Module 6 - Supply and Equilibrium

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AP Economics
Mr. Bernstein
Module 6:
Supply and Demand – Supply and
Equilibrium
October 7, 2014
AP Economics
Mr. Bernstein
Competitive Markets
• An institution which brings together buyers and
sellers of particular goods or services
• Local, national or international
• Face-to-face, electronic or other impersonal
• Assumption: no buyer or seller so large they affect
pricing
• Will look at markets which are not perfectly
competitive later in the course
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AP Economics
Mr. Bernstein
Supply Schedule and Supply Curve
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AP Economics
Mr. Bernstein
Law of Supply
• All other things equal, as price increases the quantity
supplied rises
• So there is an direct relationship between price and
quantity supplied
• Plotted on a graph, the law of supply infers an upward
sloping supply curve
• The law of diminishing returns causes the supply
curves to be upward sloping
•
Note: It will be important to distinguish between a change in the “quantity supplied” and a
change in “supply”
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AP Economics
Mr. Bernstein
Supply Shifters
• Factors which change supply other than price
• An increase in supply shifts the supply curve to the
right
• A decrease in supply shifts
the supply curve to the left
• Notice an increase in supply
shifts the supply curve
horizontally, not vertically
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AP Economics
Mr. Bernstein
A Shift in Supply
is different from
movement along the
Supply Curve!!
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AP Economics
Mr. Bernstein
A Shift in Supply is different
from movement along the
S
Supply Curve!!
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AP Economics
Mr. Bernstein
Supply Shifters
• Input or Resource prices
• Increase in the price of inputs causes a decrease in the quantity
supplied
• Prices of related goods
• Increase in the price of Substitute Goods’ price causes a
decrease in the quantity supplied (production shifts to higher
price substitute product)
• Increase in the price of a Compliment in Production causes an
increase in the quantity supplied (production increases to take
advantage of higher price of complimentary good)
• Technology
• Advances in technology increases the quantity supplied
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Mr. Bernstein
Supply Shifters, cont.
• Expectations
• Expectations of future price increases decreases the
quantity supplied today
• Number of producers
• More producers increase the quantity supplied
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AP Economics
Mr. Bernstein
Supply Shifters:
T - RICE
• Technology
• Related prices (substitutes, compliments)
• Input prices
• Competition (number of producers)
• Expectations
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AP Economics
Mr. Bernstein
Equilibrium
• Equilibrium is the point where no buyers or sellers
would be better off changing price or quantity
• AKA “Market-clearing” price
• Market prices are like a pendulum, swinging back
and forth. At equilibrium, they are stable
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AP Economics
Mr. Bernstein
Equilibrium: Where Supply and Demand Curves
Intersect
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AP Economics
Mr. Bernstein
Equilibrium Prices Fall When There is a Surplus
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AP Economics
Mr. Bernstein
Equilibrium Prices Rise When There is a Shortage
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