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Supply &

we would gei the same quandt) supplied by horizontally summing over all the food stores in the area instead of the geographic region. Summing over a few other prices and then connecting the resulting dots together would yield the rest of the South County supply curve.


It is important to distinguish between the supply and the quantity supplied of a good. Supply refers to the whole curve, whereas the quantit) supplied refers to the amount supphed at a specific price. Thus, when the price of a-good changes, we move along a stationary supply curve, giving us a change in the quantity supplied, but not a change in supply. A change in the quantit)- supplied is illustrated in Figure III. An

increase in the price from P to P increases the tity supplied from Q to Q. A decrease in the would, of course, reverse these effects, giving decrease in the quantity supplied. In short, changes the quantity supphed do not involve any shift of i supply curve and are caused solely by changes in pr along the same stationary curve. For example, increase in the price of yo-yos will not increase thesu ply; it will only increase the quandt) supplied.

While a change in quandt) supplied represen a movement along a stationary supply curve, a i in supply is a shift of the entire supply curve leftl right to a new position. In Figure fV a shift of the! ply curve from S] to S? shows an increase in supply. supply increase means that at each price a gre quantity will be offered or what is the same thing -( any specific quantity will now be offered at a lc price. For example at the price P, Q] units are ir ly supplied, but after the supply increase, Qg units! supplied at this price. Looking at it another way.j see that initially Q] units are offered at P, but after! supply increase, Qi units are offered at the lower of P. Since in Figure fV the supply curve has shif downward, it is tempting to consider the shif decrease in supply. Resist this temptation. Supply] increased, not decreased, because more is available every price. You can spare yourself some confusion! remembering that supply and demand increases i both curves rightward; it is usually counterproducS to think in terms of up or dovvn.

A supply decrease, on the other hand, is a l ward shift of the entire supply curve. Figure V pc a supply decrease from Sj to Sg by shifting the supply curve leftward. After the supply decrease,

Fig. II Generating Ttie Market Supply


Santa Barbara




25 5




Fig. Ill

Fig. IV


Increase in the Quantity Supplied

Supply Increase


Supply Decrease

ofiered at any given price. For example, ini-"Qj units are available at the price of P, but after ipply decrease, only Qs units are av-ailable at the P. Moreover, after a supply decrease, suppliers ;t upon a higher price for selling any given such as Qg.

The major, but not exclusive, forces which shift ipply curve are changes in the munber of suppli-cost of inputs, the technology, and often the ler. For example, air increase in the number of j Jers increases the market supply, as in Figure fV. IS only common sense: The greater the number of Willing to supply a good at various prices, the will be the amount supplied at those prices. If other hand, firms were to exit from the indus-le market supply curve would decrease, i.e., shift Srd as in Figure V. The impact of entry and exit 1 market supply curve will become very impor-n Section V when we consider firms long run Stmeiu.5.

Increases in the price of inputs decrease the lly, while decreases in input prices increase the y. For example, if the price of ferdlizers rises, ers will insist upon a higher price for supplying iven quantity of food, i.e., there will be a decrease upply as in Figure V. A decrease in the wages of workers, on the other hand, would increase the of cars, giving us a supply increase as in Figure IV. f Ad\-ances in technology likewise increase the ;ly. For example, improvements iu fertilizers, ani-id plant genedcs, farm implements, and the like Considerably shifted the supply of farm products time as in Figure fV. Weather is often an impor-UPply .shifter, especially in agriculnue. Poor

weather decreases the amount of crops and livestock axailable at any one price, which is to say, it decreases the supply as in Figure V. Exceptional!) fine weadier, of course, reverses these effects giving us a supply increase as in Figure FV.


Now we bring supply and demand together to show how the market price, and quantit) exchajiged (bought and sold) is determined. Consider the price Pj in Figure VI where the subscript "s" suggests surplus. At this price, the quantity supplied is Qs and that demanded is Qj. In other words, the quandt)- supplied exceeds the quandty demanded, so that a surplus or excess supply of the good equal to Qs - Qd exists at the price Pj. Under free market arrangements, neither the surplus price, Pj, nor the resulung surplus, itself can persist. The mechanism is as follows: .A.t Pj suppliers find they collectively have more to offer than demanders wish to buy, causing some to cut their price in order to draw down their inventories and to bid biners avvav from other sellers. Similarly, some demanders seeing unsold goods will perhaps reduce their offers below Ps . This reduction in price will occur until the equilibriiun price, Pp, is reached. Once at that price, the quandt) buyers wish to buy exactly equals the quantity sellers wish to sell so that no fiutber tendeiicx for price to change exists.

Figure VII portrays a shortage or excess demand for the same good. Here at the price P.. where the subscript suggests excess demand, die quantity- demanded, Qcj is greater than the quantitv .supplied, Qs- An excess demand equal io Qj- exist.s. Some disappointed buyers will therefore stun u> oiler

Supply OEquiUbtiu

Fig. Vi Downward Price Pressure

Fig. Vii Upward Price Pressure

more than in order to bid the good away from other demanders. Similarly, some sellers will also start to ask for more than Pgd- This process will also con-dnue until a new price is found at which the quantity buyers wish to buy is consistent with the quandty sellers wish to sell. The only such price is Pp the equilibrium price (also called the market clearing price). Note that this process results endrely from the self-interests of buyers and sellers. Nobody from the government plans the parties acdvities, much less orders anyone to do anything.


We have already seen that both su Iuses and shortages will disappear when market forces are allowed to work. Soraedmes the government interferes vdth these forces by imposing price ceiUngs or price floors. For instance, suppose the market for gasoline is as depicted in Figure VIII. As we have seen, the market clearing price will be Pg. Inevitably some pressure groups feel that Pi is "unfair" to the poor or generates too many "windfall" profits to the oil companies. Such groups may lobby the government to impose a price ceiling i.e., a maximum price of P. The price ceiling restricts the amount of price compedtion to prices at or beneath Pj; it now becomes illegal for buyers to offer sellers prices in excess of Pj. Provided the ceiling is set below the market clearing price, a shortage will develop. In the figure, demanders want to buy at the ceiling price, bul suppliers are offering only the lesser quandty, Qs. A shortage equal to Qj - Q will develop at the ceiling price. Note that this shortage exists only because the price cant legally rise above the ceiling. If it could, the shortage would be eliminated.

Not only does the price ceiling cause a age, it also reduces the amount actually sold. Ifi government would allow this market to dear, quandty traded would be Q.. Under the price ceili the amount sold will be the lesser amount Q. Mac they might like to, buyers cannot purchase any ml than sellers are willing to offer at the price ceilingl this case the amount Qs

According to the analysis of Secdon I the i pression of price compeddon will result in incre non-price compeiidon. People will now compete the available supplies by waidng in line, by "but in", by bribing gas station attendants, or by any n ber of other means. All such modes of non-price ( peuuon represent costs to the corapedt (Remember, cost represents what is foregone, not! money.)

Fig. VIII The Impact of a Price Ceiling

Q per week

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