EC4101 week 3 lecture 2

Supply and Equilibrium

• Supply is the quantity of a good sellers are willing to sell at various prices.
• Excess supply occurs when quantity supplied exceeds quantity demanded at the current price.
• Excess demand is the opposite, quantity demanded exceeds quantity supplied.
• Equilibrium price is where quantity supplied equals quantity demanded.

Supply Function

• Direct Supply Function: Q = c - dP (Q = quantity supplied, c = constant, d = constant, P = price)
• Inverse Supply Function: P = (a/b) - (1/b)Q

Equilibrium Price

• Equilibrium Price = (a-c)/(b+d)

Supply Curve

• Shows the quantity supplied at any given price.
• It's the horizontal sum of individual supply curves.
• Quantity supplied is the amount producers are willing to produce at a specific price.

Factors Shifting Supply Curves

• Technology: Improvements shift the curve to the right (lower costs).
• Input costs: Lower input prices shift the curve to the right.
• Government intervention (e.g., subsidies, taxes, price controls): These can shift the curve.
• Supplier expectations: Anticipated price changes can affect supply.
• Number of suppliers: More suppliers shift the curve to the right.

Substitutes in Production

• Different products a supplier can make
• A change in profitability of one product may lead to a change in a related product's supply.

Steps for Analyzing Equilibrium Changes

• Identify curves shifted.
• Determine if shifts are left or right.
• Analyze how the shift affects equilibrium price and quantity.

Demand-Related Effects

• An increase in demand increases both equilibrium price and quantity.
• A decrease in demand decreases both equilibrium price and quantity.
• An increase in supply decreases equilibrium price but increases equilibrium quantity.
• A decrease in supply increases equilibrium price but decreases equilibrium quantity.

Consumer and Producer Surplus

• Consumer Surplus: Difference between what consumers pay and their maximum willingness to pay.
• Producer Surplus: Difference between what producers receive for a good and their minimum willingness to sell it for.

Static Analysis

• Comparative Static Analysis focuses on how changes in economic conditions affect equilibrium price and quantity.

This quiz focuses on the concepts of supply and equilibrium in economics, including the definitions of excess supply and demand, supply functions, equilibrium price, and factors that shift supply curves. Test your understanding of how these concepts relate to market dynamics and pricing.