Lecture: Supply & Market Equilibrium
Lecture script · about 15–20 minutes spoken · Week 4
Opening
Picture a farm stand after a late frost. Half the strawberry blossoms are gone, so there are fewer baskets to sell. The sign that said 4 dollars a basket now says 6, and the baskets still sell out. Nobody at the stand did any math. The price moved because fewer berries met the same crowd of buyers.
Here's where we are. In Week 1 you met opportunity cost and the habit called ceteris paribus, holding everything else fixed while one thing changes. In Week 2 you saw why specialization and trade make both sides better off. In Week 3 you built the buyers' half of a market: the demand curve, and the difference between sliding along it and moving the whole thing.
This week the sellers arrive. I'll start with the law of supply and the sellers' schedule, then draw the supply curve and the things that shift it. After that comes the payoff: putting the two curves together to find the market price. Then we'll knock the market out of balance and move the curves around. Next week, in Week 5, Elasticity, you'll measure how strongly buyers respond to these price changes.
1. The law of supply
Let's switch sides of the counter. Imagine you bake sourdough on weekends and sell it. At a low price per loaf, a whole day of baking barely covers your flour and your time. At a much higher price, it's worth giving up other plans and baking twice as many. That's opportunity cost from Week 1, showing up on the seller's side.
A farm deciding how many acres to plant works the same way. A higher price pulls more of the good onto the market.
That pattern has a name. 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. That positive link between price and quantity is why a supply curve slopes upward.
And the amount offered at one price 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.
Like the law of demand, the law of supply is a positive statement. It predicts what sellers will do, and evidence can test it. It doesn't say whether a price is fair.
Pause and try this. Someone says sellers offer more at a higher price because they're greedy. Is that what the law of supply claims?
Think about what it costs to make one more unit.
Here's the answer. No. The law makes no claim about anyone's character; a higher price makes it worth covering the cost of producing more.
2. The supply schedule
Now let's write the sellers' plans down, the same way we did for buyers. That list is a 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.
The course's running market, the one whose buyers you met last week, has sellers who follow one rule. Quantity supplied equals 10 times the price, minus 30. The numbers are illustrative, built for this course.
Let's fill it in out loud. At 4 dollars, 10 times 4 is 40, and 40 minus 30 is 10, so sellers offer 10 units a day. At 5 dollars, they offer 20. At 6 dollars, 30. At 7 dollars, 40. And at 8 dollars, 80 minus 30 leaves 50 units a day.
Hear the pattern? Every 1-dollar rise in the price adds 10 units to quantity supplied. That's the law of supply, written in numbers. And at 3 dollars, 30 minus 30 is zero. Nobody sells at 3 dollars or less, because that price doesn't cover the cost of even one unit.
Pause and try this. Last week, buyers wanted 50 units at 4 dollars. How many units do sellers offer at that same price?
Look back at the first line of the schedule.
Here's the answer. Sellers offer 10 units at 4 dollars, because 10 times 4 is 40, and 40 minus 30 is 10.
3. The supply curve and moving along it
Now turn the schedule into a picture. Put quantity across the bottom, in units per day, and price up the side, in dollars. That's the same layout as last week's demand curve. Plot the five points. At 10 units the height is 4 dollars, and at 50 units it's 8 dollars. The dots sit on one straight line that starts low on the left and climbs steadily to the upper right.
That line is the 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. The straight line is a classroom model that makes the logic easy to see.
Now change only the price. Suppose it rises from 6 dollars to 7. Nothing else about the sellers changes. They offer 40 units instead of 30, which is 10 more, on the same line. That's a 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's a change in quantity supplied.
So the word supply means the whole relationship between a good's price and the quantity sellers want to sell at each price, the full schedule or the full line. Quantity supplied is one spot on it.
Pause and try this. The price rises from 6 to 7 dollars, and a news story says "supply rose." What should it have said?
Ask whether the cause was the good's own price.
Here's the answer. It should say "quantity supplied rose," because a change in the good's own price slides sellers along an unchanged supply curve.
