Econ 100
Lecture 2.3
Supply Curves
10-7-2010
Figure 4.8 The Individual Firm
Supply Schedule and Curve
Supply curve is a marginal cost (MC) curve
Market Supply
• The market supply curve is the horizontal
sum of all the individual firm supply
curves.
Figure 4.9 The Supply of Coffee in
the City of Burlington, Vermont
The Law of Supply
5
Changes in Supply
• Factors that affect the supply of a good:
– Prices of inputs (such as wages)
– Technology
– Natural disruptions (such as bad weather)
– The number of firms in the market
– Expectations
– Government policies
Changes in Supply (cont’d)
Table 4.2
Factors That Shift the Supply
Curve
Equilibrium
• The combined forces of supply and demand in a market
determine:
– The quantity of a product bought and sold, and
– The price per unit of the product.
• The equilibrium price is the price at which:
– The quantity demanded equals the quantity supplied and the
market “clears.”
Equilibrium (cont’d)
• When a market is in equilibrium, there will
be no tendency for price or quantity to
change.
Equilibrium (cont’d)
Price
(£)
The Cobweb Theorem
S
11
The
Assume
Farmers
the
respond
falls
initial
£5
by
equilibrium
and
planning
farmers
This
In price
acreates
‘divergent
atomassive
cobweb’
- to
price
increase
react
is
by
£7
cutting
supply,
and
the
plans
ten
quantity
months
for
turkey
9.
shortage
also termed
of 9 an
million
unstable
turkeys If
demand
later,
production.
the rises,
supply
the
months
of
shortage
turkeys
later,
is
and
cobweb
the
price
- Ten
theis
price
forced
tends
up
–to15
pushes
million.
supply
At
the
the
this
price
market
level,
upequilibrium.
to
there
will
£11be
will
per
8
and
move
soon
away
the
process
from
continues!
turkey.
be
million.
a surplus of turkeys and the
A divergent
price
drops. cobweb leads to
price instability over time.
7
5
D
8
9
15
17
D1
Quantity Bought and Sold
(millions)
Cobweb Theorem
• http://www.bized.co.uk/current/mind/2004_5/251004.ppt
• Hungarian-born economist Nicholas Kaldor (1908-1986)
• Simple dynamic model of cyclical demand with time lags
between the response of production and a change in
price (most often seen in agricultural sectors).
• Cobweb theory is the process of adjustment in markets
• Traces the path of prices and outputs in different
equilibrium situations. Path resembles a cobweb with the
equilibrium point at the center of the cobweb.
• Sometimes referred to as the hog-cycle (after the
phenomenon observed in American pig prices during the
1930s).
Some Questions to Ponder
1.
An early freeze destroys half of Florida’s orange crop.
a)
b)
2.
Import quotas restrict the quantity of particular goods, e.g., large screen
TVs, that can be imported from a given country
a)
b)
3.
4.
5.
What will be the impact on the price of OJ?
On the price of meals that include OJ as part of the package?
What is the impact on the US market of restricting TVs imported from China?
What is the impact on the US housing market of restricting “illegal” immigrants
who provide construction labor? Or harvest agricultural products, like apples?
How does a sales tax, e.g., 10% of the purchase price, affect the demand
for those goods or services?
How does a subsidy, e.g., a 10% rebate, affect the demand for those
goods and services? How would a subsidy for “green energy”, e.g.
biodiesel fuels, affect: a) the demand for biodiesel fuels? b) the demand
for gasoline, c) the demand for corn (from which biodiesel is produced)?
Seattle is considering two alternatives to the Alaska Way Viaduct. 1) A
tunnel (2 lanes each way) and 2) a surface street. One proponent of the
surface street option has said that it will encourage more people to use
buses and reduce car travel. Is she correct?
Useful Websites
– Understanding differences between factors
that cause shifts in demand or supply
• http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.h
tml
– Basics of demand and supply
• http://www.investopedia.com/university/economics/
economics3.asp
– Cobweb theorem
• http://www.bized.co.uk/current/mind/2004_5/25100
4.ppt