SUPPLY

• What is Quantity supplied is the amount of a good that sellers

are willing and able to sell during some time period.
• Law of Supply:
– The law of supply states that, the price of a product and the quantity
supplied are positively related, other things equal. the higher the
price the more its producers will supply, vice versa.
The Supply Curve: The Relationship between Price and Quantity
Supplied
• Supply Schedule
– The supply schedule is a table that shows the relationship between
the price of the good and the quantity supplied.
 Lobel’s Supply Schedule
Price of bread Quantity of bread

$0.00 0

0.50 0

1.00 1

1.50 2

2.00 3

2.50 4

3.00 5
 The Supply Curve: The Relationship between Price and Quantity
Supplied

• Supply Curve
– The supply curve is the graph of the relationship between the price of
a good and the quantity supplied.
 Lobel’s Supply Schedule and Supply Curve

Price of bread Price of Quantity of

bread bread

$3.00 $0.00 0
0.50 0
2.50 1.00 1
1. An
increase 1.50 2
in price ... 2.00
2.00 3
1.50 2.50 4
3.00 5
1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of bread

2. ... increases quantity of bread supplied.

 Properties of supply curve
• It is upward sloping. Why?
a) Holding costs constant, higher prices means
higher profit margin.
b) The law of supply is the result of the law of
increasing cost.
– As the quantity of a good produced rises, the
marginal opportunity cost rises.
– Sellers will only produce and sell an
additional unit of a good if the price rises
above the marginal opportunity cost of
producing the additional unit.
 Market Supply versus Individual Supply
• Market supply refers to the sum of all individual supplies for all
sellers of a particular good or service.
• Graphically, individual supply curves are summed horizontally
to obtain the market supply curve.
 Determinants of supply
These are factors affecting supply;
• Price of product
• Resource prices
• The technology
• Prices of other goods
• Expectations of the seller
• Number of sellers in the market
• Government taxes and subsidies
• Prices of related products and joint products
 Shifts in the Supply Curve

• Change in Quantity Supplied

– Movement along the supply curve.
– Caused by a change in anything that alters the quantity supplied at
each price.
 Change in Quantity Supplied
Price of Ice-
bread S
C
$3.00
A rise in the price
of bread results in
a movement
along the supply
A curve.
1.00

Quantity of
bread
0 1 5
 Shifts in the Supply Curve
• Input prices
• Technology
• Expectations
• Number of sellers
• A change in these factors will shift the
supply curve, either to the right or left.
It is a shift in the location of the supply curve. They alters the quantity
supplied at every price.
 Shifts in the Supply Curve

Price of
bread Supply curve, S3
Supply
curve, S1
Supply
Decrease curve, S2
in supply

Increase
in supply

0 Quantity of bread
 Shifts in the Supply Curve

• How changes in each determinant affect supply?

• Technology- Technological improvements help reduce
production cost and increase profit, thus stimulate higher
supply.
•  Number of sellers- More sellers in the market increase the
market supply.
• Expectation for future prices - If producers
expect future price to be higher, they will try
to hold on to their inventories and offer the
products to the buyers in the future, thus they
can capture the higher price.
• Taxes and Subsidies- Taxes reduces profits, an
increase in taxes reduce supply, whilst a
decrease in taxes increase supply. Subsidies
reduce the burden of production costs on
suppliers, thus increasing the profits.
Therefore increase in subsidies increase
supply and decrease in subsidies decrease
supply.
• Prices of Joint Products- When two or more goods are
produced in a joint process and the price of any of the product
increases, the supply of all the joint products will be increased
and vice versa. For example, increase in price of meat will
increase the supply of leather.
Variables That Influence Sellers
 The determination of market price: Market Equilibrium

• How do the two forces of supply and demand interact to

determine price?
 SUPPLY AND DEMAND TOGETHER
Demand Schedule Supply Schedule

Price of bread Market Price of bread Market

$0.00 19 $0.00 0
0.5 16 0.5 0
1.00 13 1.00 1
1.50 10 1.50 4
2.00 7 2.00 7
2.50 4 2.50 10
3.00 1 3.00 13

At $2.00, the quantity demanded is

equal to the quantity supplied!
 The Graphical Analysis

Price of
bread
Supply

Equilibrium price Equilibrium

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of bread
• Equilibrium refers to a situation in which the price has reached the level where quantity
supplied equals quantity demanded
• Equilibrium Price or market clearing price
– The price that balances quantity supplied and quantity demanded, no excess ss or
dd.
– On a graph, it is the price at which the supply and demand curves intersect.
• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the equilibrium price.
– On a graph it is the quantity at which the supply and demand curves intersect.
 Markets Not in Equilibrium

