Supply and Supply in Product/Output Markets
Price and Quantity Supplied: The Law of
Market Equilibrium Supply
Other Determinants of Supply
Shift of Supply versus Movement Along
the Supply Curve
From Individual Supply to Market Supply
Market Equilibrium
Excess Demand
Excess Supply
Changes in Equilibrium
Demand and Supply in Product
Markets: A Review
Supply in Product/Output Markets
Firms build factories, hire workers, and buy raw materials
because they believe they can sell the products they
make for more than it costs to produce them.
profit The difference between revenues and costs.
Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
quantity supplied The amount of a particular product that a firm
would be willing and able to offer for sale at a particular price during
a given time period.
supply schedule A table showing how much of a product firms will
sell at alternative prices.
Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
law of supply The positive relationship between price and quantity
of a good supplied: An increase in market price will lead to an
increase in quantity supplied, and a decrease in market price will
lead to a decrease in quantity supplied.
supply curve A graph illustrating how much of a product a firm will
sell at different prices.
FIGURE 3.6 Clarence Brown’s Individual Supply Curve
TABLE 3.3 Clarence Brown’s Supply
Schedule for Soybeans
Quantity Supplied
Price (per Bushel) (Bushels per Year)
$1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000
A producer will supply more when the price of output is
higher. The slope of a supply curve is positive.
Note that the supply curve is red: Supply is determined
by choices made by firms.
Other Determinants of Supply
The Cost of Production
For a firm to make a profit, its revenue must exceed its costs.
Cost of production depends on a number of factors, including the available
technologies and the prices and quantities of the inputs needed by the firm
(labor, land, capital, energy, and so on).
Other Determinants of Supply
The Prices of Related Products
Assuming that its objective is to maximize profits, a firm’s decision about
what quantity of output, or product, to supply depends on:
1. The price of the good or service.
2. The cost of producing the product, which in turn depends on:
■ The price of required inputs (labor, capital, and land).
■ The technologies that can be used to produce the product.
3. The prices of related products.
Supply in Product/Output Markets
Shift of Supply versus Movement Along a Supply Curve
movement along a supply curve The change in quantity supplied
brought about by a change in price.
shift of a supply curve The change that takes place in a supply curve
corresponding to a new relationship between quantity supplied of a good
and the price of that good. The shift is brought about by a change in the
original conditions.
FIGURE 3.7 Shift of the Supply Curve for Soybeans
following Development of a New Seed Strain
TABLE 3.4 Shift of Supply Schedule for Soybeans
following Development of a New Disease-
Resistant Seed Strain
Schedule S0 Schedule S1
Quantity Supplied Quantity Supplied
Price (Bushels per Year (Bushels per Year
(per Bushel) Using Old Seed) Using New Seed)
$1.50 0 5,000
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000
When the price of a product changes, we move along the supply
curve for that product; the quantity supplied rises or falls.
When any other factor affecting supply changes, the supply curve
shifts.
Shift of Supply versus Movement Along a Supply Curve
As with demand, it is very important to distinguish between movements
along supply curves (changes in quantity supplied) and shifts in supply
curves (changes in supply):
Change in price of a good or service leads to
Change in quantity supplied (movement along a supply curve).
Change in costs, input prices, technology, or prices of related goods and
services leads to
Change in supply (shift of a supply curve).
From Individual Supply to Market Supply
market supply The sum of all that is supplied each period by all
producers of a single product.
FIGURE 3.8 Deriving Market Supply from Individual Firm Supply Curves
Total supply in the marketplace is the sum of all the amounts
supplied by all the firms selling in the market. It is the sum of all
the individual quantities supplied at each price.
FIGURE 3.8 Deriving Market Supply from Individual Firm Supply Curves
Market Equilibrium
equilibrium The condition that exists when quantity supplied and
quantity demanded are equal. At equilibrium, there is no tendency
for price to change.
Excess Demand
excess demand or shortage The condition that exists when quantity
demanded exceeds quantity supplied at the current price.
Excess Supply
excess supply or surplus The condition that exists when quantity
supplied exceeds quantity demanded at the current price.
Excess Demand
FIGURE 3.9 Excess Demand, or Shortage
At a price of $1.75 per bushel, quantity
demanded exceeds quantity supplied.
When excess demand exists, there is a
tendency for price to rise.
When quantity demanded equals quantity
supplied, excess demand is eliminated and
the market is in equilibrium. Here the
equilibrium price is $2.50 and the
equilibrium quantity is 35,000 bushels.
When quantity demanded exceeds quantity
supplied, price tends to rise. When the price
in a market rises, quantity demanded falls
and quantity supplied rises until an
equilibrium
is reached at which quantity demanded and
Excess Supply
FIGURE 3.10 Excess Supply, or Surplus
At a price of $3.00, quantity supplied
exceeds quantity demanded by
20,000 bushels.
This excess supply will cause the
price to fall.
When quantity supplied exceeds
quantity demanded at the current
price, the price tends to fall. When
price falls, quantity supplied is likely
to decrease and quantity demanded
is likely to increase until an equilibrium
price is reached where quantity
supplied and quantity demanded are
equal.
Changes In Equilibrium
FIGURE 3.11 The Coffee Market: A Shift of
Supply and Subsequent Price Adjustment
Before the freeze, the coffee market was
in equilibrium at a price of $1.20 per
pound.
At that price, quantity demanded
equaled to quantity supplied.
The freeze shifted the supply curve to
the left (from S0 to S1), increasing the
equilibrium price to $2.40.
When supply and demand curves shift, the
equilibrium price and quantity change.
FIGURE 3.12
Examples of Supply
and Demand Shifts
for Product X
Demand and Supply in Product Markets: A Review
Here are some important points to remember about the mechanics of
supply and demand in product markets:
1. A demand curve shows how much of a product a household would buy
if it could buy all it wanted at the given price. A supply curve shows how
much of a product a firm would supply if it could sell all it wanted at the
given price.
2. Quantity demanded and quantity supplied are always per time period—
that is, per day, per month, or per year.
3. The demand for a good is determined by price, household income and
wealth, prices of other goods and services, tastes and preferences, and
expectations.
Demand and Supply in Product Markets: A Review
Here are some important points to remember about the mechanics of supply
and demand in product markets:
4. The supply of a good is determined by price, costs of production, and
prices of related products. Costs of production are determined by
available technologies of production and input prices.
5. Be careful to distinguish between movements along supply and demand
curves and shifts of these curves. When the price of a good changes,
the quantity of that good demanded or supplied changes—that is, a
movement occurs along the curve. When any other factor changes,
the curve shifts, or changes position.
6. Market equilibrium exists only when quantity supplied equals quantity
demanded at the current price.