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.