BHHT1123

HOSPITALITY ECONOMICS

LECTURE 4

SUPPLY
Learning Objectives
On completion of the chapter, the student will be
able to:

1. Define supply, law of supply and market supply.

2. Distinguish between a change in quantity
supplied and a change in supply.
3. Explain the determinants of price elasticity of
supply.
4. Explain market equilibrium, equilibrium price
and equilibrium output.
DEFINITION OF SUPPLY

Supply is defined as
the ability and willingness to sell or produce
a particular product and services
in a given period of time
at a particular price, ceteris paribus.
LAW OF SUPPLY

Law of supply states that the higher the price

of a good, the greater is the quantity supplied
for that good and the lower the price of a good,
the lower is the quantity supplied, ceteris paribus.

P  Qss 

POSITIVE RELATIONSHIP
SUPPLY SCHEDULE AND CURVE

Supply Schedule Supply Curve

Price Quantity 12

5 10 10

4 8 8

3 6 6
Supply
2 4 4

1 2 2

0
1 2 3 4 5
 The Supply Curve

Supply
curve is
upward
sloping
from left to
right.
INDIVIDUAL AND MARKET SUPPLY

INDIVIDUAL SUPPLY
The relationship between the quantity of a
product supplied by a single seller and its
price.

MARKET SUPPLY
The relationship between the total quantity
of a product supplied by adding all the
quantities supplied by all sellers
in the market and its price.
Deriving a Market Supply Schedule and a
Market Supply Curve

Individual
PRINCIPLES Supply Curve
OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 Market Supply 3– 8
Curve
Changes in Quantity Supplied versus
Changes in Supply

❑ Changes in Quantity Supplied:

- a movement along the supply curve.
❑ Changes in Supply: a shift in the supply curve.

– Increase in supply: a shift to the right.

– Decrease in supply: a shift to the left.
Proportion of the
expenditure on a
product

DETERMINANTS
OF SUPPLY
Factors Which Can Shift the Supply
Curve

1) Price of a relevant resources

2) Technology
3) Number of sellers
4) Expectations of future price
5) Taxes and subsidies
6) Government restrictions
 Factors Which Can Shift the Supply
Curve

1)Price of a relevant resource

❑ If the price of a relevant resource changes, the
supply curve will shift.
❑ E.g. the wood prices increase, cost of a new
house increases as well, supply of house will
decrease and supply curve will shift to left.
 Factors Which Can Shift the Supply
Curve

2) Technology
❑ Technology - can increase the quantity supplied
by producing more of a product with the same
quantity of resources, thus reducing per unit
production costs.
❑ i.e. An advancement in technology → able to
produce more output → cost per unit production
reduce → quantity supplied of the good at each
price to increase → supply increases
 Factors Which Can Shift the Supply
Curve

3) Number of sellers
❑ If the number of sellers increase, the supply
curve will shift to right.
❑ If the number of sellers decrease, the supply
curve will shift to left.

4) Expectations of future price

❑ If the price of a good is expected to be higher in
the future, the supply curve will shift to the left.
❑ If the price of a good is expected to be lower in the
future, the supply curve will shift to the right.
 Factors Which Can Shift the Supply
Curve

5) Taxes and subsidies

❑ Taxes increase, the unit costs will increase, supply
curve will shift to the left.
❑ Subsidies will have the opposite effect, supply
curve will shift to the right.

6) Government restrictions
❑ Government restrictions can change the supply
curve by increasing or limiting production.
❑ i.e. An import quota on foreign goods such as
Japanese TV sets – supply curve of Malaysian
goods shift to the right.
Factors Which Can Shift the Supply Curve

❑ A Change in the Supply Curve is a shift in the

Supply Curve, not merely moving up and down the
same curve.
A Change in Supply versus a Change in
Quantity Supplied
CHANGE IN QUANTITY SUPPLIED VS. CHANGE
IN SUPPLY
CHANGE IN QUANTITY SUPPLIED
Price
SS
Quantity
❖ Movement along supply curve
❖ Price changes and other factors are
constant
❖ Downward movement  Decrease in
quantity supplied (Contraction)
❖ Upward movement  Increase in
quantity supplied (Expansion)
CHANGE IN SUPPLY
Price
s0
s1
Quantity
❖ Shift in the supply curve
❖ Occurs when there are changes in other
factors but the price remains constant
❖ Increase in Supply (S0 → S1)
❖ Decrease in Supply (S1 → S0)
PRICE ELASTICITY OF SUPPLY

DEFINITION:

Measures the sensitivity/responsiveness

of the quantity supplied due to
a change in the price of a product or service.
PRICE ELASTICITY OF SUPPLY (cont.)

FORMULA:

ss = %  Quantity Supplied

%  Price

SS = Q2 – Q1 x P1
Q1 P2 – P1
 DEGREE OF ELASTICITY
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.

Inelastic Supply
Price (RM)
ss =0 A large percentage of change in the price of a good
ss = 1 will only affect a small percentage of change of the
quantity supplied.
ss < 1
Unitary Elastic Supply
Percentage change in price equals the percentage
change in the quantity supplied.

