity supplied is greater than quantity demanded Excess Demand
3 Steps to Analyzing Changes in the Equilibrium 1) determine whether the event shifts supply curve, or demand curve, or both 2) decide in which direction the curve shifts 3) use the supply & demand diagram to analyze how the shift changes the equilibrium price & quantity Example 1: A Shift in Demand Curve
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