Supply

Prof. Anjali M Kulkarni

Supply in Output Markets

• A supply schedule is a table 
showing how much of a product 
firms will supply at different 
prices.

• Quantity supplied represents the 
number of units of a product that 
a firm would be willing and able to 
offer for sale at a particular price 
during a given time period.

Prof. Anjali M Kulkarni 2

The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much 
of a product a firm will supply at different prices.

Prof. Anjali M Kulkarni 3

The Law of Supply
P Q
 The law of supply states that
there is a positive relationship
P Q between price and quantity of
a good supplied.
 This means that supply curves
typically have a positive slope.

Prof. Anjali M Kulkarni 4

 Change in D vs. Change in Qd

 Change in Demand - a change in a factor

that effects demand other than the price
of the good, thus there is a change in
quantity demanded at EVERY price.
 Change in Quantity Demanded - a
movement along a given demand curve-
due only to a change in the price of the
good itself

Prof. Anjali M Kulkarni 5

Determinants of Supply

 The price of the good or service.

 The cost of producing the good, which in turn
depends on:
 The price of required inputs (labor, capital,
and land),
 The technologies that can be used to
produce the product,
 The prices of related products.

Prof. Anjali M Kulkarni 6

 A Change in Supply Versus
a Change in Quantity Supplied

• A  change  in  supply  is 

not  the  same  as  a 
change  in  quantity
supplied.
• In this example, a higher 
price  causes  higher
quantity supplied,  and 
a  move along  the 
demand curve.
• In  this  example,  changes  in  determinants  of  supply,  other 
than  price,  cause  an  increase in supply,  or  a  shift  of  the 
entire supply curve, from SA to SB.
Prof. Anjali M Kulkarni 7
 A Change in Supply Versus
a Change in Quantity Supplied

• When  supply shifts 

to  the  right,  supply 
increases.  This 
causes  quantity
supplied  to  be 
greater  than  it  was 
prior  to  the  shift,  for
each and every price
level.

Prof. Anjali M Kulkarni 8

 A Change in Supply Versus
a Change in Quantity Supplied
To summarize:

Change in price of a good or service
         leads to

Change in quantity supplied
(Movement along the curve).

Change in costs, input prices, technology, or prices of 
related goods and services
         leads to

Change in supply
Prof. Anjali M Kulkarni
(Shift of curve). 9
From Individual Supply
to Market Supply

 The supply of a good or service can be defined

for an individual firm, or for a group of firms
that make up a market or an industry.
 Market supply is the sum of all the quantities
of a good or service supplied per period by all
the firms selling in the market for that good or
service.

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Market Supply
 As with market demand, market supply is the horizontal summation of
individual firms’ supply curves.

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Market Equilibrium
 The operation of the
market depends on the
interaction between buyers
and sellers.
 An equilibrium is the
condition that exists when
quantity supplied and
quantity demanded are
equal.
 At equilibrium, there is no
tendency for the market
price to change.
Prof. Anjali M Kulkarni 12
Market Equilibrium

 Only in equilibrium is
quantity supplied equal
to quantity demanded.

• At any price level 
other than P0, the 
wishes of buyers 
and sellers do not 
coincide.
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Market Disequilibria

 Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded 
exceeds quantity 
supplied, price tends to 
rise until equilibrium is 
restored.
Prof. Anjali M Kulkarni 14
Market Disequilibria
 Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds
quantity demanded at
the current price.

• When  quantity  supplied 

exceeds  quantity 
demanded,  price  tends  to 
fall  until  equilibrium  is 
restored.
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Increases in Demand and Supply

 Higher demand leads to  Higher supply leads to

higher equilibrium price and lower equilibrium price
higher equilibrium quantity.
Prof. Anjali M Kulkarni and higher equilibrium 16

quantity.
Decreases in Demand and Supply

 Lower demand leads to  Lower supply leads to

lower price and lower higher price and lower
quantity exchanged.
Prof. Anjali M Kulkarni
quantity exchanged. 17
Relative Magnitudes of Change

• The  relative  magnitudes  of  change  in  supply  and 

demand determine the outcome of market equilibrium.
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Relative Magnitudes of Change

• When supply and demand both increase, quantity 
will increase, but price may go up or down.
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Elasticity of Supply: Types, Methods and
Factors

The supply of a commodity is said to be elastic when as a result of a

charge in price, the supply changes sufficiently as a quick response.
Contrarily, if there is no change or negligible change in supply or
supply pays no response, it is inelastic.

