Supply, Shifts, and Market Equilibrium

Understanding Supply and Market Equilibrium

Introduction to Supply

• Definition: Supply refers to the quantity of an item that sellers are willing to sell and able to sell at various prices.
  • Sellers generally wish to sell more items when prices are higher.
  • Example: If the price of coffee increases from 2 to 3, sellers are incentivized to sell more.
• Individual vs. Market Supply:
  • Individual Supply: Refers to the supply of a single seller.
  • Market Supply: Refers to the collective supply of all sellers in the market.

Law of Supply

• The Law of Supply states that quantity supplied (Q_S) is a function of price (P).
• There is a positive (direct) relationship between price and quantity supplied:
  • If price goes up, suppliers are willing to sell more.
  • If price goes down, suppliers are willing to sell less.

Supply Schedule and Curve

• Supply Schedule: A table showing the relationship between different prices and the quantity a seller is willing and able to sell at each price.
  • Example Schedule (Hypothetical Coffee Sales):
    • Price 0: Quantity Supplied 0 (Not willing to sell as costs are not covered).
    • Price 1: Quantity Supplied 0 (Cost not covered).
    • Price 2: Quantity Supplied 2 units.
    • Price 10: Quantity Supplied 18 units.
• Supply Curve: A graphical representation of the supply schedule, plotting price on the vertical axis and quantity supplied on the horizontal axis.
  • The supply curve slopes upward from left to right, reflecting the direct relationship between price and quantity supplied.
  • Starting Point: The supply curve typically starts above 0 price and quantity. There's a minimum price required for sellers to even begin supplying, as they need to cover their costs.
    • This minimum point indicates the lowest price at which sellers start offering the item in the market.
  • Interpretation:
    • If the price is 8, the quantity supplied might be 14 units (referencing a point on the curve).
    • If the quantity supplied is 12, the corresponding price point on the curve might be 7.

Movements Along the Supply Curve

• A change in the own price of a good causes a movement along the existing supply curve.
  • Example: If the price of an item goes from 4 to 6, suppliers are willing to sell more (e.g., from 6 to 10 items).
  • This is not a shift of the curve; it's a change in the quantity supplied at a different price point on the same curve.
  • Key Principle: Changes in own price lead to movements along the curve; other factors cause the curve to shift.

Shifts in the Supply Curve (Changes in Supply)

• When factors other than the item's own price change, the entire supply curve shifts either to the right (increase in supply) or to the left (decrease in supply).
• Factors that Shift the Supply Curve:
  1. Input Prices (Cost of Production):
     • Inputs: Resources used to produce a good (e.g., for a burger: patty, bun, cheese, labor, utilities like rent).
     • Impact: If input prices (costs) go up, a seller's budget is affected, and they can produce less at any given price.
       • Example: If Nova Scotia's minimum wage increases from 15 to 17, labor costs for Burger King increase. If their budget was 1000 for 1000 burgers, an increased wage means they are 500 short and might only produce 700 burgers. This leads to a decrease in supply (shift left).
       • Rule: If input prices (P_{input}) go up, quantity supplied (Q_S) goes down (supply shifts left, e.g., from S_1 to S_2). Conversely, if input prices decrease, supply increases (shifts right).
  2. Number of Sellers (Competitors):
     • Impact: More sellers in the market mean a higher overall supply at any given price.
       • Example: If 10 burger sellers in Sydney reduced to 8 because two businesses closed, the total burgers supplied would decrease (e.g., from 1000 to 800). This is a decrease in supply (shift left).
       • Rule: If the number of sellers goes up, supply shifts right. If the number of sellers goes down, supply shifts left.
  3. Technology:
     • Impact: Improved technology allows producers to make goods more efficiently or at a lower cost, increasing supply.
       • Example 1: The improvement in laptop technology over 20-30 years has made them cheaper and more widely available, leading to an increase in supply (shift right).
       • Example 2: Simple technology in fast-food chains (like KFC) allows for easy replication of production processes, leading to an increase in global supply of such food items.
       • Rule: If technology improves (tech goes up), quantity supplied (Q_S) goes up (supply shifts right).
  4. Expected Prices (P_E):
     • Impact: What sellers expect prices to be in the future affects their current willingness to supply.
       • Example: If the price of gas is 1.48 today but is expected to be 1.70 tomorrow, sellers might decrease current supply (shift left), holding back inventory to sell at the higher future price.
       • Rule: If future prices are expected to increase, current supply decreases (shifts left). If future prices are expected to decrease, current supply increases (shifts right).
• Summary of Supply Shifters: The quantity supplied depends on price, input prices, number of sellers, and technology.

