Supply and Equilibrium

Lesson 2.6

Law of Supply

• When Prices go up, quantity Supplied goes up• When Prices go down, quantity Supplied goes

down– Quantity supplied is a measure of the number of

suppliers in the market, and how many products can be sold at a high price.

– As the price goes higher, producers look at bigger profits, so they create more goods.

Understanding the Supply Curve

• The supply curve is a upward sloping curve, showing the proportional relationship between prices and quantity supplied.

Price

Quantity

Supply

Supply Schedules and Market Schedules

• Just as with demand, it is possible to set up a price versus supply schedule chart, to show how much is supplied at various prices.

Shifts in the Supply Curve

• Changes in price changes quantity supplied, but does not move the curve.

• Just like with Demand, the Supply curve can move as factors other than price affect the curve.

– Changes in input prices– Changes in the prices of related

goods– Changes in technology– Changes in expectations– Changes in the number of producers

The Role of Prices

• Prices, or what someone is willing to pay for a good or service, and what a supplier is willing to provide, is a cornerstone of capitalism.

• This goes a long way to answering the three basic questions that an economic system: What do we make; How do we make it; Who gets it.

• While suppliers always want to get the maximum price for their goods (profit motive), buyers often are looking for the best deals.

Supply and Demand

• Market Balance– When Supply and Demand meet, the market is

said to be in balance. This point at which they meet on the graph is called the Equilibrium Point.

– The equilibrium point is considered very important in economics, because it is the point at which a “free market” will decide on the price of goods or the Market Clearing Price

The Equilibrium of Supply and DemandPrice of

Ice-CreamCone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

Markets Not in Equilibrium

Price ofIce-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantitydemanded

Quantitysupplied

Surplus

Quantity ofIce-Cream

Cones

4

$2.50

10

2.00

7

Markets Not in Equilibrium

Price ofIce-Cream

Cone

0 Quantity ofIce-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantitysupplied

Quantitydemanded

1.50

10

$2.00

74

Shortage