1 supply – quantity supplied quantity supplied number of units of a good all sellers in the market...
TRANSCRIPT
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Supply – Quantity Supplied
• Quantity supplied• number of units of a good• all sellers in the market would choose to sell • over some time period• given their constraints
– Implies a choice• the quantity that firms choose to sell• maximizing profit• given their constraints
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Supply – Quantity Supplied
• Quantity supplied– Is Hypothetical
• quantity firms would sell• given the price of the good• and all other constraints
– Depends on the price• assume other things constant• explore the relationship between price and
quantity supplied
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The Law of Supply
• When the price of a good rises, and everything else remains the same, the quantity of the good supplied will rise
• Ceteris paribus assumption• many variables change simultaneously• we must understand each variable
separately
– we assume “everything else remains the same” • understand how supply reacts to price
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Supply Schedule and Supply Curve
• Supply schedule• list of different quantities supplied at different
prices, ceteris paribus• Supply curve
– relationship between the price of a good and the quantity supplied, with all other variables held constant
– Each point on the curve• total quantity that sellers would choose to
sell at a specific price– Slopes upward - Law of Supply
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The Supply Curve
F
G
2.00
S
40,000 60,000
$4.00
Number of Bottles per Month
Price per Bottle
• Figure 5 The Supply Curve – movement along the supply curve
When the price is $2.00per bottle, 40,000 bottlesare supplied
At $4.00 per bottle,
quantity supplied is
60,000 bottles
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Movements Along the Supply Curve
• a change in the price of a good causes a movement along the supply curve, ceteris paribus
• In Figure 5– a rise in price - move rightward along the
demand curve (from F to G)
– a fall in price - move leftward along the demand curve (from G to F)
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Shifts of the Supply Curve
• a change in any variable that affects supply—except for the good’s price— causes the supply curve to shift.– Sell a greater quantity at any price
• The supply curve shifts rightward (increase in supply)
– Sell a smaller quantity at any price• The supply curve shifts leftward (decrease in
supply)
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Shifts of the Supply Curve
S2
GJ
S1
60,000
$4.00
80,000 Number of Bottles per Month
Price per Bottle
• Figure 6 A Shift of the Supply Curve
A decrease in transportationcosts shifts the supply curvefor maple syrup from S1 to S2.At each price, more bottles aresupplied after the shift.
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Factors that Shift the Supply Curve
1. Input Prices– A fall in the price of an input
• lower cost of production• increase in supply (rightward shift)
2. Price of Alternatives– Other goods that a firm could produce
– A rise in the price for an alternative• decrease in supply (leftward shift)
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Factors that Shift the Supply Curve
3. Technology– technological advances
• increase the supply of a good
4. Number of Firms– An increase in the number of sellers
• increase supply
5. Expected price– An expected rise in price
• decrease the current supply (leftward shift)
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Factors that Shift the Supply Curve
6. Changes in Weather/Other Natural Events
– Favorable weather• increases crop yields• increases the supply (rightward shift)
– Unfavorable weather• destroys crops, shrinks yields, • decreases the supply (leftward shift)
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The Supply Curve• Figure 7 The Supply Curve – A summary
Q
P
P1A
BP2
Q1Q2 Q
P
P2B
AP1
Q2Q1
a) Price ↓
Move leftward along
the supply curve
b) Price ↑
Move rightward along
the supply curveS S
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The Supply Curve• Figure 7 The Supply Curve – A summary
c) The Supply curve shifts rightward
Q
P S1
S2
Price of input ↓
Price of alternatives ↓
Number of firms ↑
Expected price ↓
Technological advance
Favorable weather
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The Supply Curve• Figure 7 The Supply Curve – A summary
d) The Supply curve shifts leftward
Q
P S2
S1
Price of input ↑
Price of alternatives ↑
Number of firms ↓
Expected price ↑
Unfavorable weather
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Supply and Demand
• Equilibrium– both P and Q have settled into a state of
rest
• Equilibrium price and quantity– once achieved - remain constant
– until either the demand curve or supply curve shifts
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Excess Demand
• the amount by which quantity demanded exceeds quantity supplied - at a given price – Buyers compete with each other to get
more of the good than is available
– The price will rise
– Equilibrium is reached
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Excess Demand
E
HJ1.00
$3.00
D
S
50,000 75,00025,000 Number of Bottles per Month
Price per Bottle
• Figure 8 Excess Demand Causes Price to Rise
Excess Demand
1. At a price of $1.00 per
Bottle, an excess demand
of 50,000 bottles . . .
2. causes the priceto rise . . .
3. shrinking the excessdemand until pricereaches its equilibriumvalue of $3.00
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Excess Supply
• the amount by which quantity supplied exceeds quantity demanded - at a given price– Sellers compete with each other to sell
more than buyers want
– The price will fall
– Equilibrium is reached
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Excess Supply
K L
E3.00
D
S
$5.00
50,00035,000 65,000
Excess Supply
Number of Bottles per Month
Price per Bottle
• Figure 9 Excess Supply Causes Price to Fall
1. At a price of $5.00 perbottle an excess supplyof 30,000 bottles . . .
2. causes the price
to drop…
3. shrinking the
excess supply . . .
4. until price reaches
its equilibrium
value of $3.00
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What Happens When Things Change
• Income rises• normal good• the demand increases (rightward shift of
the demand curve)– Rightward movement along the supply
curve
– Equilibrium price rises
– Equilibrium quantity rises
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Income rises, causing an increase in D
E
E'
3.00
D1
D2
S
$4.00
50,000 60,000 Number of Bottles of Maple Syrup per Period
Price per Bottle
• Figure 10 A Shift in Demand and a New Equilibrium
1. An increasein demand . . .
2. moves us along
the supply curve…
3. to a new
equilibrium
4. equilibrium
price increases
5. equilibrium quantity
increases too
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What Happens When Things Change
• An Ice Storm Hits– Weather changes will shift the supply
curve
• decrease in supply (the supply curve shifts leftward)– Equilibrium price rises
– Equilibrium quantity falls
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Bad weather hits, decreasing the S
E'
E3.00
D
$5.00
50,00035,000
S2 S1
Number of Bottles
Price per Bottle
• Figure 11 A Shift of Supply and a New Equilibrium
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Both Curves Shift
• Just one curve shifts (D or S)– we can determine the direction that
BOTH equilibrium price AND quantity will move
• Both curves shift (D and S) – we can determine the direction that
EITHER equilibrium price OR equilibrium quantity will move
– direction of the other – which curve shifts by more
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Income rises and Bad weather hits
E'
E3.00
D1
$6.00
S2 S1
Number of Bottles
Price per Bottle
• Figure 12 A Shift in Both Curves and a New Equilibrium
D2
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The Three Step Process
• Step 1—Characterize the Market• markets - problem analyzed • identify the decision makers
• Step 2—Find the Equilibrium• conditions for equilibrium• method - determine equilibrium
• Step 3—What Happens When Things Change
• how events/government polices change market equilibrium
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Avian Flu in Early 2006
• In Europe– people were buying substantially less
chicken
• In the United States– people were buying more chicken
• Use the three step process
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Avian Flu in Early 2006• Figure 13 The European Market for Chicken
B
A
0.14
D2005
$0.42
Q1Q2
S2006 S2005
Quantity of Chicken
Price per pound
D2006
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Avian Flu in Early 2006• Figure 14 The U.S. Market for Chicken
B
A
0.14
D2006
$0.42
Q1 Q2
S2005
S2006
Quantity of Chicken
Price per pound
D2005