Market Supply

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 Supply
• Firms serve as agents on the supply side of the theory of the
market price.
• Firms are units that employ factors of production or inputs to
produce products that it sells to other firms, consumers or to
government
• The firm is often called the producer and are responsible for
the supply of goods and services. A firm must:
a. Have workers, that are paid fixed wages and are told what to
do
b. There are managers who are responsible for making decisions
and also monitor the workers to make sure that they are
contributing to the welfare of the firm
c. There are owners that fund the firm’s investments and bear the
financial risks associated with the business

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 Supply

• Firms therefore are economic agents responsible for

hiring and organizing factors of production or productive
factors to produce goods and services which are offered
for sale
• Supply is a complete description of the quantity that
sellers want to sell at each possible price per unit of time
– It refers to the quantity of a good that sellers or firms are
willing and able to offer for sale sell wish to sell at each
possible price
– Market supply – refers to the sum of supplies of a
commodity made by all individual firms

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 Determinants of Supply
• There are several non-factors that determine the quantity
of good x (Px) supplied at any given price. These include:
1. Objectives of the firm (o)
2. Prices of related goods
3. State of technology
4. Prices of inputs or factors of production
5. Expectations
• These factors determine the opportunity cost of production
relative to a given benefit and therefore the trade-off that
producers face.

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 Determinants of Supply
Total cost
1. Objectives of the firm - firms
tend to have different objectives Total
revenue
which affect the amount of

Costs revenue
commodities supplied. These
objectives include:
a. Profit maximization - here, the
firm chooses both its inputs and
its outputs with the sole goal of
achieving maximum economic
profits that is - to maximize the 0 q2 q1 profits
difference between total revenue Quantity per week
and total economic costs
This is intuitive since the This diagram shows the plot of
entrepreneur’s or the owner’s Total revenue and costs against
benefit lies in the profit incomethe Quantity supplied
firm generates.

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 Determinants of Supply
Total cost
a. Profit maximization – a profit
Total
maximizing firm will sell where revenue

Costs revenue
the gap between total revenue
and total costs is highest.
– This is attained at q2. where it
will produce and sale
b. sales maximization – in large
firms or for corporations, the 0 q2 q1 profits
ownership is separated from Quantity per week
management. Sometimes, The difference between total cost
management may not be and total revenue gives us the
necessarily maximising the profits
shareholders’ profits.

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 Determinants of Supply
Total cost
b. Sales maximization –Often
the shareholders are large in Total
revenue
number and do not have

Costs revenue
adequate information about
the true merits and demerits
of important decision
making.
– Thus, the management can 0 q2 q1 profits
survive and do well for itself Quantity per week

as long as it provides some In this case managers make decisions

minimum acceptable returns
to the shareholders, thereby
‘keeping them happy.
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so as to maximise sales or revenues—
to which their remuneration, perks and
reputation are linked—subject to some
minimum profit constraint.The firm in
this case will produce at q2.
 Determinants of Supply
Total cost
c. Other objectives -while the
Total
goal of profit making is revenue

Costs revenue
certainly pertinent for a private
firm, public sector firms may
also have different goals –
which include working in the
‘public interest’ and not
necessarily to maximise 0 q2 q1 profits
profits. (e.g., employment Quantity per week

creation, strategic interest etc)

The amount supplied by a firm will
depend on the firm’s objectives (0)

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 Determinants of Supply

2. Price of related goods (Pr) -if the price of some other

good say y (alcohol based hand sanitisers) rise, with
the price of x (say bear during coronavirus)
unchanged, some of the firms producing x may move
to the production of Y motivated by their search for
profits. In this case, Y and X are substitutes and
there is an inverse relationship between the supply of
one good and the price of the other.
o However, for complements –used together such as petrol
and cars, or which are jointly supplied (such as petrol and
paraffin) an increase in the demand and price for cars may
lead to a rise in the price of petrol

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 Determinants of Supply
3. Price of Inputs or Factors of production (Pf)- when the
price of one or more of these inputs rises, producing X is
less profitable, and your firm supplies less x.
– If input prices rise substantially, some firms shut down supply
will reduce.
– supply of a good is negatively related to the price of the inputs
used to make the good
4. The state of technology - technology for turning the
inputs into output ( X) is yet another determinant of supply.
– The invention of the a more efficient mechanized machine, for
example, can reduce the amount of labor necessary to make
good X. By reducing firms’ costs, the advance in technology
raised the supply of x

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 Determinants of Supply

5. Expectations - the amount of x you supply today may

depend on your expectations of the future.
– For example, if you expect the price of X to rise in the
future, you will put some of your current production into
storage and supply less to the market today
6. Other factors (Z) many other factors may affect the
supply of a good on the market . These will include but
not limited to:
a. Structure of the industry – the amount of the good
produced is likely to be higher if there are many
producers of the good (e.g., soaps) then if there is only
one producer of the good

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 Determinants of Supply
6. Other factors (Z) many other factors may affect the
supply of a good on the market . These will include but
not limited to:
b. Public or government policy -if government imposes
restrictions on production , output tends to fall
c. Non- economic factors – the factors like an disease
outbreak like coronavirus, that leaves factories closed,
strikes by workers etc. can also cause output to fall
7. Price of X -The price of good itself is one determinant
of the quantity supplied. If the price of x goes up with
costs etc unchanged, the production of x becomes
profitable and old firms may increase production and
new firms may enter the production and increase
supply.

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 Supply Curve
• In functional notation, the supply function can be written
as:
– Sx = f( O, Px, Pr, Pf, E, Z)
• The Law of Supply states that the higher the price, the
greater the quantity produced. When prices decrease,
the quantity of that good is decreased.
– Think of the law of supply in terms of scales. In one hand
you have prices and in the other you have quantity
supplied. As one hand rises or falls (prices), the other hand
follows (quantity supplied).
– Therefore the supply of a product increases with increase
in its price and decreases with a decrease in its price
ceteris Paribus.

