Week 4 · Chapter

Chapter 4 — Supply & Market Equilibrium

Principles of Microeconomics Free sample edition

The module's primary reading · ~40–50 minutes · Objective 2 (explain how demand and supply determine a market's equilibrium price and quantity, and predict how a shift in demand or supply changes them), building on Objective 1 (use the tools of economic modeling — scarcity, opportunity cost, the production possibilities frontier, comparative advantage, and the gains from trade — and distinguish positive statements (what is) from normative statements (what ought to be)) · Read it first this week; the lecture, the slide deck, the tutorial, the quiz, and the Model Workshop all build on it.

In plain language

This week is about sellers and about the price a market settles on. When something sells for more, the people who make it want to offer more of it. Economists call that pattern the law of supply (the rule that a higher price means a larger amount offered, with everything else held still). When the sellers' plans meet the buyers' plans from last week, the market finds its equilibrium (the one price where the amount people want to buy matches the amount offered for sale). The big skill this week is predicting what happens to that price, and to the amount sold, when something changes.

Why you already care about this

Think about a farm stand after a late frost. The strawberry patch lost half its blossoms, so there are fewer baskets to sell this season. The sign that said 4 dollars a basket last year now says 6, and the 40 baskets on the table still sell out in 2 hours. Nobody at the stand read an economics book. The price moved because fewer berries met the same crowd of buyers.

Now picture this course's running market from last week, the one you built a demand schedule for. At 4 dollars a unit, buyers want 50 units a day, but sellers offer only 10. At 8 dollars, sellers offer 50 units, but buyers want only 10. At 6 dollars, both sides want exactly 30. Those three numbers are the whole chapter in miniature: a supply schedule, a market out of balance, and the one price where it balances.

By the end of this chapter you will be able to:

state the law of supply and say why it holds other influences fixed;
build a supply schedule from a rule such as Qs = 10P − 30 and describe the supply curve in words;
tell a change in quantity supplied (a movement along the curve) from a change in supply (a shift of the curve);
solve Qd = Qs for the equilibrium price and quantity, and name a shortage or a surplus at any other price;
name which curve moves, which way, and where the new price and quantity land after a change;
say which result cannot be signed when both curves move at once.

Carry this sentence with you: demand moves price and quantity together; supply moves them apart.

Where we are

Already covered: Week 1 taught opportunity cost, the production possibilities frontier, and ceteris paribus ("all else equal"). Week 2 showed why trade makes both sides better off. Week 3 built the demand side of a market.
This week: the supply side of the same market, the equilibrium where the two sides meet, and what happens to that equilibrium when one curve or both curves move.
How they connect: supply is built exactly the way demand was, with a schedule, a curve, a movement along it, and shifts of it; equilibrium then puts last week's curve and this week's curve on one graph.
Where we're going next: Week 5 asks how strongly buyers respond to a price change, a measure called elasticity, so this week finishes the model that elasticity will measure.

Week 3 is the chapter this one leans on most. Recall its rule for the course's market: Qd = 90 − 10P, which gives 50 units a day at 4 dollars down to 10 at 8. Recall, too, its central distinction. A change in the good's own price moves buyers along the demand curve, a change in quantity demanded. A change in anything else shifts the whole curve, a change in demand. This week that same distinction runs on the sellers' side. Week 1's idea of a positive statement, a claim evidence can check, describes the law of supply too.

1. State the law: higher price, more offered

Start with a seller's view, yours. Suppose you bake and sell loaves of sourdough on weekends. At 5 dollars a loaf, a day of baking barely pays for your flour and your time. At 12 dollars a loaf, it is worth giving up a paid shift elsewhere and baking twice as many. That is opportunity cost from Week 1 at work. A higher price makes it worth covering the cost of more output.

The same pattern shows up for a farm deciding how many acres of a crop to plant, a rideshare driver deciding whether to log on during a surge, and a print shop deciding whether to run an extra evening shift. A higher price pulls more of the good onto the market.

The law of supply says that, with every other influence held fixed, a higher price for a good raises the quantity sellers want to sell and a lower price reduces it; this positive link between price and quantity is why a supply curve slopes upward.

As with demand, two words carry the weight. "Fixed" means ceteris paribus: if input costs or technology are changing at the same time as the price, you cannot tell which change caused what. "Quantity" means one amount at one price, and it gets its own name.

