THEORY OF SUPPLY

WHAT IS SUPPLY?
SUPPLY – quantities of goods &
services that sellers are willing &
able to sell/produce at different
prices in a given period of time
LAW OF SUPPLY
- States a direct relationship
between the price of a
commodity and its quantity
supplied

P Qs P Qs
Quantity Supplied
+the number that will be
supplied or produced to the
public at a given price
SUPPLY FUNCTION

Qs = c + dP
 SUPPLY SCHEDULE
- is a tabular statement showing
the different quantities of a
commodity which will be supplied
or produced at its different prices
during a specified time period
 Qs = 10 + 2P
Price Quantity Supplied (Qs)
0 10
1 12
2 14
3 16
4 18
5 20
 SUPPLY CURVE
+is a graph of the relationship
between the price of a good and the
quantity supplied
P

Upward Sloping

Qs
FACTORS AFFECTING SUPPLY

1. Number of Firms
2. Technology
3. Prices of Inputs
4. Price Expectations
5. Taxes & Subsidies
6. Prices of Related Goods
1. Number of Firms (F)

F S
DIRECT
F S
2. Technology (T)

T S
DIRECT
T S
3. Prices of Inputs (Pi)

Pi S
INVERSE
Pi S
4. Price Expectations (Pe)

Pe S
INVERSE
Pe S
5. Taxes & Subsidies
TAXES (Tx)

Tx S
INVERSE
Tx S
5. Taxes & Subsidies
SUBSIDIES (SB )

SB S
DIRECT
SB S
6. Price of Related Goods
SUBSTITUTES (Ps)

Ps S
INVERSE
Ps S
6. Price of Related Goods
COMPLEMENTS (Pc)

Pc S
DIRECT
Pc S
CHANGE IN QUANTITY SUPPLIED
VS.
CHANGE IN SUPPLY

Change in Quantity Supplied

- Affected by the price
- Related to the Law of Supply
Change in Supply
- Change due to factors other
than price

RIGHT : Increase in supply (at all

prices)

LEFT: Decrease in supply (at all

prices)
 EXAMPLE #1:

• The Xbox factory finds out that the

workers are getting a 25% pay raise
(increase in the cost of labor –
input)

• What happens to the supply

curve?
 S
$500 S

450
Price per Xbox

400

350 Increase in labor pay =

more production costs
300
= decrease in the # of
250 S Xboxs

200
S

0 30 40 50 60 70 80 90
Quantity Supplied
in Billions of Xboxes per Year
 EXAMPLE #2:

• The Xbox factory invents a technology

that produces twice as many Xboxs in a
day as before.

• What happens to the supply curve?

 $500 S
Increase technology =
450 more Xboxs produced S
= increase in the # of
Xboxs
Price per Xbox

400

350

300

250

200
S S

0 30 40 50 60 70 80 90
Quantity Supplied
in Billions of Xboxes per Year
 EXAMPLE #3:

• The CEO of the Xbox factory decides to

increase the price of the Xboxs as a
way to make more profit.

• What happens to the supply curve?

 $500 S

450
Price per Xbox

400

350 Increase in price = no

shift in the supply
300
curve
250

200
S

0 30 40 50 60 70 80 90
Quantity Supplied
in Billions of Xboxes per Year
QUESTIONS?