Supply

Quantity supplied (Qs)

Amount of a good or service offered
for sale during a given period of time

Supply
Six variables that influence Qs
Price of good or service (P)
Input prices (PI )
Prices of goods related in production (Pr)
Technological advances (T)
Expected future price of product (Pe)
Number of firms producing product (F)

General supply function

Qs = f(P, PI, Pr, T, Pe, F)

General Supply Function

Qs = h + kP + lPI + mPr + nT +
rP
k,el,+
m,sF
n, r, & s are slope parameters
Measure effect on Qs of changing one of
the variables while holding the others
constant

Sign of parameter shows how variable

is related to Qs
Positive sign indicates direct relationship
Negative sign indicates inverse
relationship

General Supply Function

Variable

P
PI
Pr
T
Pe
F

Relation to Qs
Direct

Sign of Slope Parameter

k = Qs/ P is
positive

Inverse
Inverse for substitutes
Direct for
complements
Direct

l = Qs/ PI is
negative

m = Qs/ Pr is
negative
m
= Qs/ Pr is
positive

n = Qs/ T is
positive

Inverse

r = Qs/ Pe is
negative

Direct

s = Qs/ F is
positive

Direct Supply Function

Supply of pork
Q S ( p, ph )
Q 178 40 p 60 ph
ph $1.50
Q 88 40 p

Inverse Supply Function

Traditionally, price (P) is plotted on
the vertical axis & quantity supplied
(Qs) is plotted on the horizontal axis
The equation plotted is the inverse
supply function, P = f(Qs)

Inverse Supply Function

Qs 88 40 p
p 2.2 .025Qs

Graphing Supply Curves

A point on a direct supply curve
shows either:
Maximum amount of a good that will be
offered for sale at a given price
Minimum price necessary to induce
producers to voluntarily offer a
particular quantity for sale

Direct Supply Function

Qs S ( P, PI , F )
Qs 100 20 P 10 PI 20 F
PI 100, F 25
Qs 400 20 P
Inverse Supply
P 20 1 / 20Qs

A Supply Curve

(Figure 2.3)

Graphing Supply Curves

Change in quantity supplied
Occurs when price changes
Movement along supply curve

Change in supply
Occurs when one of the other variables,
or determinants of supply, changes
Supply curve shifts rightward or leftward

Three Supply Functions

Qs 100 20 P 10 PI 20 F
Qs / PI 10

Shifts in Supply

(Figure 2.4)

Market Equilibrium
Equilibrium price & quantity are
determined by the intersection of
demand & supply curves
At the point of intersection, Qd = Qs
Consumers can purchase all they want
& producers can sell all they want at
the market-clearing or equilibrium
price

Market Equilibrium
Qd 1,400 10 P
Qs 400 20 P
Qd Qs
1,400 10 P 400 20 P
Pe $60
Qe 800

Market Equilibrium
2.5)

(Figure

Market Equilibrium
Excess demand (shortage)
Exists when quantity demanded
exceeds quantity supplied

Excess supply (surplus)

Exists when quantity supplied exceeds
quantity demanded

Ceiling & Floor Prices

Ceiling price
Maximum price government permits
sellers to charge for a good
When ceiling price is below equilibrium,
a shortage occurs

Floor price
Minimum price government permits
sellers to charge for a good
When floor price is above equilibrium, a
surplus occurs

Ceiling & Floor Prices

(Figure

2.12)
Px

Sx

2
1

Price (dollars)

Px

Sx
3
2

Dx

Dx
22

50 62

Quantity

Panel A Ceiling price

Qx

32 50

84

Quantity

Panel B Floor price

Qx

Market Equilibrium
Qd 1,400 10 P
Qs 400 20 P
Qd Qs
1,400 10 P 400 20 P
Pe $60
Qe 800

$50 Price Ceiling

Qd 1,400 10 P
Qd 1,400 10(50)
Qd 900
Qs 400 20 P
Qs 400 20(50)
Qs 600
Excess demand Qd Qs 300

A price ceiling is only effective

when it is set below the equilibrium
price

Marginal Valuation

Qd 1,400 10 P
Qs 600

600 1,400 10 P

P 80
Highest black market price

$80 Price Floor

Qd 1,400 10 P
Qd 1,400 10(80)
Qd 600
Qs 400 20 P
Qs 400 20(80)
Qs 1,200
Excess supply Qs Qd 600

500 Unit Quota

Qd 1,400 10 P
Qe 800
Qs 500
Qd Qs
500 1,400 10 P
PQuota 90

The amount exchanged

Above equilibrium price the amount
exchanged is determined by the
demand curve
Below equilibrium price the amount
exchanged is determined by the
supply curve

Value of Market Exchange

Typically, consumers value the
goods they purchase by an amount
that exceeds the purchase price of
the goods
Economic value
Maximum amount any buyer in the
market is willing to pay for the unit,
which is measured by the demand
price for the unit of the good

Measuring the Value of

Market Exchange

Consumer surplus

Difference between the economic value

of a good (its demand price) & the
market price the consumer must pay

Producer surplus

For each unit supplied, difference

between market price & the minimum
price producers would accept to supply
the unit (its supply price)

Social surplus

Sum of consumer & producer surplus

Area below demand & above supply over
the relevant range of output

Measuring the Value of

(Figure 2.6)

Market Exchange

Changes in Market
Equilibrium
Qualitative forecast
Predicts only the direction in which an
economic variable will move

Quantitative forecast
Predicts both the direction and the
magnitude of the change in an
economic variable

Demand Shifts (Supply Constant)

2.7)

(Figure

Supply Shifts (Demand Constant)

2.8)

(Figure

Simultaneous Shifts
When demand & supply shift
simultaneously
Can predict either the direction in
which price changes or the direction in
which quantity changes, but not both
The change in equilibrium price or
quantity is said to be indeterminate
when the direction of change depends
on the relative magnitudes by which
demand & supply shift

Simultaneous Shifts: (D,

S)
P
S
S
S

P
P
P

C
D
D

Q
Q

Price may rise or fall; Quantity rises

Simultaneous Shifts: (D,

S)
P
S
S
S
A

D
D

Q Q

Price falls; Quantity may rise or fall

Simultaneous Shifts: (D,

S)
P
S
S
P

P
A

D
D
Q

Q Q

Price rises; Quantity may rise or fall

Simultaneous Shifts: (D,

S)
P
S

P
P
P

D
D
Q

Price may rise or fall; Quantity falls