MICRO ECONOMICS

Petshariq Inc. is willing to supply the following quantities of Moringa Juice at the following prices.

The Supply Schedule and Curve
Market Equilibrium: Supply and Demand

An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. This condition is illustrated on the graph below:







Only in equilibrium, is quantity supplied equal to quantity demanded.

P* is the equilibrium price and Q* is the equilibrium quantity
Summary
Quantity supplied of a product varies directly with its price. When prices are high, suppliers will offer greater quantities for sale, conversely, when prices are low, suppliers will offer smaller quantities for sale.

A change in overall supply will cause the supply curve to shift (non-price effect).

A change in quantity supplied will cause movements along the original curve (price effect).

Shifts Versus Movements of the Supply Curve
Shift of Supply Curve
Effect of non-price determinants
Effect of Price changes
Shifts Versus Movements of the Supply Curve

Changes in price cause changes in quantity supplied, and are shown by movements along the same supply curve.


A change in supply is not the same as a change in quantity supplied.
While changes in any of the non-price determinants cause changes in supply, which are shown by shifts in the entire supply curve.
Determinants of Supply
The price of the good or service.

Input Costs:
Labour, Technology, Capital, and Land

Government Policy – Taxation

Sellers Expectations

Size of the industry

The prices of related products.

ECON1001 Introduction to Microeconomics
The Supply Curve and
Market Equilibrium


Prepared by: Carline Ellis
September 2014
The Supply Curve
A supply schedule is a table showing how much of a product firms will supply at different prices during a given period of time, ceteris paribus.

A supply curve is a graphical representation of the information shown in the supply schedule.

Quantity supplied is the amount (# units) of a product that a firm would be willing and able to offer for sale at a particular price during a given period of time.
Disequilibrium
Certain changes in the market can cause the market to be in disequilibrium, which is a condition where demand does not equal to supply.

When this occur there are two possibilities:
1) Excess Demand – which is the situation where the price is below its equilibrium price. The quantity supplied is lower than the quantity demanded by the consumers.

or

2) Excess Supply – which is the situation where the price is above its equilibrium price. The quantity willingly supplied by the producers is higher than the quantity demanded by the consumers.




Shortages and Surplus
When there is excess demand or shortage in the market, then quantity demanded exceeds quantity supplied at the current price. This is shown as the red shaded area on the graph.
The blue shaded area represents the situation where quantity supplied exceeds quantity demanded, or market surplus.

In both situations market forces will push demand and supply closer until equilibrium is restored.
Market Forces at Work
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 quantity supplied are equal again.


When quantity supplied exceeds quantity demanded, the price tends to fall. When price falls, quantity supplied will decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal.
THE END
Glossary Cont'd
Law of supply is 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 schedule is a table showing how much of a product firms are willing to sell at different prices.
Supply curve is a graph illustrating how much of a product a firm will sell at different prices.

Glossary Cont'd
Quantity supplied is the amount of a product that a firm is able to offer for sale at a particular price during a given time period.
Supply is defined as the amount of a product that would be offered for sale at all possible prices in the market

Glossary
A firm is an organization that produces finished products from raw materials.
An entrepreneur is a risk taker who turns new ideas into successful business ventures. This person normally thinks 'out of the box' and is innovative.
Households are the consumers of finished products in economy.

Profit is the difference between revenues and costs.

Summary
The supply of a good is determined by price, costs of production, and prices of related products.

When the price of a good changes, a movement occurs along the curve. When any other factor changes, the curve shifts.

Market equilibrium exists only when quantity supplied equals quantity demanded at the current price.

Equilibrium price and quantity changes when there is a shift in the demand or supply curve.

When a good is in short supply, price rises. As it does, those who are willing and able to continue buying, do so; while others stop buying.

Market forces will likely try to drive the market towards equilibrium.
Changes in Equilibrium
Note that whenever there is a shift in either of the curves equilibrium price and quantity will change.
Here, the demand curve shifts to the right, due to an increase in general income. People have more disposable income, so demand for goods increases for all price levels.

The increased demand pushes the price level up towards P1, giving suppliers an incentive to increase quantity supplied. This continues until the market settles down at a new price and quantity of P1 and Q1.

Note that quantity demanded did not fall but increased also to Q1 up from Q0.
Changes in Equilibrium
When the supply and the demand curves shift, the equilibrium price and quantity change.


Here, an increase in production costs shifts the supply curve to the left. Before the increase, the market was in equilibrium at a price of $2.50, and a quantity of 15b litres. At that price, quantity demanded equaled quantity supplied.

After the shift, excess demand pushes the price to $4, those who can afford to buy still do so, while other stopped buying as the good is now too expensive; and this pushes quantity demanded down to 10b litres and equilibrium is restored at a new price of $4 and new quantity of 10b litres.
The Law of Supply
The law of supply states that there is a positive relationship between the price and the quantity of a good supplied. Thus, the supply curve display a positive slope, which means that as the price increases, quantity supplied also increases.
P Qs and as P Qs

Rationale: The higher the market price the greater the potential for high profits; therefore suppliers are more willing to produce larger quantities of a product when the price is high than when it is low.

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There is little incentive for supplier to produce when the price of their product is low, as the bottom line for suppliers is profit.
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When the supply curve shifts to the right, supply increases and when it shifts to the left, supply decreases. This causes quantity supplied to change for all price levels.
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Supply is the quantities that would be offered for sale at all possible prices in the market.
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This equilibrium, depends on the interaction between buyers and sellers. P* and Q* are the price and quantity at which the market is cleared.


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Ceteris paribus, all other things held constant, is underlying principle in examining the supply price/quantity relationship.
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