Quantity supplied is the amount of a good that sellers want to sell at one particular price during a stated period; it changes only when the good's own price changes.

The law of supply is a positive statement. It predicts what sellers will do, and data on prices and output can test it. It does not say whether a price is fair to buyers. That would be a normative question.

Misconception check. Students often think sellers offer more at a higher price because they are greedy. The model makes no claim about character. The cure: think in costs. Making more units usually costs more per extra unit, as you will see in Week 9, so a seller covers that cost only when the price is higher. A higher price makes more output worth producing; that is the whole law.

2. Read the schedule: what sellers offer at each price

A supply schedule is the sellers' version of last week's table. At each possible price, it lists how many units the market's sellers would offer that day.

A supply schedule is a table that lists, for each price of a good, the quantity sellers want to sell at that price, with everything else held fixed.

The course's running market sells a single good by the unit, and its numbers are illustrative, constructed for this course rather than taken from a real market. Its supply side follows one rule: Qs = 10P − 30. Here P is the good's own price in dollars, and Qs is quantity supplied, the amount all sellers in the market want to sell, in units per day.

Worked example — building the supply schedule. Put each price into the rule, one line at a time.

At 4 dollars. Qs = 10 × 4 − 30 = 40 − 30 = 10 units per day.
At 5 dollars. Qs = 10 × 5 − 30 = 50 − 30 = 20 units per day.
At 6 dollars. Qs = 10 × 6 − 30 = 60 − 30 = 30 units per day.
At 7 dollars. Qs = 10 × 7 − 30 = 70 − 30 = 40 units per day.
At 8 dollars. Qs = 10 × 8 − 30 = 80 − 30 = 50 units per day.

The results fill the table.

Supply schedule for the course's running market: price in dollars and quantity supplied in units per day (illustrative)
Price (dollars)	Quantity supplied (units per day)
4	10
5	20
6	30
7	40
8	50

Read down the table and you can see the law of supply. Each 1-dollar rise in the price raises quantity supplied by 10 units per day, so 20 − 10 = 10 and 50 − 40 = 10. Sellers offer 50 units at 8 dollars versus 10 at 4 dollars, five times as many.

The rule also tells you where selling starts. At 3 dollars, Qs = 10 × 3 − 30 = 30 − 30 = 0, so no one sells at a price of 3 dollars or less. A price that low does not cover what it costs any seller to make even one unit.

In practice (your tools). In Google Sheets, type the prices 4 to 8 in cells A2 to A6. In B2, type =90-10*A2 for last week's demand and copy it down. In C2, type =10*A2-30 for supply and copy it down to C6. Column C shows 10, 20, 30, 40, and 50. You now have both sides of the market in one sheet, which is where the next sections go.

Misconception check. Students often expect the supply column to fall as the price rises, because the demand column did. The two schedules run in opposite directions. The cure: ask whose plan the column records. Buyers want less at a higher price; sellers offer more.

3. Draw the curve and move along it

A table is precise, but a picture shows the pattern at a glance. Plot the supply schedule on the same axes as last week's demand curve, and you get the supply curve.

A supply curve is a graph of the supply schedule with price on the vertical axis and quantity on the horizontal axis; it slopes upward from left to right because of the law of supply.

Here is the curve, described in words. The horizontal axis is quantity, in units per day, running from 0 to 60. The vertical axis is price, in dollars, running from 0 to 10. Five dots come from the schedule: (10, 4), (20, 5), (30, 6), (40, 7), and (50, 8), each written as (quantity, price). All five sit on one straight line. The line starts low on the left at (10, 4) and rises steadily to (50, 8) on the upper right. Extended downward, it meets the price axis at 3 dollars, where quantity supplied is 0.

A caveat about this model: real supply curves are rarely perfect straight lines. The straight line is a classroom model that makes the logic easy to see, and the upward slope carries over to curves of any shape.

Now change only the price tag. Input costs, technology, and the number of sellers all stay the same. Sellers respond only to the new price, so they slide from one dot to another on the same line.

A movement along the supply curve is a move from one point to another on an unchanged supply curve, caused only by a change in the good's own price; it is a change in quantity supplied.

Worked example — the price rises from 6 to 7 dollars. Use the original schedule.

