HERCOR COLLEGE

Km. 1 Lawaan, Roxas City, Capiz 5800

ACADEMIC YEAR 2020-2021

MELCS BASED MODULE FOR

APPLIED ECONOMICS
CONTENT
STANDARDS
Economics as an applied science and its utility in addressing the
economic problems of the country.

PERFORMANCE
STANDARDS
Analyze and propose solutions to the economic problems using
the principles of applied economics

MOST ESSENTIAL LEARNING

COMPETENCIES

Analyze market supply

ANNIE D. ALBA, MBA

APPLIED ECONOMICS – ABM 12
HERCOR COLLEGE - HIGH SCHOOL DEPARTMENT
 MODULE 5
CONTENT
CHAPTER 2 [THE MARKET: SUPPLY]

DISCUSSIONS
SUPPLY (FIRMS/SELLER’S SIDE

Supply is the quantity of goods and services that firms are ready and willing to sell at a given
price within a period of time, other factors being held constant. Supply is a product made
available for sale by firms. It should be remembered that sellers normally sell more at a higher
price than at a lower price. This is because higher price results in higher profits.

Methods in Supply Analysis

Just like demand, supply can also be analyzed using a supply schedule, a supply curve and a
supply function.

● Supply Schedule
A supply schedule is a table listing the various prices of a product and the specific
quantities supplied at each of these prices at a given point in time. Generally, the
information provided by a supply schedule can be used to construct a supply curve
showing the price or quantity supply relationship in graphical form.

Table 2.2
Hypothetical Supply Schedule for Rice per month

Situation Price (Php)/kg. Quantity (kg)

A 50 10

B 42 15

C 38 25

D 26 35

E 10 35
 Table 2.2 shows the various prices and quantities for supply of rice per month. For
instance, at a given of Php65 per kilo, the seller is willing to sell 55 kilos of rice (situation
A). However, at a price of Php10 per kilo, he is only willing to sell 8 kilos of rice (situation
E).

Table 2.2 presents a hypothetical supply schedule for rice per month. Observe that as the
price increases, the quantity supplied also increases. For instance, if the price of rice per
kilo is Php65, sellers will be willing to sell 55 kilos of rice in the market. However, if the price
of rice decreases to Php10, sellers will only be willing to sell 8 kilos of rice. As we have
noted earlier, high prices provides incentives to sellers to sell more because of the
expected increase in their profits. However, when prices decline, this becomes a
disincentive to the sellers to sell more goods and services in the market since their profits
will be low.
● Supply Curve
A supply curve is a graphical representation showing the relationship between the prices
of the product sold of the factor of production (e.g., labor) and the quantity supplied per
time period. The typical market supply curve for a product slopes upward from the left to
right, indicating that as price rise or (falls), more (less) of the product is supplied. The
upward slope indicates the positive relationship between price and quantity supplied
(see figure 2.4)

FIGURE 2.4: SUPPLY CURVE

 Figure 2.4 illustrates a typical supply curve. The Y-axis represents the price (P) and the
X-axis represents the quantity supplied (Qs). The supply curve is positively sloped or
upward sloping. This positive slope indicates that as the price of commodities increases
(or decreases), more (or less) goods will be offered for sale by the producers.

Let us assume that the supply in our supply curve S is at S0 when the price of good A is at
P0 and the price level of the supplied is at Q0. Suppose the price of good A increases to
P1. The quantity supplied will also increase, and in our illustration, it goes up to Q1. Supply
will now be at α in our supply curve.

Note at the new price P1, the quantity supplied has increased to Q1. What is the reason
behind this? This is because of the direct relationship between the price and the quantity
supplied. The reverse will he happen if the price decreases to P2. Under this new price,
the quantity supplied will be at Q2 so the supply will be at point b in the supply curve.

This now brings us to the Law of Supply. The Law of supply states that if the price of a
good or service goes up, the quantity supplied for such good or service will also go up. If
the price goes down, the quantity supplied will also go down, ceteris paribus. The Law of
Supply implies that a higher price is an incentive for business firms or producers produce
more goods or services as it will maximize their profits.