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 Supply Curve
Price (ZMK) Supply (Shirts)
• Th supply curve shows the 10 1
different prices of a commodity 20 3.5
and corresponding quantity
30 5
that suppliers are willing to
40 6
offer for sale
60 7.5
• Sx = f(Px) ceteris paribus
80 8
• The data in the table is plotted
in the graph which depicts the 60
law of supply 40

• The SS schedule is upward 30 supply

20 curve
sloping or positively sloped
because a higher quantity of 10
supply is associated with a
1 3.5 5 6 7.5 8
higher price

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 Supply Curve
Price (ZMK) Supply (Shirts)
• In other words, the supply 10 1
curve slopes upward 20 3.5
because, ceteris paribus, a 30 5
higher price means a greater 40 6
quantity supplied. 60 7.5
80 8
• Movement along the supply 60
curve: 40
• The effect of a change in 30 supply
price of x ceteris paribus, can 20 curve
be traced by a movement 10
along good X’s market
supply curve 1 3.5 5 6 7.5 8

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 Shifts in Supply Curve
• Whenever there is a change in
any determinant of supply,
other than the good’s price, the s
supply curve shifts either to the s
left or right.
• For example, after an
improvement in technology, the
supply curve shifts to the right
• Reason: the improvement in
technology reduces the firm’s s s
costs of production causing
supply to increase at every
price • Home work: Discuss and
• Shifts in SS curve represents show using the diagrams the
change in supply and not effect in the change to any
change in quantity supplied. three other determinant of
supply.

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 Elasticity of Supply
• The elasticity of supply is the measure of the extent to
which the quantity supplied of a good responds to
changes in one f the influencing factors:
• Price elasticity of supply: is a measure of how much
the quantity supplied of a good responds to a change in
the price of that good,
– It measures the responsiveness of quantity supplied (of x)
to changes in its price (of x) ceteris paribus
– Computed as the percentage change in quantity supplied
divided by the percentage change in price

• 

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 Elasticity of Supply
∆𝑞/𝑞
In symbols 𝑒𝑠 =
∆𝑝/𝑝
– For example, suppose that an increase in the price of milk
from K2.85 to K3.15 per litre raises the amount that dairy
farmers produce from 9,000 to 11,000 litres per month.
– Using the midpoint method, we calculate the percentage
change in price as:
– Percentage change in price is ((3.15 - 2.85)/3.00)x 100 =
10%
– Similarly, we calculate the percentage change in quantity
supplied as
– Percentage change in quantity supplied ((11,000-
9,000)/10,000 )* 100 = 20%

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 Elasticity of Supply
20
• The elasticity of supply is: 𝑒𝑠 = =2
10
– Supply is said to inelastic ( es <1 ) when a given percentage
change in price causes a smaller percentage change in
quantity supplied
– It is elastic (( es >1 ) when a given percentage change in
price causes a bigger percentage change in quantity
supplied.
– Perfectly inelastic of supply is when es =0
– Perfectly elastic supply when es = 
– Unit elastic supply when es = 1

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 • THE VARIETY OF SUPPLY CURVES
The price elasticity of
supply determines
whether the supply
curve is steep or flat.
Note that all
percentage changes
are calculated using
the midpoint method.

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Determinants of Elasticity of Supply
1. Time Horizon and the
Market Period
– Time period is one of the
most important factor in
determining the elasticity of
the supply curve.
– It takes time for firms to
adjust the quantities they
produce. In the short period,
the supply of goods is likely
to be fixed and inelastic and
is likely to be more elastic
he longer the period of time
under consideration.
a. Momentary period - this is a
very short period such as within
few hours . In this period, supply
will be limited to the quantity that
is already available in the market
and cannot be increased even if
the price increased/change
• Supply is perfectly inelastic
price S
S
Quantity/time

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Determinants of Elasticity of Supply
• However, there is a limit to the
1. Time Horizon and the increase in SS that is possible
Market Period without expanding the scale
operations.
b) The Short-run - this is the
time period in which some
of the inputs can be
changed while others S
cannot be changed. The
supply of the good can be
increased by employing price
more variable factors of
production.
– The supply curve will be
upward sloping from left to
right indicating some degree S
of elasticity. Quantity/time

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Determinants of Elasticity of Supply
• The supply in the long run can be
1. Time Horizon and the expanded. Supply is likely to be
Market Period much more elastic than in the
short run
b) The Long-run - this is the
time period in which ALL
the inputs can be changed
while be changed. The
supply of the good can be S
increased by employing
more of all the factors of price
production. The firms
already producing can be
expanded while new firms
can enter the industry start
producing the good. S
Quantity/time

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 Determinants of Elasticity of Supply

1. Excess capacity - in the

short-run, it is possible to
expand output if there is a
pool of the variable factors
such as labour and machinery
that is idle. Also if the industry
has large quantities of unsold
stock, the supply is likely to
be increase rapidly.
o Supply is likely to be more
the greater the excess
capacity in the industry and
the higher the level of unsold
stock.

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 Determinants of Elasticity of Supply
3) Ease of resource movement across industries
In both the short and long run, the absence of unsold stock
will require shifting factors of production from one use to
another.
– For example, to increase output of students on the market,
you may need more lecturers. Thus you might need to
convert bricklayers into economics lecturers. How easy is
this?
– This may be costly because the rewards to factors may
need to be increased to attract them
– In addition, there is a limit to which factors can move
between industries. Some of the limits include: Social
barriers, ii) institutional barriers, iii) political barriers, v.
Demographic barriers e.,

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