Perfectly Elastic Supply

An almost zero percentage of change in price
ss =  brings a very large percentage of change in the
quantity supplied.

Perfectly Inelastic Supply

ss > 1 A percentage of change in price has no effect on
the percentage of change in the quantity supplied.

Quantity Demanded
 Time Period

Technology
improvements
Nature of
the market
DETERMINANTS
OF PRICE ELASTICITY
OF SUPPLY

Availability and mobility of Perishability

factors of production
MARKET EQUILIBRIUM
 DEFINITION OF MARKET EQUILIBRIUM

A market equilibrium is a situation when

quantity demanded and quantity supplied are equal
and there is no tendency for price or quantity to change.

QDD = QSS
The Market
Putting Supply and Demand Together
EQUILIBRIUM PRICE AND OUTPUT

SURPLUS (QSS > QDD)

6

4
Price

E
3 P*
SS
2 DD

1 SHORTAGE (QDD > QSS)

0
Q*
2 4 6 8 10
Quantity
EQUILIBRIUM PRICE AND OUTPUT

Price Quantity Quantity Market Market Prices

Demanded Supplied Condition

5 2 10 SURPLUS Falls

4 4 8 SURPLUS Falls
3 6 6 EQUILIBRIUM Equilibrium

2 8 4 SHORTAGE Rises
1 10 2 SHORTAGE Rises
CHANGES IN DEMAND
Increase in Demand
-DD curve shifts to
Assume supply is constant the right

Price (RM) -Equilibrium price and

quantity increase
SS
P2

P*

P1 DD1

DD
Decrease in Demand DD2
-DD curve shifts to the Q1 Q* Q2 Quantity
left
-Equilibrium price and
quantity decrease
 Increase in Supply
CHANGES IN SUPPLY -SS curve shifts to the
right

Assume demand is constant -Equilibrium price

decreases and
Price (RM) quantity increases
SS2
SS

P2
SS1
P*

P1

Decrease in Supply DD
-SS curve shifts to
the left Q1 Q* Q2 Quantity
-Equilibrium price
increases and
quantity decreases
GOVERNMENT INTERVENTION
IN THE MARKET
GOVERNMENT INTERVENTION IN
MARKETS
MAXIMUM PRICE/CEILING PRICE
Government-imposed regulations that
Price Advantage:
S prevent prices from rising above a
• Consumers purchase maximum level
at lower price
Suppliers reduce the amount offered to Q1 but
demand would rise to Q2 creating a shortage

The equilibrium price is

P* and the quantity is Q*
P*
The government imposes
a maximum price of P1
P1 Price Disadvantages:
ceiling • Emergence of black market
Shortages occur • Reduction in quantity produced
• Producers tend to receive illegal
D payments from consumers
Q1 Q* Q2 Quantity
GOVERNMENT INTERVENTION IN MARKETS
(cont.)
MINIMUM PRICE/FLOOR PRICE
Price Government-imposed regulations
S that prevent prices from falling
Surplus occurs below a minimum level
Advantages:
P1 • Protects the producer’s income
Floor Price
• Higher wage rate

P* Disadvantages: Suppliers increase the amount

• Consumers pay more offered to Q2 but demand drop to
• Waste of resources of Q1 creating a surplus
production
• Creates unemployment The equilibrium price is
P* and the quantity is Q*.

The government imposes

a minimum price of P1
D
Q1 Q* Q2 Quantity
EFFECT OF TAXATION
S1
INDIRECT TAX
Price
S Tax that is imposed by the
government on producers or sellers
but paid by or passed on to end-users
The equilibrium price is RM12
14 and the quantity is 400
CONSUMER’S
SHARE The government imposes a
12 sales tax of RM4 per carton
PRODUCER’S
SHARE SS curve shift to left from S to S1 and
10 new equilibrium is RM14 and 200 units

The tax amount of RM4 is shared

equally between buyer and seller

D
200 400 Quantity
EFFECT OF SUBSIDIES
S
SUBSIDY
Price An incentive from the government to
encourage producers to produce more
S1
The equilibrium price is RM50 and
the quantity is 10
50
CONSUMER’S The government provides a
SHARE subsidy of RM10 per unit
45
PRODUCER’S
SHARE
SS curve shifts to the right from S to S1
40 and new equilibrium is RM45 and 20 units

The subsidy amount of RM10 is shared

equally between buyer and seller

10 20 Quantity
MARKET FAILURE

❑ Market failure exists when a free market is unable to

deliver an efficient allocation of resources which leads
to a loss of economic efficiency.
❑ Causes of market failure
– Externalities
– Existence of monopoly power
– Public goods
– Incomplete information
Q1: There is an increase in taxes on the production
of this good:

The equilibrium price will ____and the equilibrium

quantity will____ .
Q2: There is a decrease in government restrictions
for producers of this good:

The equilibrium price will____ and the equilibrium

quantity will____ .
Q3: There is an increase in preferences for
this good:

The equilibrium price will ____and the equilibrium

quantity will____.