Notes
Supply
- The law of supply: as price rises, quantity supplied rises, because higher prices promise more profit. The supply curve slopes upward.
- A change in the good's own price is a change in quantity supplied (movement along the curve). Other factors cause a change in supply (the curve shifts).
- Determinants of supply: input costs, technology, number of sellers, taxes, subsidies, regulations, expectations and natural conditions.
- Elasticity of supply $\displaystyle = \frac{\% \text{ change in } Q_s}{\% \text{ change in } P}$; supply is more elastic when output can change quickly.
Costs
- Total cost = fixed cost + variable cost. Marginal cost is the extra cost of one more unit.
- Firms maximize profit where marginal revenue equals marginal cost. Diminishing marginal returns make marginal cost rise eventually.
Equilibrium
- Equilibrium is where quantity demanded equals quantity supplied. Above it there is a surplus and prices fall; below it there is a shortage and prices rise.
- Demand up: price and quantity rise. Demand down: both fall. Supply up: price falls, quantity rises. Supply down: price rises, quantity falls.
Price controls
- A price ceiling below equilibrium (rent control) causes a shortage. A price floor above equilibrium (minimum wage, crop supports) causes a surplus. Supporters and critics weigh who gains and who loses.
Topics in this unit
Each topic has its own short notes and practice.
Practice
Quantities match at $12. At $10, $650 - 380 = 270$ more passes are wanted than offered.
Higher input costs shift supply left, which raises the equilibrium price and lowers quantity.
Both an increase in demand and an increase in supply raise quantity; their effects on price work in opposite directions.
A price floor above equilibrium creates a surplus. Economists debate how large this effect is in practice.
Total cost $= 20 + 0.50 \times 80 = 60$ dollars, and $\displaystyle \frac{60}{80} = 0.75$ dollars per cup.
Produce while MR is at least MC: the 11th unit adds $40 for $38, but the 12th costs $46.
Free response
Write your answer first, then open the scoring guide.
Free-response question
In the market for reusable water bottles, demand is $Q_d = 300 - 10P$ and supply is $Q_s = 60 + 20P$, where $P$ is the price in dollars.
(a) Calculate the equilibrium price and quantity.
Show the answer and scoring guide
$300 - 10P = 60 + 20P \Rightarrow 240 = 30P \Rightarrow P = 8$. Then $Q = 300 - 10(8) = 220$. The equilibrium price is $8 and the quantity is 220 bottles.
Check off the points you earned:
(b) The government sets a price ceiling of $6. Calculate the result and name it.
Show the answer and scoring guide
At $6, $Q_d = 300 - 60 = 240$ and $Q_s = 60 + 120 = 180$. Quantity demanded exceeds quantity supplied by $240 - 180 = 60$, a shortage of 60 bottles.
Check off the points you earned:
(c) Without the ceiling, the price of the plastic used to make bottles rises. Describe how the supply curve shifts and the effect on equilibrium price and quantity.
Show the answer and scoring guide
Plastic is an input, so higher input costs reduce supply: the supply curve shifts to the left. At the old price of $8 there is now a shortage, so the price rises above $8, and the new equilibrium quantity is lower than 220.
Check off the points you earned: