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Supply, and
Market Equilibrium Supply in Product/Output Markets
 Price and Quantity Supplied: The
Law of Supply
 Other Determinants of Supply
 Shift of Supply versus Movement
Along the Supply Curve
 From Individual Supply to Market
Supply
Market Equilibrium
 Excess Demand
 Excess Supply
 Changes in Equilibrium
Demand and Supply in Product
Markets: A Review

Supply in Product/Output Markets

Successful firms make profits because they

are able to sell their products for more than it
costs to produce them.

profit The difference between revenues and

costs.

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Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply
quantity supplied The amount of a particular product
that a firm would be willing and able to offer for sale at
a particular price during a given time period.

supply schedule A table showing how much of a

product firms will sell at different prices.

law of supply The 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 curve A graph illustrating how much of a product a

firm will sell at different prices.

Supply in Product/Output Markets

Price and Quantity Supplied:
The Law of Supply  FIGURE 3.6 Individual Supply Curve

TABLE 3.3 Supply Schedule for

paracetamol
Quantity Supplied
Price (Per pack) (pack Per Year)
Price of paracetamol $

$1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000

 A producer will supply more when the price of

output is higher.
 The slope of a supply curve is positive.
Pack of paracetamol produced
 Note that the supply curve is red: Supply is per year
determined by choices made by firms.

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Supply in Product/Output Markets

Other Determinants Of Supply

1) The Cost Of Production

In order for a firm to make a profit, its revenue must exceed

its costs.

Cost of production depends on a number of factors,

including the available technologies and the prices and
quantities of the inputs needed by the firm (labor, land,
capital, energy, and so on).

Supply in Product/Output Markets

Other Determinants Of Supply

2) The Prices of Related Products

Assuming that its objective is to maximize profits, a firm’s decision

about what quantity of output, or product, to supply depends on:
1. The price of the good or service.
2. The cost of producing the product, which in turn depends on:
■ The price of required inputs (labor, capital, and land).
■ The technologies that can be used to produce the
product.
3. The prices of related products.

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The decision of a profit-maximizing firm about what quantity

of output to supply depends on:
a. The price of the good or service.
b. The cost of producing the product.
c. The technologies that can be used to produce the
product.
d. All of the above.

Answer:
d. All of the above.

Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

movement along a supply curve The change

in quantity supplied brought about by a change in
price.

shift of a supply curve The change that takes

place in a supply curve corresponding to a new
relationship between quantity supplied of a good
and the price of that good. The shift is brought
about by a change in other factors.

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Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve
TABLE 3.4 Shift of Supply Schedule for paracetamol
Following decline in the prices of inputs  FIGURE 3.7 Shift of the Supply Curve or
paracetamol Following decline in the prices of input
SCHEDULE D0 SCHEDULE D1
Quantity Supplied Quantity Supplied
Price (pack per Year) (pack per Year
(per pack) after decline in
input’s price)
$1.50 0 5,000

Price of paracetamol $
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000

 When the price of a product changes, we

move along the supply curve for that
product; the quantity supplied rises or falls.
Pack of paracetamol produced
 When any other factor affecting supply per year
changes, the supply curve shifts.

Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

As with demand, it is very important to distinguish

between movements along supply curves (changes
in quantity supplied) and shifts in supply curves
(changes in supply):

Change in price of a good or service leads to

Change in quantity supplied (movement
along a supply curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in supply (shift of a supply curve).

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Supply in Product/Output Markets

From Individual Supply to Market Supply
market supply The sum of all that is supplied each period by all producers of a single
product.

Price of paracetamol $

 FIGURE 3.8 Deriving Market Supply

from Individual Firm Supply Curves
Total supply in the marketplace is the sum of all
the amounts supplied by all the firms selling in
the market. It is the sum of all the individual
Packs of paracetamol produced per year
quantities supplied at each price.

Refer to the figure below. Which of the following moves best describes what
happens when a change in the price of aspirin affects market supply?
a. A move from A to B.
b. A move from A to C.
c. Either move from A to B or A to C.
d. A move from B to C.

Answer:
Price of paracetamol per pack $

a. a move from A to B.