In particular, given the higher price, producers or sellers normally increase their profits. As
such, they will always want the prices of their goods or services to increase their profits. As
such, they will always want the prices of their goods to be high. Only producers or sellers
who are more efficient in their operations will survive if they sell their goods at a lower
price. These producers or sellers are able to maximize their resources, handle their
budget well, and know how to handle this kinds of situations. Conversely, producers or
sellers who are less efficient and have a bad budgeting system run the risk of losing profits
or being removed from the market (Sicat 2003). This is what the law of supply means: a
higher price entices producers or sellers to supply more goods or services because of
their profit motive, while a lower price diminishes their goal of putting additional
investment because of the possibility of incurring a loss and running the risk of being
taken out of the market.

● Supply Function
A supply function is a form of mathematical notation that links the dependent variable,
quantity supplied (Qs), with various independent variables that determine quantity
supplied. Among the factors that influence that quantity supplied are the price of the
product, the number of sellers in the market, the price of factor inputs, technology,
business goals, importations, weather conditions, and government policies.

We can transform our statement into a mathematical function as follows:

Qs = f (product’s own price, number of sellers, price of factor inputs, technology, etc.)

Given our supply function, we can now derive our supply equation:

Qs = c + dP

Where:
Qs = quantity supplied at a particular price
c = intercept of the supply curve
d = slope of the supply curve
P = price of the good sold

Let us now illustrate our supply equation using a hypothetical example. Suppose the
price of good A is Php5. The intercept of the supply curve is 3 and the slope of the supply
curve is 0.25. If we want to know how much of good A will be supplied by sellers, we can
simply substitute the values in our supply equation. Thus:

QS= 3 + 0.25 (5)

= 3 + 1.25
QS = 4.25 units

Change in Quantity Supplied Versus Change in Supply

Before we go further in our discussion on the concept of supply, we first need to know the
difference between change in quantity supplied and change in supply.

Change in Quantity Supplied

A change in quantity supplied occurs if there is a movement from one point to another
along the same supply curve. A change in quantity supplied is brought about by an
increase or decrease in the product’s own price. The direction of the movement is
positive, considering the law of supply.
Figure 2.5 illustrates the concept of change in quantity supplied. In this figure, the original
price is at P0 and the corresponding quantity supplied is at Q0. The point of interaction
between P0 and Q0 is point α along the supply curve S. let us assume that the price
 increases to P1. As a result, the quantity supplied will increase to Q1. The quantity
supplied will then move from point α to point b along the same supply curve because of
the increase in price of the same product. The reverse, however, will happen if price
decreases. Thus a change in quantity supplied happens if the price of the good being
sold in the market changes. This is illustrated by a movement from one point to another
point along the same supply curve.

FIGURE 2.5: CHANGE IN QUANTITY SUPPLIED

Figure 2.5 illustrates a change in quantity supplied. Change in quantity supplied

happens when the price of the product changes, resulting in a change in quantity
supplied. This is illustrated in the graph above, where P0 increases to P1, resulting in a
change from Q0to Q1 and a movement along the same supply curve from point α to
point b.

Change in Supply

A change in supply happens when the entire supply curve shifts leftward or rightward. At the
same price, therefore, less (oe more) quantities of a good or service are supplied by producers
or sellers. Figure 2.6a illustrates an increase in supply. In this figure, the entire supply curve moves
rightward (indicated by the arrow) from S to S’. We can observe that at the same price P0, more
goods will be offered for sale by producers (from Q0 to Q1).
On the other hand, supply decreases if the entire supply curve shifts leftward. At the same price,
less quantities of a good or service are sold by producers. A decrease in supply is illustrated in
figure 2.6b. In this figure, the entire supply curve shifts leftward (indicated by the arrow) from S to
S’. We can see that at the same price P0, supply for the product decreases (from Q0 to Q1).

Increase (or decrease) in supply is caused by factors other than the price of the good itself, such
as a change in technology and business goals, resulting in the movement of the entire supply
curve rightward (or leftward).

FIGURE 2.6: CHANGE IN SUPPLY

Figure 2.6 shows two opposite movements of the supply curve when factors other than
the price are the main causes. Figure 2.6a shows an increase in supply while figure 2.3b
illustrates a decrease in supply.

Forces that Cause the Supply Curve to Change

Similar to demand, these are also factors that lead to a change in the supply curve. Below are
some of these factors.

