Demand Supply and Equilibrium Contents Contents Deriving Deriving the the Supply Supply Curve Curve Supply Supply and and Demand Demand Equilibrium Equilibrium Effects Effects of of Demand Demand and and Supply Supply Shifts Shifts on on Equilibrium Equilibrium Welfare Welfare Properties Properties of of Equilibrium Equilibrium Fighting Fighting the the Invisible Invisible Hand Hand The The Market Market Fights Fights Back Back Copyright 2006 South Western Thomson Learning All rights reserved The The Invisible Invisible Hand Hand Supply Supply and and demand demand automatic automatic solution solution to to economic economic problems problems Interference Interference in in markets markets counterproductive counterproductive consequences consequences Invisible Invisible hand hand in in the the pursuit pursuit of of selfselfinterest interest individuals individuals promote promote social social wellwellbeing being Copyright 2006 South Western Thomson Learning All rights reserved Deriving Deriving Supply Supply Curve Curve Recall Recall example example with with garages garages from from previous previous lecture lecture Consider Consider the the cost cost schedule schedule for forAl Al Copyright 2006 South Western Thomson Learning All rights reserved TABLE TABLE 1 1 Al s Al s Total Total Average Average and and Marginal Marginal Costs Costs Copyright Copyright 2006 South Western Thomson 2006 South Western Thomson Learning Learning AllAll rights rightsreserved reserved Marginal Cost per Added Garage thousands FIGURE FIGURE 1 1 Marginal Marginal Cost Cost Curve Curve 50 MC 45 40 35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 Output Garages per Year c Marginal Cost 9 10 Copyright Copyright 2006 South Western Thomson 2006 South Western Thomson Learning Learning AllAll rights rightsreserved reserved Supply Supply Curve Curve Supply Supply curve curve of of aa firm firm isis the the increasing increasing part part of of its its marginal marginal cost cost curve curve Why Why only only increasing increasing part part Because Because when when MC MC decrease decrease with with Q Q itit isis optimal optimal to to increase increase output output Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 2 2 Marginal Marginal Cost Cost Curve Curve Marginal Cost per Added Garage thousands and and Supply Supply Curve Curve 50 MC 45 40 35 Supply Curve 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 Output Garages per Year Marginal Cost 9 10 Copyright Copyright 2006 South Western Thomson 2006 South Western Thomson Learning Learning AllAll rights rightsreserved reserved From From Individual Individual to to Market Market Supply Supply We We derived derived supply supply of of single single firm firm In In every every market market there there are are usually usually many many producers producers The The market market supply supply isis aa sum sum of of all all individual individual supply supply curves curves Copyright 2006 South Western Thomson Learning All rights reserved Supply Supply and and Quantity Quantity Supplied Supplied Sellers Sellers producers producers supply supply Quantity Quantity supplied supplied amount amount that that producers producers wish wish to to sell sell at at each each price price Law Law of of supply supply price price and and the the quantity quantity supplied supplied are are positively positively related related all all else else equal equal Copyright 2006 South Western Thomson Learning All rights reserved TABLE TABLE 2 2 Supply Supply Schedule Schedule for for Milk Milk Copyright 2006 South Western Thomson Learning All rights reserved Supply Supply and and Quantity Quantity Supplied Supplied The The Supply Supply Schedule Schedule and and the the Supply Supply Curve Curve Supply Supply Schedule Schedule aa table table showing showing the the quantity quantity of of demand demand at at each each price price for for some some good good Supply Supply Curve Curve graph graph of of aa supply supply schedule schedule Positive Positive slope slope Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 3 3 Supply Supply Curve Curve for for Milk Milk a 1 50 S b Price per Quart 1 40 c 1 30 e 1 20 f 1 10 g 1 00 90 0 h S 30 40 50 60 70 80 90 Quantity Supplied in Billions of Quarts per Year Copyright 2006 South Western Thomson Learning All rights reserved Supply Supply and and Quantity Quantity Supplied Supplied Shifts Shifts of of the the Supply Supply Curve Curve Movement Movement along along aa supply supply curve curve due due to to Changes Changes in in price price Shift Shift between between supply supply curves curves due due to to Changes Changes in in industry industry size size entry entry and and exit exit Changes Changes in in production production technology technology Changes Changes in in prices prices of ofinputs inputs Changes Changes in in prices prices of ofrelated related outputs outputs Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 4 4 Movements Movements along along versus versus Shifts Shifts of of aa Supply Supply Curve Curve S0 Price per Quart S1 c 1 30 f 1 10 S0 S1 Quantity Supplied in Billions of Quarts per Year Copyright 2006 South Western Thomson Learning All rights reserved FIGURE FIGURE 5 5 Shifts Shifts of of the the Supply Supply Curve Curve S2 S0 Price S1 S0 Price S0 S2 S1 S0 Quantity a Quantity b Copyright 2006 South Western Thomson Learning All rights reserved Refresher Refresher on on Demand Demand Buyers Buyers demand demand Quantity Quantity demanded demanded the the amount amount that that buyers buyers wish wish to to purchase purchase at at each each price price Law Law of of demand demand price price and and the the quantity quantity of of demand demand are are negatively negatively related related all all else else equal equal Copyright 2006 South Western Thomson Learning All rights reserved Refresher Refresher on on Demand Demand The The Demand Demand Schedule Schedule Table Table showing showing the the quantity quantity of of demand demand at at each each price price for for some some good good Copyright 2006 South Western Thomson Learning All rights reserved TABLE TABLE 3 3 Demand Demand Schedule Schedule for for Milk Milk Copyright 2006 South Western Thomson Learning All rights reserved Demand Demand and and Quantity Quantity Demanded Demanded The The Demand Demand Curve Curve Graph Graph of of aa demand demand schedule schedule Negative Negative slope slope