The Market System and the Circular Flow

SupplySupply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. Law of SupplyAs price rises, the quantity supplied rises; as price falls, the quantity supplied falls.

Example : The supply schedule and the supply curve Market SupplyThe market supply curve can be obtained by horizontally adding the supply curves of the individuals producers/firms. Determinants of SupplyResources/inputs pricesTechnology Taxes and subsidies Price of other goods Producer expectationsThe number of sellers in the market Changes in Supply vs Changes in Quantity SuppliesExplain with diagrams Market Equilibrium Market equilibrium occurs where quantity demanded equals quantity supplied Q.D = Q.S

The equilibrium price is the price where the intentions of buyers and sellers match.

Changes in Supply, Demand and EquilibriumChanges in demand only

Changes in supply only

Complex Cases: When both supply and demand change Supply increase; demand decreases

What effect will a supply increase and a demand decrease for some good have on equilibrium price and quantity.

Complex Cases: When both supply and demand change Supply decrease; demand increase

Supply increase; demand increase

Supply decrease; demand decrease

Complex Cases: When both supply and demand change

Applications: Government-Set PricesPrice ceiling: the maximum legal price a seller may charge for a product or services.

Applications: Government-Set PricesPrice floors: A price floor is a minimum price fixed by the government.