Before. At 6 dollars, quantity supplied is 30 units per day.
After. At 7 dollars, quantity supplied is 40 units per day.
The change. 40 − 30 = 10 units, on the same curve.

In words: the higher price raised quantity supplied by 10 units a day, and sellers moved up the line from (30, 6) to (40, 7). The whole schedule is exactly what it was.

That gives the word supply its second meaning, the same split you met on the demand side.

Supply is the whole relationship between a good's price and the quantity sellers want to sell at each price, shown as a full schedule or a full curve rather than as one number.

In practice (your tools). In Desmos, quantity goes on the x-axis and price on the y-axis. Type y = 3 + x/10 and Desmos draws the supply curve. Click the line at x = 30 and Desmos shows the dot (30, 6). Click at x = 40 and you see (40, 7), the movement along the curve from the worked example.

Misconception check. Students often say "the price rose, so supply rose." What rose is quantity supplied, a movement along the curve. The cure is the same rule you used last week: whenever the cause is the good's own price, say "quantity supplied," and keep the word "supply" for a change in the whole curve.

4. Shift the supply curve: the determinants

Now you leave the price tag alone and change something about the sellers. Suppose a new oven lets every baker in town make loaves faster. At every price, each baker can afford to offer more. The whole curve moves.

A shift of the supply curve is a move of the whole supply curve, caused by a change in something other than the good's own price; it is a change in supply, and an increase moves the curve right while a decrease moves it left.

What can shift supply? Economists group the causes into a short list. Each one is something other than the good's own price.

The determinants of supply are the influences other than a good's own price that set how much sellers offer at every price: input prices, technology, the number of sellers, sellers' expectations, the prices of other goods they could make, and taxes or subsidies on production.

The examples below are fresh scenarios told in words, separate from the course's running market.

Input prices. When the price of fertilizer rises, every strawberry grower's cost of a basket goes up. At any price, growers offer fewer baskets. Supply shifts left.

Technology. When a print shop owned by Ines installs a press that runs twice as fast, each poster costs less to make. At any price, the shop offers more. Supply shifts right.

Number of sellers. When four new food trucks start parking near a stadium, there are more sellers of game-day tacos. Supply shifts right.

Expectations. If grain farmers expect the price of wheat to be higher next season, some store part of this season's harvest. Supply of wheat this season shifts left.

Prices of other goods sellers could make. A farmer can plant corn or soybeans on the same field. If the soybean price rises, Mehmet plants more soybeans and less corn. The supply of corn shifts left.

Taxes and subsidies. A tax on each unit produced works like a higher input cost, so supply shifts left. A subsidy for each unit works like a lower one, so supply shifts right. Week 7 measures exactly how much.

Worked example — the running market's two supply shifts. Dataset E moves the course's supply curve by 20 units at every price.

Supply increases (better technology). The new rule is Qs = 10P − 10. At 6 dollars, Qs = 10 × 6 − 10 = 60 − 10 = 50, which is 30 + 20.
Supply decreases (an input price rises). The new rule is Qs = 10P − 50. At 6 dollars, Qs = 10 × 6 − 50 = 60 − 50 = 10, which is 30 − 20.

In words: after better technology, sellers offer 20 more units at every price, and the curve shifts right. After an input price rises, they offer 20 fewer at every price, and the curve shifts left. Described as a graph, the three supply lines are parallel and all rise from lower left to upper right. The original runs through (30, 6), the increased line through (50, 6), and the decreased line through (10, 6).

In practice (your tools). In Desmos, type y = b + x/10 and accept the slider for b. Set b to 3 for the original curve. Move b to 1 and the line slides right, through (50, 6). Move b to 5 and it slides left, through (10, 6).

Misconception check — the wrong curve. Students often shift the demand curve when an input cost changes, because the price buyers pay ends up changing too. The cure: ask whose plan changed first. A rise in the cost of fertilizer changes what growers are willing to offer, not what shoppers want at a given price. It shifts supply; demand stays where it was.

Misconception check — the wrong direction. Students often see a supply line that has slid up and read "up" as "more supply." For an upward-sloping supply curve, a line that slides up also sits to the left, so it offers fewer units at every price: a decrease in supply. The cure: read along a price line. At 6 dollars the increased curve gives 50 units, more than 30, which sits to the right, and the decreased curve gives 10, which sits to the left. Right is more; left is less.