Packs of paracetamol produced per year

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Supply function ‫دالة العرض‬

Q xS  c  dPx

Q xs : Quantity supplied
:Constant
c
d  Q
s
x
 d = Slope of supply function
P x

:Price of x
Px

Market Equilibrium

equilibrium The condition that exists when

quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for
price to change.

Excess Demand

excess demand or shortage The condition

that exists when quantity demanded exceeds
quantity supplied at the current price.
 if there is excess demand, consumers bid
up the price.

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Market Equilibrium
Excess Demand  FIGURE 3.9 Excess Demand, or Shortage
 At a price of $1.75 per pack,
quantity demanded exceeds
quantity supplied.
 When excess demand exists,

Price of paracetamol per pack $

there is a tendency for price to
rise.
 When quantity demanded
equals quantity supplied,
excess demand is eliminated
and the market is in equilibrium.
Here the equilibrium price is
$2.50 and the equilibrium
quantity is 35,000 packs.
Packs of paracetamol

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.

Market Equilibrium
Excess Supply

excess supply or surplus The condition

that exists when quantity supplied exceeds
quantity demanded at the current price.
 if there is excess supply producers cut the
price. These two processes continue until
equilibrium is restored.

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Market Equilibrium  FIGURE 3.10 Excess Supply, or Surplus

Excess Supply

 At a price of $3.00,
quantity supplied

Price of paracetamol per pack

exceeds quantity
demanded by 20,000
packs.
 This excess supply
will cause the price to
fall.

$ Packs of paracetamol

When quantity supplied exceeds quantity demanded at the current

price, the price tends to fall. When price falls, quantity supplied is
likely to decrease and quantity demanded is likely to increase until an
equilibrium price is reached where quantity supplied and quantity
demanded are equal.

Refer to the figure below. When market price is $1.75, which of the following
is correct?
a. There is excess supply.
b. There is a surplus.
c. Quantity demanded is greater than quantity supplied.
d. All of the above.
Price of paracetamol per pack $

Packs of paracetamol

Answer”
c. Quantity demanded is greater than quantity supplied.

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Market Equilibrium
Changes In Equilibrium

When supply and demand curves shift, the equilibrium

price and quantity change.

 FIGURE 3.11 The Coffee

Market: A Shift of Supply and
Subsequent Price Adjustment

 Before the freeze, the coffee

market was in equilibrium at
a price of $1.20 per pound.
 At that price, quantity
demanded equaled quantity
supplied.
 The freeze shifted the supply
curve to the left (from S0 to
S1), increasing the
equilibrium price to $2.40.

Market Equilibrium
Changes In Equilibrium

 FIGURE 3.12 Examples of

Supply and Demand Shifts
for Product X

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Market Equilibrium

Changes In Equilibrium

Bad News for Orange

Juice Fanatics

Orange Juice Prices Could

Skyrocket After Freeze Destroys
Most of California Output

Which of the following situations leads to a lower equilibrium price?

a. An increase in demand, without a change in supply.
b. A decrease in supply accompanied by an increase in demand.
c. A decrease in supply, without a change in demand.
d. A decrease in demand accompanied by an increase in supply.
e. An increase in demand accompanied by an increase in supply.

Answer:
d. A decrease in demand accompanied by an increase in supply.

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Market Equilibrium
the market for dental check-ups
The Figure (a) describes what the hypothetical market would look like in
equilibrium.

 the supply curve reflects the seller’s marginal costs (the cost of producing
one extra unit) (MC)
 the demand curve reflects the marginal utility (extra benefit) (MB) that
consumers receive from consuming each unit.

Market Equilibrium
the market for dental check-ups
The Figure (b) describes what the hypothetical market would look like in excess
demand.

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Market Equilibrium
the market for dental check-ups
The Figure (c) describes what the hypothetical market would look like in excess
supply (surplus).

Now, suppose the market for dental check-ups is currently in equilibrium. What
would happen if the city’s dental clinics were to relocate outside the city?
 On the supply side: it is conceivable that building and land costs are lower
beyond the city limits. These reduced costs may result in an increase in the
quantity of check-ups supplied at all prices. In this case the supply curve will
shift to the right.
 On the demand side: if the clinic becomes more distant and people have to
travel further then they may incur higher transport and time costs. The
increasing costs may result in a decrease in the quantity of check-ups
demanded at all prices. The demand curve shifts to the left.