Market Equilibrium

• Definition: Equilibrium is a state where the quantity demanded (Q_D) equals the quantity supplied (Q_S) at a specific price. At this point, there is no pressure for the price to change.
  • Interest Clash: Buyers want the lowest prices possible, while sellers want the highest. Equilibrium is the point where these conflicting interests balance.
• Equilibrium Price (P_E): The price at which Q_D = Q_S.
• Equilibrium Quantity (Q_E): The quantity demanded and supplied at the equilibrium price.

Market Disequilibrium: Surplus and Shortage

• Using a Demand and Supply Schedule (Combined Example):
  • Condition for Equilibrium: Where Q_D = Q_S.
  • If P = 0: Q_D = 10, Q_S = 0 (Not equal).
  • If P = 1: Q_D = 9, Q_S = 0 (Not equal).
  • When P = 4: Q_D = 6, Q_S = 6. This is the equilibrium price and quantity.

Surplus (Excess Supply)

• Definition: Occurs when the price is above the equilibrium price, leading to Q_S > Q_D.
  • Sellers wish to sell more than buyers are willing to purchase at that price.
• Example: If price is 7:
  • Q_D = 3 items.
  • Q_S = 12 items.
  • Excess Supply (Surplus): Q_S - Q_D = 12 - 3 = 9 units.
  • Real-world implication: Items remain on shelves, unsold.
• Market Response: If there is a surplus, sellers will tend to decrease the price to attract more buyers, moving the market back towards equilibrium.

Shortage (Excess Demand)

• Definition: Occurs when the price is below the equilibrium price, leading to Q_D > Q_S.
  • Buyers wish to purchase more than sellers are willing to supply at that price.
• Example: If price is 3:
  • Q_D = 7 units.
  • Q_S = 4 units.
  • Excess Demand (Shortage): Q_D - Q_S = 7 - 4 = 3 units.
  • Real-world implication: Shelves are empty, leading to stock-outs (e.g., during sales).
• Market Response: If there is a shortage, sellers will tend to increase the price due to high demand, moving the market back towards equilibrium.

Visualizing Equilibrium and Disequilibrium on a Graph

• The equilibrium point is where the supply curve and demand curve intersect.
• Any price above equilibrium will show a horizontal gap between the supply and demand curves, representing a surplus (the quantity supplied is greater than the quantity demanded).
  • Example: At price 7, Q_S = 10 and Q_D = 4, so surplus is 10 - 4 = 6 units.
• Any price below equilibrium will show a horizontal gap between the demand and supply curves, representing a shortage (the quantity demanded is greater than the quantity supplied).
  • Example: At price 2, Q_D = 8 and Q_S = 4, so shortage is 8 - 4 = 4 units.

Practical Application: Analyzing Market Scenarios

Consider a supply and demand table (as discussed in lecture): P = 3 for equilibrium price and 15 for equilibrium quantity.

• Scenario 1: If the market price is 5:
  • Q_D (e.g., 8 units) is less than Q_S (e.g., 16 units).
  • This is a surplus of 16 - 8 = 8 units. (Note: The specific numbers in transcript imply Q_D is not explicitly stated for P=5 but rather Q_S=16.)
  • In the future, the price will tend to decrease.
• Scenario 2: If the market price is 2:
  • Q_D (e.g., 20 units) is greater than Q_S (e.g., 12 units).
  • This is a shortage of 20 - 12 = 8 units.
  • In the future, the price will tend to increase.
• These price adjustments (decrease for surplus, increase for shortage) naturally push the market back towards equilibrium.