Pause and reflect — choose one. Pick either prompt; they count the same.

(a) Pick a product you buy often. Name one determinant that could shift its supply, say which way, and explain why in two sentences.
(b) Think of a job or business you know well, your own or a family member's. Name a change in an input price or a technology that changed how much it could offer, and say which way supply shifted.

5. Put the blades together: market equilibrium

Here is the moment the model has been building toward. Alfred Marshall's Principles of Economics (1890) drew demand and supply together as the two blades of a pair of scissors, neither of which cuts alone. Demand alone could not tell you the price last week. Supply alone cannot either. The price comes from where the two meet.

Market equilibrium is the state of a market in which, at the going price, the amount buyers want to buy equals the amount sellers want to sell, so no one has a reason to push the price up or down.
The equilibrium price is the price at which quantity demanded equals quantity supplied, written P*; on a graph it is the height where the demand and supply curves cross.
The equilibrium quantity is the amount bought and sold at the equilibrium price, written Q*; on a graph it is the horizontal position where the demand and supply curves cross.

Worked example — solving Qd = Qs. Set the two rules equal and solve, one step at a time.

Set them equal. 90 − 10P = 10P − 30.
Collect terms. Add 10P and 30 to both sides to get 120 = 20P.
Solve for the price. Divide by 20 to get P* = 6 dollars.
Find the quantity on both sides. Qd = 90 − 10 × 6 = 90 − 60 = 30 and Qs = 10 × 6 − 30 = 60 − 30 = 30, so Q* = 30 units per day and both sides agree.

In words: at 6 dollars, buyers want exactly the 30 units sellers offer, so nothing is left over and no one is turned away. A seller deciding how much to make each day can plan on selling 30 units at that price.

You can also read the result off the two schedules side by side, the way you would in your own spreadsheet.

Quantity demanded and quantity supplied in the course's running market at five prices, in units per day (illustrative)
Price (dollars)	Quantity demanded (units per day)	Quantity supplied (units per day)
4	50	10
5	40	20
6	30	30
7	20	40
8	10	50

Only one row has the same number in both columns, the 6-dollar row. On a graph, the falling demand line and the rising supply line cross at one point, (30, 6). Above it the supply line sits to the right of the demand line, and below it the demand line sits to the right.

In practice (your tools). In Desmos, type y = 9 - x/10 for demand and y = 3 + x/10 for supply. Click the point where the two lines cross; Desmos labels it (30, 6). In the Google Sheets table from Section 2, add =B2-C2 in column D and copy it down. Column D reads 0 only in the 6-dollar row, which is the equilibrium.

Misconception check. Students often think equilibrium means buyers and sellers are equally happy, or that the price is fair. Equilibrium is a positive claim about quantities: the amount wanted equals the amount offered. Whether 6 dollars is a fair price is a normative question the model does not answer. The cure: test the definition, Qd = Qs, and nothing else.

6. Read the market out of balance: shortage and surplus

What if the price is not 6 dollars? Picture a concert venue that prices tickets too low. Fans line up for hours, the tickets vanish in minutes, and resale prices jump. Now picture a bakery that prices its cakes too high. By closing time, unsold cakes fill the shelf. Both markets are out of balance, in opposite ways.

A shortage is the gap that opens when a price sits below equilibrium and buyers want more units than sellers offer, measured as quantity demanded minus quantity supplied; it is also called excess demand, and it pushes the price up.
A surplus is the gap that opens when a price sits above equilibrium and sellers offer more units than buyers want, measured as quantity supplied minus quantity demanded; it is also called excess supply, and it pushes the price down.

Worked example — two prices away from 6 dollars. Read both columns at each price.

At 4 dollars. Qd = 50 and Qs = 10, so the shortage is 50 − 10 = 40 units per day.
At 8 dollars. Qs = 50 and Qd = 10, so the surplus is 50 − 10 = 40 units per day.
Closer in. At 5 dollars the shortage is 40 − 20 = 20 units per day, and at 7 dollars the surplus is 40 − 20 = 20 units per day.

In words: at 4 dollars, 40 units a day of wanted purchases go unfilled; at 8 dollars, 40 units a day of offered goods go unsold. The gap shrinks as the price gets closer to 6 dollars and vanishes there.