 The effect of an increase in supply will

be a fall in the equilibrium price, as will
the effect of a fall in demand.
Therefore the overall result of
relocation will be a fall in price

 The overall effect on quantity traded,

however is less clear. An increase in supply
will (all things constant) increase the
quantity traded, whereas a fall in demand
will decrease the quantity traded. One
effect will partially offset the other.

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Perfectly competitive markets and efficiency

The term ‘efficiency’ can have many different meanings.
 Allocative efficiency describes a situation where resources are
allocated and commodities distributed in a way that maximizes social
welfare.

 Social welfare is total social

benefit minus total social cost.
 Social welfare is represented by
the area below the marginal social
benefit curve (demand curve) and
above the marginal social cost
curve (supply curve).
 Social welfare is maximized at the
point where marginal social
benefit (MSB) equals marginal
social cost (MSC), the point P*Q*
shown in Figure.

Perfectly competitive markets and efficiency

 If MSB is greater than MSC then you can increase social welfare by
increasing quantity because the extra benefit is greater than the extra
cost and vice versa.
 If MSB is less than MSC then you can increase social welfare by
decreasing quantity because the benefit lost is less than the cost
saved.
 A free market will be allocatively efficient if demand is equal to
MSB and supply is equal to MSC.

 On the supply side, the efficiency condition is that supply is equal to

MSC. Producers are then technically and economically
(productively) efficient.

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Perfectly competitive markets and efficiency

 Technical efficiency – refers to the physical relation between
resources (capital and labour) and health outcome. This is called
production function.
 A technically efficient position is achieved when the maximum
possible improvement in outcome is obtained from a set of
resource inputs.
 A medical intervention is technically inefficient if the same (or
greater) outcome could be produced with less of one type of
input.

Conditions for perfectly competitive markets

 A free or perfectly competitive market can only operate efficiently if
a number of important conditions are met, including these four:
1) producers selling the same product (homogeneity);
2) There are many sellers and buyers;
3) no restrictions on potential sellers entering the market;
4) buyers and sellers well informed about prices.

Do you think health services are perfectly competitive? Explain why,

or why not.
There are several ways that health services are not perfectly competitive.

1) Different providers are not selling an identical product.

 The quality (or at least the reputation for quality) of care and
service is known to vary between providers.
 Most health care services are by nature heterogeneous.

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Do you think health services are perfectly competitive? Explain why,

or why not.
There are several ways that health services are not perfectly competitive.
2) For some areas of health care there may be many suppliers but for
others not.
 Generally, primary care is provided by a large number of
individual doctors and small group practices whereas specialist
services often have few providers.
3) There are barriers to entry into the health care system.
 Doctors, nurses and other health professionals need qualifications,
training and practice licensing and registration before they can
provide health care, and hospitals entail large start-up investments.
4) For a lot of health care, consumers are not fully informed about what
services they need and cannot be sure about differences in quality
between providers.

 While examples of perfectly competitive markets are hard to find in

health care, this does not mean that market forces do not operate
there.

Q xs  c  dPx Q xd  a  bPx

Supply Demand

Equilibrium

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p x
D S
18

Q xs  c  dPx
16

14

12

10 E
9
8

4
Q xd  a  bPx
2
D
0
100 200 300 400 500 600 700 800 900
Q x
450

How to find equilibrium price and quantity

mathematically

Q xd  a  bPx
Q xs  c  dPx
Q xd  Q xs At equilibrium

a  bPx  c  dPx

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a  bPx  c  dPx
a  c  bPx  dPx
a  c  Px (b  d )
a c
P* 
b d

ad  cd
Q* 
b d

Exercise
1) Calculate the equilibrium price and quantity
mathematically and graphically if the demand and
supply functions are as follows

Q xd  100  0.5Px

Q xs  50  0.5Px

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Q xd  100  0.5Px
Q xs  50  0.5Px

50  0.5Px
100 0.5Px

100  50  0.5Px  0.5Px

50  (1) Px

Px  50  (1)  50

Q xd  100  0.5(50)  75 Q xs  50  0.5(50)  75

Q xd  100  0.5Px Q xs  50  0.5Px

D S

p x

E
50

D
Q Ex
75

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