4. Shifting the supply curve
Now leave the price alone and change something about the sellers themselves. Picture a print shop that installs a press running twice as fast. Every poster now costs less to make, so at any price the shop is willing to offer more. The whole curve moves.
That's a shift of the supply curve: a move of the whole curve, caused by a change in something other than the good's own price. It's a change in supply. An increase moves the curve right, and a decrease moves it left.
What can shift it? The determinants of supply are the influences other than a good's own price that set how much sellers offer at every price. There are six. First, input prices: if fertilizer costs more, strawberry growers offer fewer baskets at every price, and supply shifts left. Second, technology, like that faster press, which shifts supply right. Third, the number of sellers: four new food trucks outside a stadium shift the supply of game-day tacos right. Fourth, expectations: grain farmers who expect higher prices next season store some of this season's harvest. Fifth, the prices of other goods sellers could make: if soybeans pay more, a farmer plants fewer acres of corn. Sixth, taxes and subsidies on production.
In the course's running market, better technology adds 20 units at every price. At 6 dollars, sellers now offer 50 instead of 30. A rise in an input price takes 20 away. At 6 dollars, they offer 10 instead of 30.
Pause and try this. The cost of fertilizer rises. Does that shift the demand for strawberries or the supply?
Ask whose plans changed first.
Here's the answer. It shifts supply to the left, because the fertilizer cost changes what growers will offer, not what shoppers want at a given price.
5. Putting the blades together
Here's the moment the model has been building toward. Alfred Marshall's Principles of Economics, from 1890, drew demand and supply together as the two blades of a pair of scissors, neither of which cuts alone. Demand alone couldn't give you a price last week. Supply alone can't either. The price comes from where they 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, and we write it P-star. The equilibrium quantity is the amount bought and sold at that price, written Q-star.
Let's find it. Buyers want 90 minus 10 times the price. Sellers offer 10 times the price minus 30. Set them equal. Add 10 times the price to both sides, and add 30 to both sides. Now 120 equals 20 times the price. Divide by 20, and the price is 6 dollars. At 6 dollars, buyers want 90 minus 60, which is 30, and sellers offer 60 minus 30, which is also 30.
In words: at 6 dollars, buyers want exactly the 30 units sellers offer, so nothing is left over and no one is turned away. Picture the graph: the falling demand line and the rising supply line cross at a single point, 30 units across and 6 dollars up.
Pause and try this. Is 6 dollars the fair price for this good?
Think about what kind of claim equilibrium is.
Here's the answer. The model can't say, because equilibrium is a positive claim that quantities match, while fairness is a normative question.
6. Shortages and surpluses
What if the price isn't 6 dollars? Think of a concert that prices its tickets too low. Fans line up, tickets vanish, and resale prices jump. Now think of a bakery that prices its cakes too high. By closing, the shelf is full of cakes nobody bought. Both markets are out of balance, in opposite directions.
A shortage is the gap that opens when a price sits below equilibrium and buyers want more units than sellers offer. A surplus is the gap that opens when a price sits above equilibrium and sellers offer more units than buyers want.
In the running market, at 4 dollars, buyers want 50 units and sellers offer 10. That's a shortage of 40 units a day. At 8 dollars, sellers offer 50 and buyers want 10. That's a surplus of 40. Closer in, at 5 dollars the shortage is 20, and at 7 dollars the surplus is 20.
Why does the price move? With a shortage, buyers who are turned away offer more, and sellers notice. The price rises, quantity supplied goes up, quantity demanded goes down, and the gap closes. With a surplus, sellers stuck with unsold goods cut the price, and the gap closes from the other side. Either way, the price is drawn toward 6 dollars.
One honest note about scope. This week, a price of 4 dollars is a market that hasn't adjusted yet. In Week 7 you'll ask what happens when a law holds the price there, which is a different question.
Pause and try this. At 8 dollars, a friend calls the 40 unsold units a shortage. Is that right?
Compare the price with 6 dollars first.
Here's the answer. No, it's a surplus, because above the equilibrium price sellers offer more than buyers want.
7. Comparative statics
Markets don't sit still. 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.
