Supply ↑ 5) Number of supplies Number of Producers ↑ , Supply ↑ Number of Producers ↓ , Supply ↓ The Market Supply Curve: is the horizontal sum of all individual supply curves. It has an upward slope and is determined by: 1) At higher prices, existing suppliers supply more. 2) At higher prices, new suppliers enter the market. The forces of supply and demand interact to arrive at equilibrium . Equilibrium : ( Q * ) means that the upward pressure on one price is exactly offset by the downward pressure on price.
Equilibrium Quantity : is the amount bought and sold at the equilibrium price. Equilibrium Price : is the price toward which the invisible hand drives the market. In other words, quantity demanded equals quantity supply. ( Q d = Q s = Q * at P * ) Shifts in either supply or demand change the equilibrium price. Excess Supply: (surplus) ; the quantity supplied is greater than the quantity demanded. Some suppliers would not be able to sell all their goods. Q s > Q d Excess Demand: (shortage) ; the quantity demanded is greater than the quantity supplied. There are more consumers who want the good than there are suppliers selling the good. Q d > Q s An increase in demand or a decrease in supply: 1) Creates excess demand at the original equilibrium price. 2) Excess demand increases price until a new higher equilibrium price and quantity are reached. (Class Example) Suppose Supply equals P = 10Q – 20 and Demand equals P = -5Q + 40. What is the equilibrium price and what is the equilibrium quantity? So at equilibrium: Q s = Q d P/10 + 2 = -P/5 + 8
P * = 20 Then P = 10Q – 20 20 = 10Q – 20 Q * = 4 When quantity demanded is greater than quantity supplied, prices tend to rise . When quantity supplied is greater than quantity demanded, prices tend to fall. If the quantities are equal, the prices remain the same. Sometimes supply and demand are interconnected. The other things constant assumption is likely not to hold when the goods represent a large percentage of the entire economy. The fallacy of composition is the false assumption that what is true for a part will also be true for the whole. SHIFT FACTORS REVIEW Shift Factors of Demand Shift Factors of Supply Income Price of Inputs Prices of Other Goods Technology Tastes Expectations Expectations Taxes and Subsidies on Producers Taxes and Subsidies on Consumers
- Fall '07
- Supply And Demand, Other Goods