ECON 205 1st Edition Lecture 2 Outline of Last Lecture II The Market is made of buyers and sellers III Supply Demand cause changes in price and quantity Outline of Current Lecture II Determinants of Market Supply III Equilibrium in the Market IV Basic Government Policies and their effects on Supply and Demand Current Lecture Market Supply Market supply is the sum of quantities supplied by all sellers at each price Non price determinants of supply o Increase in supply shifts the Supply curve to the right o Decrease in supply shifts the supply curve to the left Factors that create shifts in the supply curve o Input prices Decrease in input prices wages or price of raw materials shift the supply curve to the right o Technology Determines amount of inputs needed to produce one unit of output Cost saving technological improvement will create a fall in input prices o Expectations May affect current supply i e if producers expect price to rise they should decrease supply now save and sell goods later when they can make more money off of them mostly affects goods that are storable o Number of sellers Increase in the number of sellers shifts the market supply curve to the right Equilibrium Equilibrium occurs when supply meets demand Price of goods adjusts to equate quantity supplied and quantity demanded Surpluses and shortages should be temporary and will always go back to the market equilibrium To see the effect of an event on equilibrium o See if the event shifts either of the curves o Which way do the curves and then the equilibrium shift Shortage is excess demand Surplus is excess supply Supply Demand and Government Policies Price controls are created by the government and affect the market s ability to reach a natural equilibrium o Price ceiling legal maximum on price o Price Floor legal minimum on price i e minimum wage A non binding price ceiling doesn t prevent the market from reaching the equilibrium it would ve reached in a free market o Essentially has no effect on the market Binding constraint causes a shortage if a price ceiling or a surplus if a price floor in the market Price controls are signals that guide the allocation of resources The balance of supply and demand create a coordinating economy
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