Supply:
Quantity supplied:
- amount that sellers are willing & able to sell
Law of supply:
- that quantity supplied of a good rises when the prices of the good rises, other things equal
Supply schedule:
- a table that shows the relationship between the price of a good & the quantity supplied
Shifts in the supply curve:
Input prices
- wages, prices of raw materials
- decades in input prices makes production more profitable at each output price
- firms supply a larger quantity at each price
- the S curve shifts to the right
Technology:
- determines how much inputs are required to produce a unit of output
- technological improvement has the same effects as a fall in input prices
- the S curve shifts to the right
Number of Sellers:
- increases the quality supplied at each price
- the S curve shifts to the right
Expectations:
- sellers may adjust supply when expectations of future prices change
- the S curve may shift to the right or left, depending
Equilibrium:
- Price (P) has reached the level where quantity supplied equals quantity demanded
Equilibrium price:
- the price that equates quantity supplied with quantity demanded
Equilibrium quantity:
- the quantity supplied and quantity demanded at the equilibrium price
Surplus:
- when quantity supplied is greater than quantity demanded
P = $5, Qd = 9 & Qs = 25 teas, surplus of 16 teas
- sellers try to increase sales by decreasing price
Qd rises & Qs falls
- continues to fall until market reaches equilibrium
Shortage:
- when quantity demanded is greater than quantity supplied
P= $1, Qd = 21 & Qs = 5 teas, shortage of 16 teas
- sellers try to increase sales by increasing price
Qd falls & Qs rises
- continues to rise until market reaches equilibrium
, Three steps into analyzing changes in equilibrium
1. Decide whether event shifts S curve, D curve, or both
2. Decide in which direction curve shifts
3. Use Supply-Demand diagram to see how the shift changes equilibrium P & Q
Terms for shift vs movement along the curve
1. Change in supply: shift in the S curve occurs when a non-price determinant of supply changes
(like technology or costs).
2. Change in the quantity supplied: movement along a fixed S curve occurs when P changes.
3. Change in demand: shift in the D curve occurs when a non-price determinant of demand
changes (like income or # of buyers).
4. Change in the quantity demanded: movement along a fixed D curve occurs when P changes.
If both supply & demand shift, the effect on P is unambiguous.
- Increase in demand > supply, P rises
- Increase in supply > demand, P falls
Price elasticity of demand = % change in Qd / % change in P
To compute % :
P2 - P1 / P1 = % change in P
Q2 - Q1/Q1 = % change in Qd
Midway point:
P1 + P (Midpoint) —> P2 - P1 / Midpoint
Q1 + Q (Midpoint) —> Q2-Q1 / Midpoint
To determine elasticity & inelasticity:
Ep >1 = elastic, price increase ; revenue decrease
price decrease ; revenue increase
Ep < 1 = inelastic, price increase ; revenue increase
price decrease ; revenue decrease
Ep = 1 = unit elastic or inelastic
price increase or decrease ; no effect on revenue
- The flatter the curve , the bigger the elasticity
- The steeper the curve , the smaller the elasticity
Quantity supplied:
- amount that sellers are willing & able to sell
Law of supply:
- that quantity supplied of a good rises when the prices of the good rises, other things equal
Supply schedule:
- a table that shows the relationship between the price of a good & the quantity supplied
Shifts in the supply curve:
Input prices
- wages, prices of raw materials
- decades in input prices makes production more profitable at each output price
- firms supply a larger quantity at each price
- the S curve shifts to the right
Technology:
- determines how much inputs are required to produce a unit of output
- technological improvement has the same effects as a fall in input prices
- the S curve shifts to the right
Number of Sellers:
- increases the quality supplied at each price
- the S curve shifts to the right
Expectations:
- sellers may adjust supply when expectations of future prices change
- the S curve may shift to the right or left, depending
Equilibrium:
- Price (P) has reached the level where quantity supplied equals quantity demanded
Equilibrium price:
- the price that equates quantity supplied with quantity demanded
Equilibrium quantity:
- the quantity supplied and quantity demanded at the equilibrium price
Surplus:
- when quantity supplied is greater than quantity demanded
P = $5, Qd = 9 & Qs = 25 teas, surplus of 16 teas
- sellers try to increase sales by decreasing price
Qd rises & Qs falls
- continues to fall until market reaches equilibrium
Shortage:
- when quantity demanded is greater than quantity supplied
P= $1, Qd = 21 & Qs = 5 teas, shortage of 16 teas
- sellers try to increase sales by increasing price
Qd falls & Qs rises
- continues to rise until market reaches equilibrium
, Three steps into analyzing changes in equilibrium
1. Decide whether event shifts S curve, D curve, or both
2. Decide in which direction curve shifts
3. Use Supply-Demand diagram to see how the shift changes equilibrium P & Q
Terms for shift vs movement along the curve
1. Change in supply: shift in the S curve occurs when a non-price determinant of supply changes
(like technology or costs).
2. Change in the quantity supplied: movement along a fixed S curve occurs when P changes.
3. Change in demand: shift in the D curve occurs when a non-price determinant of demand
changes (like income or # of buyers).
4. Change in the quantity demanded: movement along a fixed D curve occurs when P changes.
If both supply & demand shift, the effect on P is unambiguous.
- Increase in demand > supply, P rises
- Increase in supply > demand, P falls
Price elasticity of demand = % change in Qd / % change in P
To compute % :
P2 - P1 / P1 = % change in P
Q2 - Q1/Q1 = % change in Qd
Midway point:
P1 + P (Midpoint) —> P2 - P1 / Midpoint
Q1 + Q (Midpoint) —> Q2-Q1 / Midpoint
To determine elasticity & inelasticity:
Ep >1 = elastic, price increase ; revenue decrease
price decrease ; revenue increase
Ep < 1 = inelastic, price increase ; revenue increase
price decrease ; revenue decrease
Ep = 1 = unit elastic or inelastic
price increase or decrease ; no effect on revenue
- The flatter the curve , the bigger the elasticity
- The steeper the curve , the smaller the elasticity