Why does the price move? With a shortage, buyers who are turned away offer more, and sellers notice they could charge more. The price rises, which raises quantity supplied and lowers quantity demanded, so the gap closes. With a surplus, sellers stuck with unsold goods cut the price, which lowers quantity supplied and raises quantity demanded. Either way, the price is drawn toward 6 dollars.

An honesty note about scope: this week, a price of 4 dollars is a market that has not yet adjusted. Week 7 asks what happens when a law holds the price there, which is a different question with its own tools.

Misconception check. Students often call any mismatch a "shortage," including the unsold cakes at 8 dollars. A price above equilibrium leaves sellers with extra units, so it is a surplus. The cure: compare the price with 6 dollars first. Above it, sellers have too much (surplus); below it, buyers cannot get enough (shortage).

Pause and reflect — choose one. Pick either prompt; they count the same.

(a) Describe a time you saw a shortage, such as a sold-out item or a long line. Say whether the price was below where it would settle, and what you think happened next.
(b) Describe a time you saw a surplus, such as a clearance rack or unsold produce at closing. Say whether the price was above where it would settle, and what the seller did about it.

7. Run comparative statics: which curve, which way, where it lands

Markets do not sit still. Incomes change, technology improves, input costs rise. Comparative statics is the economist's name for comparing the equilibrium before and after one such change.

Comparative statics means comparing a market's equilibrium before and after one influence changes: name the curve that moves, name the direction, and find where the new price and quantity land.

The method has three steps, and the order matters.

Name the curve. Does the change alter what buyers want (demand) or what sellers offer (supply)?
Name the direction. More at every price is a shift right; less is a shift left.
Solve for the new equilibrium. Set the new Qd equal to the new Qs and solve for the price, then the quantity.

Worked example — four shifts on the running market. Each change moves one curve by 20 units at every price, starting from (6, 30) written as (price, quantity).

Demand increases (incomes rise, and the good is normal). 110 − 10P = 10P − 30, so 140 = 20P and P = 7; Q = 110 − 10 × 7 = 110 − 70 = 40. Demand shifted right; the price rises to 7 dollars and the quantity to 40 units.
Demand decreases (incomes fall). 70 − 10P = 10P − 30, so 100 = 20P and P = 5; Q = 70 − 10 × 5 = 70 − 50 = 20. Demand shifted left; the price falls to 5 dollars and the quantity to 20 units.
Supply increases (better technology). 90 − 10P = 10P − 10, so 100 = 20P and P = 5; Q = 90 − 10 × 5 = 90 − 50 = 40. Supply shifted right; the price falls to 5 dollars and the quantity rises to 40 units.
Supply decreases (an input price rises). 90 − 10P = 10P − 50, so 140 = 20P and P = 7; Q = 90 − 10 × 7 = 90 − 70 = 20. Supply shifted left; the price rises to 7 dollars and the quantity falls to 20 units.

New equilibrium price in dollars and quantity in units per day after each one-curve shift on the running market (illustrative)
Change	Curve and direction	New price (dollars)	New quantity (units per day)
Incomes rise	Demand, right	7	40
Incomes fall	Demand, left	5	20
Better technology	Supply, right	5	40
Input price rises	Supply, left	7	20

Look for the pattern. A demand shift moves price and quantity in the same direction. A supply shift moves them in opposite directions. That pattern is worth more than the four rows: it lets you predict any one-curve shift before you solve it.

Back at the farm stand from the opening, the frost cut the strawberry harvest. That is supply shifting left, so the model predicts a higher price and fewer baskets sold, which is what the stand saw.

Misconception check. Students often think a supply increase raises the price, since "more" sounds like "up." It is the reverse. More units offered at every price means sellers must accept a lower price to sell them all. The cure: in row 3, supply rose and the price fell from 6 to 5 dollars while the quantity rose from 30 to 40.

8. Shift both curves: what you can and cannot predict

Sometimes two things change at once, and you have to track both. A city's incomes rise while a new technology lowers costs. Now both curves move, and the three-step method runs twice.

Simultaneous shifts are changes in which the demand curve and the supply curve both move at once; the direction of either price or quantity then depends on the relative sizes of the two moves and cannot be signed without numbers.

Worked example — both curves increase by 20. Demand moves to Qd = 110 − 10P and supply to Qs = 10P − 10.

