Lecture 7 Outline of Last LectureI. Determinates of DemandII. Supplya. Law of supplyOutline of Current LectureI. Supply (cont.)II. Supply curveIII. Determinants of supplya. Price of inputsb. Technological changesc. Taxes and subsidiesd. Prices of goods produced by using the same resourcese. Producer expectations about future prices f. Number of sellersIV. Market Equilibrium V. Productive EfficiencyVI. Allocative Efficiency Current LectureI. Supply (cont.) a. Revenue = price x quantity b. Other things equal, as price rises the quantity supplied risesII. Supply curvea. Supply curve is the producer’s marginal cost (MC) curveb. Upward sloping from left to right so as the quantity supplied increases the marginal cost increases as well III. Determinants of supply – factors that shift the supply curve to the right or to the left - Shift in supply is called change in supply (as opposed to change in quantity supplied)a. Price of inputsi. Example: gasoline production – crude oil is the input and gasoline is the outputii. If the price of crude oil goes down then more gasoline can be produced and the supply curve will shift to the right. The profit will increase after selling more. Cheap crude oil leads to more gasoline in the market.iii. Any decrease in input prices leads to rightward shift in the supply curveiv. Any increase in input prices leads to leftward shift in the supply curveb. Technological changesc. Taxes and subsidies d. Prices of goods produced by using the same resourcese. Producer expectations about future pricesf. Number of sellers ARE 1150 1st EditionLecture 7 IV. Market equilibrium - What allows us to draw both demand and supply curves on the same chart? – Because they have the same units. Price on the y-axis and quantity on the x-axis a. Equilibrium price (or market-clearing price) and equilibrium quantity = The only place where consumers and buyers agree on the quantity being demanded and the corresponding price b. How do buyers and sellers respond to surplus and shortage?i. They lower the price to get rid of surplusii. They increase the price if there is a shortage V. Productive efficiencya. Competitive market ensures efficient allocations of society’s resourcesb. Productive efficiency = production of any particular good in the least costly way VI. Allocative efficiencya. Competitive market ensures efficient allocations of society’s resourcesb. Allocative efficiency = the particular mix of goods and services most highly valueby society is produced ARE 1150 1st