● Optimization in the Use of Factors in Production

 An optimization in the utilization of resources will increase supply, when a failure to
achieve such will result in the decrease in supply. Optimization in this sense refers to the
process or methodology of making or creating something as fully perfect, functional or
effective as possible. Simply put, it is the efficient use of resources. In business parlance, it
can mean maximum production of output at minimum cost.
Thus, the optimization of the various factors of production (i.e., land, labor, capital, and
entrepreneurship) results in an increase in supply (Sicat 2003).

● Technological Change
The introduction of cost-reducing innovations in the production technology increases
supply. However, it can also decrease supply if it freezes production because of
problems that this new technology might encounter, such as technical trouble
(Samuelson and Nordhaus 2004).

Take for example AST Motors Corporation, which uses Machine A in the production of its
cars. Machine A can produce 20 cars per week. However, after three years of
production, AST Motors Corporation decides to replace Machine A with the newer and
faster Machine B, which can fully produce 80 cars per week. Because of the introduction
of this new technology (Machine B), the quantity of cars supplied by AST Motors
Corporation increases from 20 cars to 80 cars per week. However, if Machine B
malfunctions and is not fixed immediately, AST Motors Corporation’s production of cars
will decrease and thus not meet the optimum level of production using Machine B.

● Future expectations
This factors impacts sellers as much as buyers. If sellers anticipate a rise in prices, they
may choose to hold back the current supply to take advantage of the future increase in
price, thus decreasing market supply. If sellers, however, expect a decline in the price of
their products, they will increase present supply.

For example, if MVB Meat Company expects a drastic increase in prices of meat within
the following week, it may opt to hold its supply of meat for the meantime and sell it only
upon application of the price increase, thus reducing the present supply of meat in the
market.

Conversely, NKR Company, a producer of pagers, expects that its product will be
rendered obsolete after two years due to the introduction of cellular phones in the
market. So it may decide to sell all its stocks of pagers to presently earn profit from their
sale, rather than leave them unsold in the following years, considering its apparent
obsoleteness in the near future.
 ● Number of sellers
The number of sellers has a direct impact on the quantity supplied. Simply put, the more
sellers there are in the market, the greater the supply of goods and services will be
available. For example, during the Christmas season, more tiangge stores sell T-shirts and
RTW’s, resulting in an increase in the available shirts and RTWs in the market. Moreover, if
more farmers plant rice instead of other crops, then the supply of rice in the market will
increase due to increased production, assuming that no destructive calamities strike in
the country.

● Weather conditions
Natural disasters---typhoons, drought, and others-----reduce the supply of agricultural
commodities while good weather has an opposite impact. For instance, if a typhoon
destroys the vegetable farm sin Benguet, the supply of vegetables, particularly in Metro
Manila markets, will decline.

● Government Policy
Removing quotas and tariffs on imported products also affects supply. Lower trade
restrictions and lower quotas or tariffs boost imports, therefore boosting the supply of
goods in the market.

For imported products to accept in a country, there is a need for importers to pay the
government they require tariffs or duties, and taxes. Importers must also abide by the
quota set by the government on certain products. A quota is a limitation on the number
of quantity of imported goods that can enter a country. This is in place to protect
domestic or local products.

TEST AND EVALUATION OF KNOWLEDGE

Direction: In a sheet of yellow paper, answer the following essay questions.

● In what way do the forces of supply affect the supply curve?
● Describe the difference between change in quantity supplied and change in supply.

REFERENCES
APPLIED ECONOMICS: EDILBERTO B. VIRAY JR. AND JESUSA AVILA-BATO

Fundamentals of Economics with Agrarian Reform, Taxation and Cooperatives (Roman D. Leano, Jr., Ronald M. Corpuz)
Rubric for Essay

Excellent (10 pts.) Good (7 pts.) Fair (5 pts.) Not Mastered (2 pts.)

Students’ responses are
correct and offer extra
supporting facts. Responses
include some interpretation
that indicates mastery of the
topic.
Student’s responses are
correct, complete with
relevant detail and example.
Ideas and sentences show
clear understanding of the
topic.
Students’ responses are
somewhat correct but lack
relevant detail and
supporting examples. Ideas,
information and quotes are
explained and properly cited.
Students’ responses are
largely incorrect. The
answers lacks a clear sense
of direction. Responses were
copied from an article,
books, and other online
references.

END of Learning Module