Law of supply Quantity supplied is the amount that sellers are willing and able to sell, other factors being kept constant. Other things being equal, the quantity supplied of a good rises when the price of the good rises. Under the assumption of perfect competition, supply is determined by marginal cost. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive.
Individual supply vs market supply Market supply – sum of supplies of all sellers The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus in the graph of the supply curve, individual firms' supply curves are added horizontally to obtain the market supply curve.
Short-run & long-run supply curve Economists distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs (typically physicalcapital), and the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.
Determinants of supply curve Price Technology Resource prices Taxes or subsidies Expectations , and the price of other goods produced by the same seller. Changes in these determinants of supply, other than price, results in a new supply curve, and we say that the supply curve has SHIFTED from the initial position to the new position.
Shift in supply curve We could view the SHIFT in the supply curve as showing that it takes a higher price to provide the same quantity (as the table shows). Also note that the diagram also shows that, for a particular price, say $14.00, a lower amount of the product will be supplied with the new supply curve.
We use different ways to describe (a) a movement along a constant supply curve, which only happens when the price changes, and (b) a change in the position of the supply curve. A CHANGE IN QUANTITY SUPPLIED means that only the price has changed and a new quantity is supplied along a constant supply curve. A CHANGE (DECREASE OR INCREASE) IN SUPPLY or a SHIFT IN SUPPLY means that a change in amount supplied occurs because of a change (shift) in the position of the supply curve. This SHIFT IN SUPPLY means that one of the other determinants of supply (technology, resource prices, taxes or subsidies, expectations, and the price of other goods produced) has changed. In our example, resource prices went up so that less is supplied at each price. This shift could also be called a DECREASE IN SUPPLY.
Equilibrium between demand & supply When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
Change in equilibrium – shift in demand curve If one of the other factors affecting demand and supply change, then the demand and/or supply curves will shift, and a new equilibrium will result. Example 1: Suppose that the price of Chinese food delivery rises. What happens to the market for pizza? Step 1: Will this affect the demand or supply curve? Chinese food is a substitute for pizza, so the price of Chinese food affects the demand curve Step 2: In what direction will the affected curve move? The price of Chinese food, a substitute, INCREASES, so the demand for pizza INCREASES, or the demand curve shifts right. Step 3: What is the resulting impact on the equilibrium price and quantity? A new equilibrium is established at a higher price and larger quantity. An increase in demand results in an increase in price and quantity.
Shift in supply curve Example 2: Suppose instead that the Chinese food business is incredibly popular and profitable. What happens to the market for pizza? Step 1: Will this affect the demand or supply curve? The chinese food business is an alternative to the pizza business, affecting the supply curve Step 2: In what direction will the affected curve move? The profitability of chinese food means that some pizza places will switch to chinese food places, so the supply of pizza DECREASES, or the supply curve shifts left. Step 3: What is the resulting impact on the equilibrium price and quantity? The new equilibrium has a higher price and smaller quantity. An decrease in supply results in an increase in price and a decrease in quantity.
Shift in demand & supply curve Example 3: Now lets combine examples 1 and 2 so that the demand for pizza increases AND the supply of pizza decreases. What happens to the market for pizza? we know an increase in demand will increase equilibrium price and increase quantity. we know a decrease in supply will increase equilibrium price and decrease quantity. put both together the equilibrium price will increase but the affect on quantity is uncertain, and depends on whether the shift in demand is smaller or larger than the shift in supply. In this graph, there is no change in quantity.
Table shows how changes in demand and supply affect equilibrium price (P) and quantity (Q)