Set them equal. 110 − 10P = 10P − 10.
Solve for the price. 120 = 20P, so P = 6.
Find the quantity. Q = 110 − 10 × 6 = 110 − 60 = 50.
Compare. Quantity rises from 30 to 50, a rise of 50 − 30 = 20 units; the price change is 6 − 6 = 0 only because both curves moved by the same 20 units.

In words: both shifts push quantity up, so quantity rises for certain. But the demand shift pushes the price up while the supply shift pushes it down. Here the two pushes are the same size and cancel. If demand had moved further than supply, the price would rise; if supply had moved further, it would fall. Without numbers for both shifts, the direction of the price cannot be signed.

The same logic gives a short table of sure things and open questions.

Which equilibrium result can be signed when both curves shift, by the directions of the two shifts
Demand shifts	Supply shifts	Price	Quantity
Right	Right	Cannot be signed without numbers	Rises
Left	Left	Cannot be signed without numbers	Falls
Right	Left	Rises	Cannot be signed without numbers
Left	Right	Falls	Cannot be signed without numbers

A limitation worth stating plainly: the table tells you what is certain, not how large anything is. To get the size, you need the numbers, which is why a careful answer always says which result is open.

Misconception check. Students often sign both results after a double shift: "demand and supply both rose, so the price and the quantity both rose." Only quantity is certain. The cure: run each shift on its own, write down which way it pushes price and which way it pushes quantity, and sign a result only when both pushes agree.

9. Check the classic wrong turns

Most mistakes this week are a curve moved the wrong way or a word swapped, not a deep confusion. If you make one, you are in good company, and a short routine you can run every time catches them.

Step one: name the cause. Is it the good's own price? Then it is a movement along a curve, not a shift.
Step two: name the curve. Does the change alter buyers' plans or sellers' plans?
Step three: name the direction. More at every price is right; less is left.
Step four: find the new price and quantity, and say which one is open if both curves moved.

Worked example — one news story, run through the routine. Suppose a story says, "A spike in the cost of a key ingredient raised the price of a snack, and buyers demanded less." Run it on the course's market as a supply decrease.

The cause. An input price rose. That is not the snack's own price, so a curve shifts.
The curve. Input costs change sellers' plans, so supply shifts, not demand.
The direction. Sellers offer less at every price, so supply shifts left, to Qs = 10P − 50.
The landing. The new equilibrium is a price of 7 dollars and a quantity of 20 units.

In words: the story's "buyers demanded less" really means quantity demanded fell, a movement along an unchanged demand curve from 30 units to 20 as the price rose from 6 to 7 dollars. Demand did not shift at all.

Misconception check. Students often read a news story's "demand fell" literally and shift the demand curve left. The cure: ask whether buyers' plans changed at every price, or only the price they faced. If the price rose because supply fell, buyers moved along their curve, and demand is unchanged.

Key terms

Law of supply — With every other influence held fixed, a higher price for a good raises the quantity sellers want to sell and a lower price reduces it; this positive link between price and quantity is why a supply curve slopes upward. (first used: 1. State the law: higher price, more offered)
Quantity supplied — The amount of a good that sellers want to sell at one particular price during a stated period; it changes only when the good's own price changes. (first used: 1. State the law: higher price, more offered)
Supply schedule — A table that lists, for each price of a good, the quantity sellers want to sell at that price, with everything else held fixed. (first used: 2. Read the schedule: what sellers offer at each price)
Supply curve — A graph of the supply schedule with price on the vertical axis and quantity on the horizontal axis; it slopes upward from left to right because of the law of supply. (first used: 3. Draw the curve and move along it)
Movement along the supply curve — A move from one point to another on an unchanged supply curve, caused only by a change in the good's own price; it is a change in quantity supplied. (first used: 3. Draw the curve and move along it)
Supply — The whole relationship between a good's price and the quantity sellers want to sell at each price, shown as a full schedule or a full curve rather than as one number. (first used: 3. Draw the curve and move along it)
Shift of the supply curve — A move of the whole supply curve, caused by a change in something other than the good's own price; it is a change in supply, and an increase moves the curve right while a decrease moves it left. (first used: 4. Shift the supply curve: the determinants)
Determinants of supply — The influences other than a good's own price that set how much sellers offer at every price: input prices, technology, the number of sellers, sellers' expectations, the prices of other goods they could make, and taxes or subsidies on production. (first used: 4. Shift the supply curve: the determinants)
Market equilibrium — The state of a market in which, at the going price, the amount buyers want to buy equals the amount sellers want to sell, so no one has a reason to push the price up or down. (first used: 5. Put the blades together: market equilibrium)
Equilibrium price — The price at which quantity demanded equals quantity supplied, written P*; on a graph it is the height where the demand and supply curves cross. (first used: 5. Put the blades together: market equilibrium)
Equilibrium quantity — The amount bought and sold at the equilibrium price, written Q*; on a graph it is the horizontal position where the demand and supply curves cross. (first used: 5. Put the blades together: market equilibrium)
Shortage — The gap that opens when a price sits below equilibrium and buyers want more units than sellers offer, measured as quantity demanded minus quantity supplied; it is also called excess demand, and it pushes the price up. (first used: 6. Read the market out of balance: shortage and surplus)
Surplus — The gap that opens when a price sits above equilibrium and sellers offer more units than buyers want, measured as quantity supplied minus quantity demanded; it is also called excess supply, and it pushes the price down. (first used: 6. Read the market out of balance: shortage and surplus)
Comparative statics — Comparing a market's equilibrium before and after one influence changes: name the curve that moves, name the direction, and find where the new price and quantity land. (first used: 7. Run comparative statics: which curve, which way, where it lands)
Simultaneous shifts — A change in which the demand curve and the supply curve both move at once; the direction of either price or quantity then depends on the relative sizes of the two moves and cannot be signed without numbers. (first used: 8. Shift both curves: what you can and cannot predict)

