The document discusses how a shift in the supply curve of butter from Supply* to Supply1, representing an increase in the cost of a vital input. This causes the market for butter to move from an initial equilibrium at point A, with price Pe and quantity Qe, to a new equilibrium. With the higher costs, the supply curve shifts leftward to Supply1. The market attempts to price butter at the initial price P1, but this creates a surplus as the quantity supplied at B exceeds the quantity demanded at E. Economic theory suggests the price will decrease to clear the market, moving along the demand and supply curves until a new equilibrium is reached at point C, with a higher price P2 and quantity Q1.

1. Price
Of
Butter
Quantity of Butter
Demand*
Supply*
Pe
Qe
Market for Butter
“A”

2. Quantity of Butter
Demand*
Supply*
Pe
Qe
Market for ButterPrice
Of
Butter
P1
“B”
To still produce Quantity “Qe” the
ADDITIONAL cost
is the difference between “Pe” and
“P1”. This is
represented by Point “B”.
“A”

3. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
P1
“B”
Ceterus Paribus, what is true from
Point “A” on the Supply Curve to Point
“B” is also true at every other point
along Supply*
“C”

4. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
P1
“B”
Ceterus Paribus, what is true from
Point “A” on the Supply Curve to Point
“B” is also true at every other point
along Supply*
“D”
“C”

5. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
P1
“B”
With the increase in the cost of a vital
input we can see a new supply curve,
SUPPLY 1 emerging representing a
shift in Market Supply for Butter.
“C”
“D”
Supply 1

6. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
P1
“B”
The new Market Supply Curve lies to
the LEFT of the old one.“C”
“D”
Supply 1

7. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
“B”
If the Market attempted to price Butter
at “P1” we can see from the respective
Demand and (new) Supply Curves the
Market is not in equilibrium.
At “P1” the Quantity Demanded is Point
“E” and the Quantity Supplied is at
Point “B”...
“C”
P1
“E”
Qd
Supply 1

8. Quantity of Butter
Demand*
Supply*
Pe
Qs
“A”
Market for ButterPrice
Of
Butter
“B”
We have a SURPLUS equal to Qs minus
Qd (Point “B” minus Point “E”).
Economic theory suggests the Market
Price will DECREASE in order to “Clear
the Market”.
With a Decrease in PRICE, the market
will obey the Laws of Demand and
Supply and move ALONG the respective
Demand and Supply Curves until a new
Equilibrium is established at...
“C”
P1
“E”
Qd
“SURPLUS” Supply 1

9. Quantity of Butter
Demand*
Supply*
Pe
Qe
“A”
Market for ButterPrice
Of
Butter
P2
Point “C” where the new Market
Price is “P2” and the Market
Quantity (Qd=Qs) is “Q1”.
NOTE that the New Market Price is
in equilibrium at a HIGHER Price
than when we started out at Point
“A” and Market Quantity “Qe”.
“C”
Q1
Supply 1