(a) Excess Supply

Price of
bread Supply
Surplus
$2.50

2.00

Demand

0 4 7 10 Quantity of
Quantity Quantity bread
demanded supplied
 At P2 – price above equilibrium
Excess supply or surplus
Qs > Qd
• Firms will find themselves with unwanted inventory of goods.
• Would prompt competing sellers to bid down price to encourage buyers
to take this surplus off their hands
• Price goes down, buyer take more of the product, and firms use a
smaller amount of resources in production
• Process of bidding down prices continuous until equilibrium is reached
at $2.00.
 Markets Not in Equilibrium

(b) Excess Demand

Price of
bread Supply

$2.00

1.50
Shortage

Demand

0 4 7 10 Quantity of
Quantity Quantity bread
supplied demanded

Copyright©2003 Southwestern/Thomson Learning

 At P1 – price below equilibrium

• Qs< Qd excess demand or Shortage

• Shortages of goods causes competition among buyers
• Buyers bid up prices for the limited goods
• The rise in price will force firms to commit more resources in
production .thus production increases
• The process continues until equilibrium is reached at $2.00
• The ability of the competitive forces of SS and DD to establish
price where selling and buying decisions are coordinated is
called the rationing function of price
• once equilibrium is established, it will persist until it is
disturbed by changes in market conditions.
 Changes in market prices
• Adjustment process
• The methodical approach of market analysis
• Three steps
Three Steps to Analyzing Changes in Equilibrium
STEP 1:
• Demand or Supply? Does the event impacts the
DD or SS side of the market?
STEP 2:
• Shift or Movement? If so in which direction.
STEP 3:
• Adjustment to new equilibrium. Did the shock
caused excess DD or excess SS at initial price.
In which direction will price adjust.
 The four effects of DD and SS curve shifts
• Four laws of DD and SS
a) An ↑DD causes an ↑ in both equil P and Q.
b) A ↓ DD causes a ↓in both equil P and Q.

c) An ↑SS causes a ↓in equil P and ↑ Q.

d) A ↓SS causes an ↑ in equil P and ↓ Q.

 How an Increase in Demand Affects Equilibrium
Price of
bread 1. Income increases
the demand for bread. . .

Supply

$1.50 New equilibrium

1.00
2. . . . resulting
Initial
in a higher
equilibrium
price . . .
D

0 7 10 Quantity of
3. . . . and a higher bread
quantity sold.
 How a Decrease in Supply Affects Equilibrium

Price of
1. Bad weather affect wheat
bread
price of flour increases reduces
the supply of bread. . .
S2
S1

New
$1.50 equilibrium

1.00 Initial equilibrium

2. . . . resulting
in a higher
price of bread
... Demand

0 4 7 Quantity of
3. . . . and a lower bread
quantity sold.
What Happens to Price and Quantity When
Supply or Demand Shifts?
 Summary
• Economists use the model of supply and demand to analyze
competitive markets.
• In a competitive market, there are many buyers and sellers,
each of whom has little or no influence on the market price.
 Summary
• The demand curve shows how the quantity of a good depends upon the
price.
– According to the law of demand, as the price of a good falls, the quantity
demanded rises. Therefore, the demand curve slopes downward.
– In addition to price, other determinants of how much consumers want to buy
include income, the prices of complements and substitutes, tastes, expectations,
and the number of buyers.
– If one of these factors changes, the demand curve shifts.
 Summary
• The supply curve shows how the quantity of a good supplied
depends upon the price.
– According to the law of supply, as the price of a good rises, the
quantity supplied rises. Therefore, the supply curve slopes upward.
– In addition to price, other determinants of how much producers want
to sell include input prices, technology, expectations, and the number
of sellers.
– If one of these factors changes, the supply curve shifts.
 Summary
• Market equilibrium is determined by the intersection of the
supply and demand curves.
• At the equilibrium price, the quantity demanded equals the
quantity supplied.
• The behavior of buyers and sellers naturally drives markets
toward their equilibrium.
 Summary
• To analyze how any event influences a market, we use the
supply-and-demand diagram to examine how the even affects
the equilibrium price and quantity.
• In market economies, prices are the signals that guide
economic decisions and thereby allocate resources.