In practical implications, an organization needs to estimate the

degree of change in the quantity supplied of a product with respect
to change in the price of the product. The degree or extent of
change in the quantity supplied of a product in response to change
in the price of the product is known as the elasticity of supply.

Prof. Anjali M Kulkarni 20

Elasticity of Supply
The  degree  of  change  in  the  quantity  supplied  with  respect  to  change  in  the 
price of a product varies in different situations.

eS = Percentage change in quantity supplied/Percentage change in price

Percentage change in quantity supplied =

New quantity supplied (∆S)/Original quantity supplied (S)

Percentage change in price = New price (∆P)/Original Price (P)

eS = ∆S/S * P/∆P
               
               eS = ∆S/∆P * P/S
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Perfectly Elastic Supply

 when the quantity supplied completely

increases or decreases with respect to
proportionate change in the price of a
product. In such a case, the numerical
value of elasticity of supply ranges from
zero to infinity (eS = 00)This situation is
imaginary as there is no as such product
whose supply is perfectly elastic.
 Therefore the situation does not have any
practical implication. In such a case, the
price remains constant as the price of a
product does not affect the quantity
supplied.

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Relatively Elastic Supply

 When the proportionate change in

the quantity supplied is more than
proportionate change in the price
of a product. In such a case, the
numerical value of elasticity of
supply is greater than one (eS>1)
For example, if the quantity
supplied increases by 30% with
respect to 10% change in the price
of a product, it is called relatively
elastic supply.

Prof. Anjali M Kulkarni 23

 Relatively Inelastic Supply

When the proportionate change in the

quantity supplied is less than
proportionate change in the price of a
product. In such a case, the numerical
value of elasticity of supply is less than
one (eS<1). For instance, the elasticity of
supply would be less than unit, if the
quantity supplied increases by 20% with
respect to 30% change in the price of a
product.

Prof. Anjali M Kulkarni 24

Unit Elastic Supply

When the proportionate change in the

quantity supplied is equal to the
Proportionate change in the price of a
product. The numerical value of unit elastic
supply is equal to one (eS=1).

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Perfectly Inelastic Supply

When the quantity supplied does not change

with respect to proportionate change in
price of a product. In such a case, the
quantity supplied remains constant in all
the instances of change in price. The
numerical value of elasticity of supply is
equal to zero. This situation is imaginary as
there is no as such product whose Supply is
perfectly inelastic. Therefore, this situation
does not have any practical implication.

Prof. Anjali M Kulkarni 26

Factors Determining Elasticity of Supply

• Nature of a Good

• Production Technology

• Time Period

• Scale of Production

• Agricultural Products

Prof. Anjali M Kulkarni 27

Nature of Good

Acts as a major determinant that influence the elasticity of supply. Goods,

such as antiques and old wines, cannot be reproduced in the same form;
therefore, the supply of such goods remains constant. Similarly, in case of
perishable goods such as vegetables, fruits, and other eatables, the supply
would be inelastic.

This is because the supply of perishable goods cannot be increased or

decreased easily. On the contrary, in case of durable goods, such as
furniture and electric appliances, the supply would be elastic as their
supply can be increased or decreased quickly.

Prof. Anjali M Kulkarni 28

Production Technology

Refers to the level of technology that helps in determining the

elasticity of supply. The supply of a good produced by using
higher level technology is faster with respect to the change in its
price.

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Time Period

Affects the elasticity of supply to a larger extent. In short-run,

elasticity of supply is low while in the long run elasticity of supply
is more. Therefore, changes in prices do not affect the supply of a
good immediately. If the price remains high for a longer period,
only then suppliers prefer to increase the supply of product.

Prof. Anjali M Kulkarni 30

Scale of Production

Puts a significant impact on the elasticity of supply. In case of small-

scale production of goods, the supply would be inelastic and vice
versa. For example, if an organization has a large scale production of
soaps, then an increase in the price of soaps would increase the
supply of soaps without any time lag.

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Agricultural Products
Act as a major determinant of elasticity of supply in case of
agricultural products. The supply of agriculture products, such as
fruits, vegetables, and food grains, depends on natural factors,
including ram, humidity, and sunlight. Therefore, the production of
agricultural products cannot be increased or decreased easily.
Consequently, the supply of these products is relatively inelastic.

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