The Market Forces of

Supply and Demand

PPT 2.2
(Based on Chapter 4, Mankiw)
 Supply

Quantity supplied is the amount of a good

that sellers are willing and able to sell.

A Supply curve is drawn under

the assumption of ceteris paribus -
all other important factors
remaining unchanged
 Law of Supply

The law of supply states that there is a

direct (positive) relationship between
price and quantity supplied.
 Supply Schedule

The supply schedule is a table that

shows the relationship between the
price of the good and the quantity
supplied.
Supply Schedule

Price Quantity
$0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5
 Supply Curve

The supply curve is the upward-

sloping line relating price to quantity
supplied.
Price of Supply Curve
Ice-Cream
Cone
$3.00 Price Quantity
$0.00 0
2.50
0.50 0
2.00 1.00 1
1.50 2
1.50 2.00 3
2.50 4
1.00
3.00 5
0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Understanding Supply
 It shows the willingness to accept of a producer
for a certain unit of the commodity.

 It also shows the quantity supplied by a

producer or firm at a particular price.

 While demand typically refers to consumers,

supply typically refers to firms, and the item of
interest is Market Supply
 WTA and the
Tendency of Supply
P
The min. WTA for the 23rd
unit is $15. The quantity
supplied at $20 is 33 units
S per period. Note the entry
$20 price of $8. No one is
$15 supplying until $8 when 10
are offered.
$8
D
Qs/t
10 23 33
 Market Supply
 Market supply refers to the sum of
all individual supplies for all sellers
of a particular good or service.
 Graphically, individual supply
curves are summed horizontally to
obtain the market supply curve.
Market Supply Schedule

P($) Mary’s John’s Ling’s Market

qs qs qs Qs
5 3 5 4 12

10 5 8 5 18

15 7 10 6 23
Determinants of Supply

 Market price
 Input prices
 Price of related goods
 Technology
 Expectations
 Number of producers
Price of related goods

u What would happen to the Supply

of small cars if the price of big cars
increased?
v
The Supply of small cars would
probably fall since it would be
more profitable to produce big cars.
Price of Resources / inputs
An increase in the price of a
resource used in production
will decrease the Supply of
the good
And a decrease in the price
of a resource will increase
the Supply of the good
 Expectations
If there is a news
about how people are
turning vegetarian the meat
suppliers will probably think
of changing their business.
Number of Sellers
u A positive relationship - the greater
the number of sellers, the larger the
total quantity supplied of the good at
a given price. Supply increases, or
the supply curve shifts to the right.
u Likewise, if there are fewer sellers in
the market there is less quantity
supplied at every price, so supply
has decreased.
Technology

uImprovement in technology
lowers costs
uLower cost of production
increases Supply
 Change in Quantity Supplied
versus Change in Supply

Change in Quantity Supplied

 Movement along the supply curve.
 Caused by a change in the market price
of the product.
 Change in Quantity Supplied
Price of
Ice-Cream
Cone
S
C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00

Quantity of
0 1 5 Ice-Cream
Cones
Change in Quantity Supplied
versus Change in Supply

Change in Supply
 A shift in the supply curve, either to the
left or right.
 Caused by a change in a determinant
other than price.
 Change in Supply
Price of S3
Ice-Cream
Cone
S1 S2
Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
 Change in Quantity Supplied
versus Change in Supply
Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve