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Supply and Price Determination

Supply is the overall willingness of producersto provide a given quantity of a given good, at

a given price, a given place and a given time.

Quantity Supplied The actual amount thatwill be provided when price is specified.

Law of Supply As price rises, quantity

supplied will rise, as price falls, quantity

supplied will fall.

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Supply and Price Determination

Supply Schedule

P Qs

$1.100

$2.200

$3.300

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Change in Quantity Supplied

0

0.5

1

1.5

2

2.5

3

3.5

0 100 200 300 400

Price

Quantity

S

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Change in Supply

0

0.5

1

1.5

2

2.5

3

3.5

0 100 200 300 400

P

rice

Quantity

S2 S1

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

2. in production technology.

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

2. in production technology.3. in government regulation.

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

2. in production technology.3. in government regulation.

4. in price of production substitutes.

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

2. in production technology.3. in government regulation.

4. in price of production substitutes.

5. in producer expectations.

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Supply and Price Determination

6 Determinants of Supply

1. in cost or availability of resources.

2. in production technology.3. in government regulation.

4. in price of production substitutes.

5. in producer expectations.

6. in market size.

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Supply and Price Determination

Elasticity of Supply

As with Demand, there is elasticity of Supply.

The main determinant of elasticity of Supply

is time.

Since the time required for suppliers to

respond is the main determinant of elasticity

of supply, almost all goods will have unitary

elasticity of supply in the long run.

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Supply and Price Determination

In order to determine price, we must

consider supply and demand at thesame time.

The combination of these conflicting

market forces is the interaction between

buyers and sellers that answers the

basic questions in a market system.

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Price Determination

There are three possible market states

that can result from the interaction ofsupply and demand.

If the price is artificially held below the

equilibrium level, then the market will

be in shortage, because more items are

demanded than will be produced.

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Demand and Supply

0

0.5

1

1.5

2

2.5

3

3.5

0 100 200 300 400

Pr

ice

Quantity

S

D

SHORTAGE

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Price Determination

There are three possible market states that can result from the

interaction of supply and demand.

If the price is artificially held above the

equilibrium level, then the market will

be in surplus, because more items areproduced than will be bought.

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Demand and Supply

0

0.5

1

1.5

2

2.5

3

3.5

0 100 200 300 400

Pr

ice

Quantity

S

D

SURPLUS

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Price Determination

There are three possible market states that can result from the

interaction of supply and demand.

In a competitive market, the price and

quantity should eventually settle at

equilibrium.

At this point, we say that the market is

cleared.

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Demand and Supply

0

0.5

1

1.5

2

2.5

3

3.5

0 100 200 300 400

Pr

ice

Quantity

S

D

Equilibrium