Three steps, always in this order. Name the curve. Name the direction. Then solve for the new equilibrium.
Let's run all four shifts on the running market, starting from 6 dollars and 30 units. Each one moves a curve by 20 units at every price. If incomes rise and the good is normal, demand shifts right, and the new equilibrium is 7 dollars and 40 units. If incomes fall, demand shifts left, to 5 dollars and 20 units. If technology improves, supply shifts right, to 5 dollars and 40 units. If an input price rises, supply shifts left, to 7 dollars and 20 units.
Here's the pattern. A demand shift moves price and quantity in the same direction. A supply shift moves them in opposite directions. That pattern lets you predict any single shift before you solve it.
And the farm stand from the opening? The frost cut the harvest. That's supply shifting left, so the model predicts a higher price and fewer baskets sold.
Pause and try this. Better technology shifts supply right in the running market. Does the price go up or down?
Recall the third of the four shifts.
Here's the answer. It goes down, from 6 dollars to 5, while the quantity rises from 30 to 40, because sellers offering more at every price must accept a lower price to sell it all.
8. When both curves shift
Sometimes two things change at once. Incomes rise and, at the same time, technology improves. Now both curves move, and you run the three steps twice.
When demand and supply move at once, economists call them simultaneous shifts, and the direction of either price or quantity then depends on the relative sizes of the two moves.
In the running market, let both curves shift right by 20 units. Set the new rules equal, and you find 120 equals 20 times the price, so the price is 6 dollars. The quantity is 110 minus 60, which is 50 units. Quantity rose by 20. The price didn't change at all.
Here's why. 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 exactly the same size, so they cancel. If demand had moved further, the price would have risen. If supply had moved further, it would have fallen. Without numbers for both shifts, you can't sign the price.
The same reasoning works the other way around. If demand shifts right while supply shifts left, both push the price up, so the price rises for certain, and it's the quantity you can't sign.
Pause and try this. Demand and supply both shift left. Which result can you sign, and which can't you?
Run each shift separately and compare the pushes.
Here's the answer. Quantity falls for certain, because both shifts push it down; the price can't be signed without numbers, because the two shifts push it in opposite directions.
9. The classic wrong turns
Most mistakes this week are a curve moved the wrong way or a word swapped, not a deep misunderstanding. If you make one, you're in good company. Here's a routine you can run every time.
First, name the cause: is it the good's own price? If so, it's a movement along a curve. Second, name the curve: does the change alter buyers' plans or sellers' plans? Third, name the direction: more at every price is right, and less is left. Fourth, find the new price and quantity, and if both curves moved, say which result is open.
Let's run a news story through it. Suppose the story says a spike in an ingredient's cost raised a snack's price, and buyers demanded less. The cause is an input price, not the snack's own price. Input costs change sellers' plans, so supply shifts, and it shifts left. In the running market, that lands at 7 dollars and 20 units.
So what about "buyers demanded less"? Buyers slid along an unchanged demand curve, from 30 units to 20, as the price rose from 6 to 7 dollars. Quantity demanded fell. Demand itself didn't move.
Pause and try this. At a price above equilibrium, is the leftover a shortage or a surplus?
Picture the cakes on the shelf at closing.
Here's the answer. It's a surplus, because above equilibrium sellers offer more than buyers want, and that extra pushes the price down.
Closing
Let me pull it together. The law of supply says a higher price raises quantity supplied, with everything else fixed. The supply schedule and the supply curve show that plan, rising from lower left to upper right. A change in the good's own price slides sellers along the curve; a change in a determinant shifts the whole curve. Equilibrium is where quantity demanded equals quantity supplied, which in the running market is 6 dollars and 30 units. Below that price there's a shortage, and above it a surplus, and both push the price back. Comparative statics means naming the curve, the direction, and the new landing spot. And when both curves move, one of the two results waits for numbers.
Next in this module come the slide deck, the Readings & Resources page, the lecture tutorial, the practice set, and the quiz, along with the discussion and the Model Workshop. Next week, in Week 5, Elasticity, you'll measure how strongly quantity responds when one of these shifts moves the price.
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