Summary

The law of supply: a higher own price raises quantity supplied, with everything else held fixed.
A supply schedule lists prices and quantities offered; the supply curve draws it, sloping upward.
A change in the good's own price is a movement along the supply curve, a change in quantity supplied.
A change in input prices, technology, the number of sellers, expectations, other goods' prices, or taxes shifts supply.
Equilibrium is the price where quantity demanded equals quantity supplied.
Below the equilibrium price there is a shortage; above it there is a surplus.
A demand shift moves price and quantity the same way; a supply shift moves them opposite ways.
When both curves shift, one of price or quantity cannot be signed without numbers.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

Honey at a weekend market (an illustrative case): Qd = 40 − 2P and Qs = 3P − 10, with P in dollars per jar and quantities in jars per day. Solve for the equilibrium price and quantity, then name what happens at a price of 12 dollars and how large it is.
A friend says, "Avocados got cheaper this month, so farmers' supply of avocados fell." Rewrite the sentence so it is correct, and explain the change in one sentence.
The price of green coffee beans, the main input for a city's coffee roasters, rises sharply. Name the curve for roasted coffee that shifts, its direction, and what happens to the equilibrium price and quantity of roasted coffee.
In a beach town, a summer festival brings more visitors who want bike rentals, and at the same time two rental shops close for repairs. Say which way each curve shifts, which result you can sign, and which you cannot.

Answers (worked reasoning — read after attempting)

Set 40 − 2P = 3P − 10. Add 2P and 10 to both sides to get 50 = 5P, so P = 10 dollars a jar. Then Qd = 40 − 2 × 10 = 40 − 20 = 20 jars, and Qs = 3 × 10 − 10 = 30 − 10 = 20 jars, so both sides agree at 20 jars a day. At 12 dollars, Qd = 40 − 24 = 16 and Qs = 36 − 10 = 26. Sellers offer more than buyers want, so there is a surplus of 26 − 16 = 10 jars a day, and it pushes the price back down toward 10 dollars.
A better sentence is "Avocados got cheaper this month, so farmers' quantity supplied of avocados fell." The cause is the good's own price, so farmers moved down an unchanged supply curve; supply itself did not change.
The input price for roasters rose, so the supply of roasted coffee shifts left. Demand has not changed. With supply shifting left, the equilibrium price rises and the equilibrium quantity falls, the same pattern as the running market's move from 6 dollars and 30 units to 7 dollars and 20 units.
More visitors who want rentals shifts demand right. Two shops closing means fewer sellers, so supply shifts left. Both shifts push the price up, so the price rises for certain. Demand's shift pushes quantity up and supply's shift pushes it down, so the change in quantity cannot be signed without numbers for both shifts.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week elasticity measures how strongly quantity responds when one of this week's shifts moves the price.

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