ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 6 Supply and Demand Supply and Equilibrium Krugman Wells What the supply curve is What affects supply How the supply and demand curves determine a market s equilibrium price and equilibrium quantity In the case of a shortage or surplus how price moves the market back to equilibrium 3 of 20 The Supply Schedule A supply schedule shows how much of a good or service would be supplied at different prices Supply Schedule for Coffee Beans Price of coffee beans per pound Quantity of coffee beans supplied billions of pounds 2 00 11 6 1 75 11 5 1 50 11 2 1 25 10 7 1 00 10 0 0 75 9 1 0 50 8 0 4 of 20 The Supply Curve A supply curve shows graphically how much of a good or service people are willing to sell at any given price Price of coffee beans per pound Supply curve S 2 00 1 75 As price rises the quantity supplied rises 1 50 1 25 1 00 0 75 0 50 0 7 9 11 13 15 17 Quantity of coffee beans billions of pounds 5 of 20 The Law of Supply The Law of Supply says that other things being equal the price and quantity supplied of a good are positively related 6 of 20 An Increase in Supply The entry of Vietnam into the coffee bean business generated an increase in supply a rise in the quantity supplied at any given price Supply Schedule for Coffee Beans Price of coffee beans per pound Quantity of beans supplied billions of pounds Before entry After entry 2 00 11 6 13 9 1 75 11 5 13 8 1 50 1 25 11 2 13 4 10 7 12 8 1 00 10 0 12 0 0 75 9 1 10 9 0 50 8 0 9 6 7 of 20 An Increase in Supply This event is represented by the two supply schedules one showing supply before Vietnam s entry the other showing supply after Vietnam came in Supply Schedule for Coffee Beans Price of coffee beans per pound Quantity of beans supplied billions of pounds Before entry After entry 2 00 11 6 13 9 1 75 11 5 13 8 1 50 1 25 11 2 13 4 10 7 12 8 1 00 10 0 12 0 0 75 9 1 10 9 0 50 8 0 9 6 8 of 20 An Increase in Supply Price of coffee beans per pound Vietnam enters coffee bean business more coffee producers 2 00 1 75 A movement S1 along the supply curve S2 1 50 1 25 1 00 is not the same thing as a shift of the supply curve 0 75 0 50 0 7 9 11 13 15 17 Quantity of coffee beans billions of pounds A shift of the supply curve is a change in the quantity supplied of a good at any given price or a change in supply 9 of 20 Movement Along the Supply Curve Price of coffee beans per pound 2 00 A movement along the supply curve S1 S2 1 75 1 50 B 1 25 A 1 00 C is not the same thing as a shift of the supply curve 0 75 0 50 0 7 10 11 2 12 15 17 Quantity of coffee beans billions of pounds A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good s price 10 of 20 Shifts of the Supply Curve Price S 3 S 1 S 2 Increase in supply Any decrease increase in in supply means a rightwardshift lefward shiftofofthe the supply curve at any given price there is aan increase ininthe decrease thequantity quantity supplied S1 S3 S2 Decrease in supply Quantity 11 of 20 Understanding Shifts of the Supply Curve Changes in input prices An input is a good that is used to produce another good Changes in the prices of related goods and services Changes in technology Changes in expectations Changes in the number of producers 12 of 20 Individual Supply Curve and the Market Supply Curve The market supply curve is the horizontal sum of the individual supply curves of all firms in that market a Mr Figueroa s Individual Supply Curve Price of coffee beans per pound S Figueroa 2 b Mr Bien Pho s Individual Supply Curve Price of coffee beans per pound 1 0 2 S Bien Pho Price of coffee beans per pound 1 1 2 3 Quantity of coffee beans pounds 0 c Market Supply Curve S Market 2 1 1 2 Quantity of coffee beans pounds 0 1 2 3 4 5 Quantity of coffee beans pounds 13 of 20 Only Creatures Small and Pampered According to a 2007 article in the New York Times the U S has experienced a severe decline in the number of farm veterinarians over the past two decades The source of the problem is the higher demand for pet veterinarians Farm veterinary services and pet veterinary services are substitutes in production 14 of 20 Supply Demand and Equilibrium Equilibrium in a competitive market when the quantity demanded of a good equals the quantity supplied of that good The price at which this takes place is the equilibrium price a k a market clearing price Every buyer finds a seller and vice versa The quantity of the good bought and sold at that price is the equilibrium quantity 15 of 20 Finding the Equilibrium Price and Quantity Price of coffee beans per pound Market equilibrium occurs at point E where the supply curve and the demand curve intersect Supply 2 00 1 75 1 50 1 25 Equilibrium price E 1 00 Equilibrium 0 75 0 50 0 Demand 7 10 Equilibrium quantity 13 15 17 Quantity of coffee beans billions of pounds 16 of 20 Price Above Its Equilibrium Level Creates a Surplus Price of coffee beans per pound There is a surplus of a good when the quantity supplied exceeds the quantity demanded Surpluses occur when the price is above its equilibrium level Supply 2 00 Surplus 1 75 1 50 1 25 E 1 00 0 75 0 50 0 Demand 7 8 1 Quantity demanded 10 11 2 Quantity supplied 13 15 17 Quantity of coffee beans billions of pounds 17 of 20 Price Below Its Equilibrium Level Creates a Shortage Price of coffee beans per pound There is a shortage of a good when the quantity demanded exceeds the quantity supplied Shortages occur when the price is below its equilibrium level Supply 2 00 1 75 1 50 1 25 E 1 00 0 75 Shortage 0 50 0 7 9 1 10 Quantity supplied 11 5 Demand 13 Quantity demanded 15 17 Quantity of coffee beans billions of pounds 18 of 20 1 The supply schedule shows the quantity supplied at each price and is represented graphically by a supply curve Supply curves usually slope upward 2 A …