Econ 100Lecture 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

5

The Law of Supply

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)

The Cobweb Theorem

D

S

7

Price (£)

Quantity Bought and Sold (millions)

9

D1

In a ‘divergent cobweb’ -also termed an unstable cobweb - the price tends to move away from equilibrium.

Assume the initial equilibrium price is £7 and the quantity 9. If demand rises, the shortage pushes the price up to £11 per turkey.

11

15

Farmers respond by planning to increase supply, ten months later, the supply of turkeys is 15 million. At this level, there will be a surplus of turkeys and the price drops.

8

The price falls to £5 and farmers react by cutting plans for turkey production. Ten months later, supply on the market will be 8 million.

5

This creates a massive shortage of 9 million turkeys and the price is forced up – and so the process continues!

A divergent cobweb leads to price instability over time.

17

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 Ponder1. An early freeze destroys half of Florida’s orange crop.

a) What will be the impact on the price of OJ?b) On the price of meals that include OJ as part of the package?

2. Import quotas restrict the quantity of particular goods, e.g., large screen TVs, that can be imported from a given country

a) What is the impact on the US market of restricting TVs imported from China?b) What is the impact on the US housing market of restricting “illegal” immigrants

who provide construction labor? Or harvest agricultural products, like apples?3. How does a sales tax, e.g., 10% of the purchase price, affect the demand

for those goods or services?4. 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)?

5. 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.html

– Basics of demand and supply• http://www.investopedia.com/university/

economics/economics3.asp

– Cobweb theorem• http://www.bized.co.uk/current/mind/

2004_5/251004.ppt