EC4101 Week 03 Lecture 02 PDF

EC4101 Wk.03 Lec.02 Supply: The quantity of a good that sellers wish to sell at each possible price. Excess Supply: Exists when the quantity supplied exceeds the quantity demanded at the ruling price. Graphically, this is any region above the equilibrium. Opposite is an excess demand, which result...

EC4101 Wk.03 Lec.02 Supply: The quantity of a good that sellers wish to sell at each possible price. Excess Supply: Exists when the quantity supplied exceeds the quantity demanded at the ruling price. Graphically, this is any region above the equilibrium. Opposite is an excess demand, which results in an increase of price towards equilibrium. Equilibrium / Market Clearing Price: The price at which the quantity supplied equals the quantity demanded. Graphically, this is where the supply and demand curves intersect. Direct Supply Function = Q=c-d P, where Q is quantity supplied, c is a positive constant, d is a positive/negative constant and P is price. Inverse Supply Function: P=(a/b) - (1/b) Q Equilibrium Price = (a-c)/(b+d) A supply curve shows the quantity supplied at any price. It's the horizontal sum of the individual supply curves of all firms in the market. The quantity supplied is the amount producers are willing to produce at a particular price. A positive increase in one of the below factors causes the curve to shift right. A change in price causes movement along the curve. Factors that shift the supply curve: Technology: Better tech shifts the curve to the right as lower costs occur. Input Costs: Lower input prices shift the curve right as a result of higher supply. Government Intervention: Subsidies, taxes and regulation Price Controls: Government rules or laws setting price floors or ceilings that forbid the adjustment of prices to clear markets. Supplier Expectations: If the price is expected to fall, they will produce more now A change in the number of Suppliers: More suppliers = right shift of curve Substitutes in production are different to those in demand. There may be a left shift of the supply curve in a product for no reason directly related to that product. For example, a farmer growing 2 types of crops may switch to growing more of the more profitable crop while producing less of the less profitable crop, even though the demand of the less profitable crop has not changed. Complements in supply are also different to those in demand. If the price of one product rises, the supply of a by-product of it will rise as a result even if the demand of the by product has not changes. E.g. sugar and molasses (complement). Steps to Analysing changes in Equilibrium: 1. Identify which curve(s) is/are shifted 2. Decide if the curve(s) shift(s) left/right 3. See how the shift affects equilibrium price and quantity An increase in demand increases equilibrium price and equilibrium quantity, a decrease has the opposite effect. An increase in supply decreases equilibrium price but increases the equilibrium quantity, a decrease has the opposite effect. Consumer Surplus: The difference between the price you paid and the maximum you were willing to pay (reservation price). Producer Surplus: The benefits producers gain by selling at market price which is higher than what they are willing to sell for. Comparative Static Analysis: Changes one of the ‘other things equal’ and examines the effect on equilibrium price and quantity. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: investopedia.com