LECTURE 4: BASIC PRINCIPLES OF SUPPLY

SUPPLY

- “ It is the willingness of sellers to offer a given quantity of a good or service for a given price. ”

QUANTITY SUPPLIED

- “ It refers to the amount of good that a seller is willing to offer for sale ”

THE LAW OF SUPPLY

“ ”

- “With the premises of ceteris paribus, there is direct relationship between the price of a good and
the quantity supplied of that good”
- “As the price increases, the quantity supplied of that product also increases” (Dinio, et.al, 2017)

SUPPLY SCHEDULE

- “ It represents the various quantities the supplier is willing to sell at certain prices ”

- It denotes the relationship between the supply and the price, while all non-price variables remain
constant.

“ Classifications of Supply Schedules : ”

a. Individual Supply Schedule

b. Market Supply Schedule

SUPPLY CURVE

- “ It illustrates the supply schedule graphically; it has upward slope which signifies the direct
relationship between the price and quantity supplied for that commodity ”
SUPPLY FUNCTION

- “ It presents how the supply for a certain commodity is affected by different determinants or
variables ”

Example of supply function: Qs= 100 + 5P

Supply schedule (based on given supply function above):

Computation based on the supply function Qs= 100 + 5P

Qs= 100 + 5 (20)= 200

Qs= 100 + 5 (40)= 300

Qs= 100 + 5 (60)= 400

Qs= 100 + 5 (80)= 500

Qs= 100 + 5 (100)= 600

PRICE
90

80

70

60

50

40 Series 1

30

20

10

0
100 200 300 400 500
Qs

Change in Quantity Supplied vs. Change in Supply

Change in Quantity supplied: Movement along the same supply curve

Change in Supply: Shifting of supply curve

“ Change in the quantity supplied ”

“ If the price of the commodity changes, the quantity supplied will also change. In this case, it will only
move along the same supply curve. A rise in price from P1 to P2 raises the quantity supplied as shown
in the figure from Q1 to Q2. If the price of the good decreases, quantity supplied also declines as shown
in the figure, it is the movement from P1 to P3. ”
Changes in supply

“ There will be increase or decrease in supply of commodity if the non-price determinants vary. This will
lead to a shift of the supply curve. Higher supply results in shifting to the right of the curve and lower
supply will lead to shifting to the left of the curve.”

“ By looking at the graph, at a price of P1, as the supply curve shifts rightward (S1 to S2), the quantity of
the good moves from Q1 to Q2 which signifies that the quantity rises. If other determinants will make the
supply curve to shift leftward (S1 to S3), It will result to decrease in quantity supplied (movement from
Q1 to Q3). ”
NON-PRICE DETERMINANTS OF SUPPLY

1. Price of Production Input – value added to raw materials through the process of production

Intermediate Input – raw materials; these are still going to be processed or transformed into higher levels
of output
Examples:
Lumber
Oil
Mineral
Factor Input – processing or transforming input
Examples:
Labor
Capital
Land

PRODUCTION INPUT ↑
Cost of Production↑ QS↓

PRODUCTION INPUT ↓
Cost of Production↓ QS↑

- Producers create a method of combining factors of production in order to create a product.

Generally, it is the production cost that determines the supply of the commodity.
- “ When the price of the factors of production increases, the minimum price will increase, too. So
we can say that an increase in the price of the factors of production decreases supply and makes
the supply curve to shift to the left. ”

- “ Likewise, if production cost decreases, producers will now have the incentives to increase their
production. This will result to rise in supply of the commodity which will then make the supply
curve to shift to the right. ”

2. Taxes – monetary expense paid to the government

Taxes ↑ QS↓
 3. Technology – the manner in which factor inputs process intermediate inputs is done through
technology

Improvement or discovery in technology

Improved technology (Cost of Production) ↑ QS↓

Obsolete technology (Cost of Production) ↓ QS↑

- “ Improvement in the technology used in production will result any of these two: number of
produced goods or output will increase without changing the quantity of factors of production or
firms will need less resources to create the same quantity of products. ”

- “ If less materials or resources will be used to create the same level of output when technology is
improved, then there will be lower cost of production which will result for the supply to increase.
This will make the supply curve to shift rightward. ”

- “ For example, the price of computers has greatly decreased as technology evolved. This causes
the telecommunication industry to have lower cost. With this great innovation of technology, the
supply curve tend to shift rightward. ”

4. Expectation – anticipation on what is going to happen on the price of the commodity

PFUTURE ↑ QS↑
PFUTURE ↓ QS↓

- “ If there is an expectation that the market price for a certain commodity will decrease in the future,
then the present quantity supply will rise resulting to the shifting to the right of the supply curve. ”

- “ Conversely, if it is anticipated that the price of the good will increase in the future, suppliers may try
to limit their supply in the market so they can benefit of the expected higher price. This will result to
decline in the quantity supply of the good thus, shifting the curve to the left. ”

5. Availability of raw materials and resources

Materials and Resources ↑ QS↑

Materials and Resources ↓ QS↓
6. Number of Sellers:

- The more sellers of a good, the higher is the supply.

- More suppliers of a commodity will shift the supply curve of that good to the right.

NOTE:

- “ If a non-price determinant causes higher supply of goods, then the entire supply curve will shift
rightward; on the other hand, a decline in supply of a good will make the supply curve to shift
leftward. ”

MARKET EQUILIBRIUM: Bringing Demand and Supply Together

- A state of balance between demand and supply

- “The quantity that sellers are willing to sell and the quantity that buyers are willing to buy for a
price” (Dinio et.al, 2017)
- The equilibrium price is the given price in which the quantity demanded, and the quantity supplied
are equal. At this price buyers are buying all the goods they desire, sellers are selling all the goods
they desire, and there is no pressure for the market price to change.
DETERMINATION OF MARKET EQUILIBRIUM

For example, given here are the demand and supply function of product X:

If we use the functions above, this will be the demand and supply schedule which will be derived at
certain prices.

PRICE Qd Qs

0 60 5

2 59 15

4 58 25

6 57 35
 8 56 45

10 55 55

12 54 65

14 53 75

16 52 85

Equilibrium is attained when Qd=Qs

Through computation using the functions:

Qd= 60- P/2 and Qs= 5 + 5P

60- P/2= 5+5P

60-5= 5P+ P/2

(2) 55= 5P+P/2 (2)

110= 10P + P

110/11= 11P/ 11

P= 10

• Using P=10, substitute P in the functions:

Qd= 60- P/2

Qd= 60- (10)/2

Qd= 60- 5

Qd= 55

Qs= 5 + 5P

Qs= 5+ 5 (10)

Qs= 5+ 50

Qs= 55

Equilibrium price is P10 and equilibrium quantity is 55