Module 1: Demand and

Supply Analysis
IIM Bodhgaya
Tamali Chakraborty
 What is Supply?
• The quantity supplied of a good is the amount that producers plan to
sell and able to sell in a given period of time at a particular price.

• Supply of a product depends on the cost of production.

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 Law of Supply
• The law of supply states that, if other factors affecting supply of the
good remain constant, with increase in price the quantity supplied of a
good increases and with decrease in price the quantity supplied of a
good decreases.

• It shows the positive or direct relation between the price of the good
and quantity supplied of the good.

• Supply schedule and supply curve reflects the law supply.

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 Supply Function
• Qs = f (P, Pr, Pw, T, E, G)
• Where, Qs = Quantity supplied of good x
P = Price of good x
Pr= Price of related good
Pw= Price of raw materials
T = Technology
E = Environment
G = Governmental policies

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 Supply Curve
• The supply curve is the graph of the relationship between the price of a good and
the quantity supplied.

• It is upward sloping and shows the positive relation between the price of a good
and the quantity supplied of that good.

• Qs = Qs (P)

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 Market Supply
• Market supply refers to the sum of all individual supplies for all sellers
of a particular good or service.

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 Market Supply Schedule
Price per Hamburger Quantity Supplied per Day
(million hamburgers)
$2.00 14
1.50 10
1.00 6
0.75 4
0.50 2
Market Supply Curve for Hamburgers

FIGURE: Market Supply Curve for Hamburgers Market

supply curve S shows that higher hamburger prices induce
producers to supply greater quantities.
 Change in Quantity Supplied
• It happens due to change in price of the commodity.

• It is the movement along the supply curve.

• It does not shift the supply curve.

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 Shift in Supply
• A shift in the supply curve happens due to change in the factors
(Technology, input prices, expectations, and Govt. policies) affecting the
supply of the product other than the price.

• Supply curve shifts to the right side or left side.

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Think and Answer

• Decline in India’s shrimp exports makes

them cheaper by 30% in domestic market

• URL:
https://economictimes.indiatimes.com/news/economy/agriculture/
decline-in-indias-shrimp-exports-makes-them-cheaper-by-30-in-
domestic-market/articleshow/84771488.cms
 Adam Smith and his Principles
• Adam Smith, the Father of Economics, wrote the famous book titled ‘An
Inquiry into the Nature and Causes of the Wealth of Nations’ in 1776. He
coined two important terms ‘invisible hand’ and ‘division of labour’.

• According to Adam Smith, the markets automatically reaches equilibrium

through the interaction of demand and supply of goods in a free market
economy and this process is called invisible hand.

• The division of labour is an economic concept developed by Smith shows

that the efficiency of production can be enhanced drastically by splitting the
works in different roles among the labourers.
• https://www.youtube.com/watch?v=DfGs2Y5WJ14

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 Market Mechanism
• Tendency in a free market economy is change in price till the market
clears or the quantity supplied or quantity demanded become equal.

• Market mechanism in a free market economy works with the help of

invisible hand.

• Invisible hand is nothing but the price mechanism where there is an

adjustment in demand and supply without any conscious effort by
visible agency.

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 The Market Mechanism

SUPPLY AND DEMAND

The market clears at price P0 and

quantity Q0.

At the higher price P1, a surplus

develops, so price falls.

At the lower price P2, there is a

shortage, so price is bid up.
 Thank You

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