Supply

1
Supply Demand equilibrium

• Chapter 4, pages 82-99 Chapter 5, pages 103-109

2
Equilibrium Putting Supply and Demand Together

• When a market is in equilibrium, at equilibrium
  price level
• Qs Qd
• The equilibrium price and equilibrium quantity
  can be found on the vertical and horizontal axes,
  respectively
• At point where supply and demand curves cross

3
Figure 7 Market Equilibrium
S
E
3.00
D
50,000
4
Key for Finding the Demand and Supply Curves

• For the demand or supply curve
• The linear demand equation is
• Q a b P
• Comparing Y a b X
• where a is the y-intercept and b is the slope.
  Find the slope by taking any two points from the
  line and plugging them into the formula
• b(Q2 - Q1)/ (P2 - P1)

5
Questions

• True or False
• The equation Q5-4P, could feasibly represent a
  supply curve.
• False
• The equation Q233P can represent a demand
  curve. (Normal goods)
• False

6
The Laws of Supply and Demand in Equations
An example of a supply equation is QS -5
2P where QS is units supplied and P is price of
each unit in dollars per unit.
An example of a demand equation is QD 10 -
P where QD is units demanded and P is price of
each unit in dollars per unit.
7
Determination of Equilibrium
To find the equilibrium price and quantity, set
the quantity demanded equal to the quantity
supplied and solve for P
QS QD - 5
2P 10 - P
Add P to both sides P P
-5 3P
10 Add 5 to both sides 5 5 3P
15 Divide both sides by 3 P 5
Insert P 5 in either QD or QS equation
QS - 5 (2 x 5) 5 units
8
Supply and Demand Equilibrium
10
QS - 5 2P
8
6
Price
5
4
QD 10 - P
2
0
1
2
3
4
5
6
7
8
9
10
Quantity
9
Disequilibrium

• When the market is not in equilibrium, there is
  either excess demand or excess supply.
• Excess supply a surplus, the quantity supplied
  is greater than the quantity demanded, and prices
  fall.
• Excess demand a shortage, the quantity demanded
  is greater than the quantity supplied, and prices
  rise.
• When quantity demanded equals quantity supplied,
  prices have no tendency to change.

10
Excess Demand Putting Supply and Demand Together

• Excess demand
• At a given price, the excess of quantity demanded
  over quantity supplied
• Qd Qs
• Price of the good will rise as buyers compete
  with each other to get more of the good than is
  available

11
"Hannah Montana" star Miley Cyrus
12
Ticket Scalping!

• Read the article, discuss in group and think
  about the following two problems
• What happened in the market by using a
  supply-demand model?
• Will the practice of scalping promotes a more
  efficient market outcome?

13
Figure 7 Market Equilibrium
S
E
250
J
H
45
D
75,000
50,000
Excess Demand
14
Figure 7 Market Equilibrium
S
E
3.00
H
J
1.00
Excess Demand
D
50,000
75,000
25,000
15
Excess Supply Putting Supply and Demand Together

• Excess Supply
• At a given price, the excess of quantity supplied
  over quantity demanded
• Price of the good will fall as sellers compete
  with each other to sell more of the good than
  buyers want

16
Figure 8 Excess Supply and Price Adjustment
Excess Supply at 5.00
S
5.00
L
K
E
3.00
D
50,000
35,000
65,000
17
Income Rises What Happens When Things Change
Income increase on price of Cars
VS

• Income rises, causing an increase in demand
• Rightward shift in the demand curve causes
  rightward movement along the supply curve
• Equilibrium price and equilibrium quantity both
  rise
• Shift of one curve causes a movement along the
  other curve to new equilibrium point

18
Figure 9
S
F'
21,000
E
17,000
D2
D1
500
600
19
An Ice Storm Hits What Happens When Things
Change Ice Storm effect on price of Tomato

• An ice storm causes a decrease in supply
• Weather is a shift variable for supply curve
• Any change that shifts the supply curve leftward
  in a market will increase the equilibrium price
• And decrease the equilibrium quantity in that
  market

20
Figure 10 A Shift of Supply and A New
Equilibrium
S2
S1
E'
2.50
E
1.50
D
5000
3500
21
LiChi, LiChi!

• LiChi can only grow in South China.
• In ancient China, LiChi is very precious. Only
  emperor can consume it due to that it is easy
  rotten away.

22
LiChi

• In ancient time, Lichi is transported from south
  to north China by horse.
• Now demand for LiChi increases while the it can
  be transported from south China by air plane.

23
Figure 11-a Changes in the Market for Handheld
PCs
S1005
S2005
A
100
B
2
D2005
D1005
Q1
Q2
24
The DVD market Change

• DVD player industry is boomed before 2002, high
  industry profit lure a lot of new firms come into
  the industry while the family who has bought a
  DVD player is less likely to buy a new one in
  next few years.

25
Figure 11-b Changes in the Market for DVD player
S2002
S2003
A
100
B
70
40
D2002
D2003
2.45
3.33
26
Both Curves Shift

• When just one curve shifts (and we know the
  direction of the shift) we can determine the
  direction that both equilibrium price and
  quantity will move
• When both curves shift (and we know the direction
  of the shifts) we can determine the direction for
  either price or quantitybut not both
• Direction of the other will depend on which curve
  shifts by more

27

• Demand shifts only
• Demand ? ? PE ?, QE ?
• Demand ? ? PE ?, QE ?
• Supply shifts only
• Supply ? ? PE ?, QE ?
• Supply ? ? PE ?, QE ?
• Supply and demand shift simultaneously
• Demand ? Supply ?
• Demand ? Supply ?
• Demand ? Supply ?
• Demand ? Supply ?

28

• Lets look at Demand ? Supply ?
• Demand ? ? PE ?, QE ?
• Supply ? ? PE ?, QE ?

PE ?, QE ?