LAW OF SUPPLY

Supply can be defined as the quantity of a good or service that is offered for sale at a
given price over a period of time in market. So, the definition of the law of supply is a
fundamental principle of economic theory which states that, keeping other factors
constant, an increase in price results in an increase in quantity supplied. The
macroeconomic law states that all other factor being equal as the price of service or
good increase, the quantity supplied will also increase and when the price falls, the
quantity supplied will also fall.Law of supply also said that the producer behaviour at
the time of changes in the prices of goods and services.There is a direct and positive
relationship between price of good .It is means that the quantities will respond in the
same direction as price changes. The sellers are willing to offer more of product for
sale on the market at higher price to earn more profits. For example, if the data show
as a graph made by price and quantity supplied, the supply curve will be an upward
sloping because of the positive relationship between the price and the quantity
supplied.

The law of supply can be expressed as:

where y is the amount that would be supplied at some price p, and y'  is the amount
that would be supplied at some other price p'. Thus, for example if p > p' then y > y'. 

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MARKET SUPPLY CURVE

Quantity Supplied
Price (RM) Market Supply
Seller A (units) Seller B (units)
(units)
0 0 0 0
1 8 20 28
2 16 40 56
3 24 60 84
4 32 80 112
5 40 100 140

The graphs show the market supply curve is derived from the combination of seller A
curves and seller B curve. When the price is RM2.00, the quantity supplied of seller A
is 16 units, while the quantity supplied of seller B is 40 units with the same goods.
Therefore, 56 units (16 units +40 units) will be the market supply of the good.

The quantity supplied of seller A increase from 16 units to 24 units and the quantity
supplied of seller B increase from 40 units to 60 units when the price rises to RM
3.00. So that, the market supply will become 84 units (24 units + 60 units).

Besides, the fall of the price from RM2.00 to RM1.00 cause the quantity supplied of
seller A decreases from 16 units to 8 units. The fall of the price will also affect the
quantity supplied of seller B decreases from 40 units to 20 units. Therefore, the
market supply is 28 unit (8 units + 20 units).

In the conclusion, market supply can be calculated by adding the amount of all
individual seller’s supply. The market supply is an upward sloping straight line from
left to right. It is because the relationship between price and quantity supplied of a
good is positive. The price and quantity supplied are influence each other. When the
price of good increases, the quantity supplied will increases too. The quantity supplied
will decreases when the price decreases.

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 Seller A
6
5
4
Price (RM)

3
2
1
0
0 5 10 15 20 25 30 35 40 45
Quantity (Units)

Seller B
6
5
Price (RM)

4
3
2
1
0
0 20 40 60 80 100 120
Quantity (Units)

Market Supply
6
5
4
Price (RM)

3
2
1
0
0 20 40 60 80 100 120 140 160

Quantity (Units)

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FACTORS AFFECTING SUPPLY

1) Price of other related goods

 Competitive supply

- In most cases of competitive supply, there is competition between the sources, with
the most economical one dominating the market.

- When price of a good increases, this will lead to a fall in supply of another good.

- Examples: beef and milk, chicken and eggs.

- At price P0, the quantity supplied in the market is Q 0 shown by point A. When the
price of beef rises from P0 to P1, the quantity supplied increases from Q0 to Q1. This
is because the production of beef is now more profitable to the producers as
compared to milk. There is a movement of point upwards along the supply curve
from point A to point B. When the supply of beef rises, the supply of milk will
automatically fall from Q0 to Q1 even if its price remains unchanged. This causes a
leftward shift in the supply curve of milk.

 Complements in supply

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-These are goods in joint supply, which a product that can end up being at least two
other types of goods. This means that, in supplying a good, the producers will also be
likely to supply another good.

- Supply of one good will automatically increase the supply of the other good.

- For example, cows are supplied for beef, cheese, yogurt, and leather.

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- At price P0, the quantity supplied of beef in the market is Q 0 shown by point A.
When the price of beef rises from P 0 to P1, the producers will tend to increase the
production of beef according to the law of supply. The quantity supplied increases
from Q0 to Q1. There is a movement of point upwards along the supply curve from
point A to point B. The supply of cheese will automatically increase from Q0 to Q1
even if its price remains unchanged because both of the beef and cheese can be
produced simultaneously from cows. Therefore, there is a rightward shift in the
supply curve of cheese.

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 Substitution in supply

- These are goods that can be produced as alternative to one another using the same
resources.

- An increase in the price of one substitute good causes a decrease in supply for the
other good, and vice versa.

- Examples: barley and wheat, rubber and oil palm

- When price of barley rises from P0 to P1 , profit-minded producers undoubtedly react

according to the law of supply and increase the quantity supplied of barley. There is a
movement of point upwards along the supply curve of barley from point A to point B.
Supply of wheat falls from Q0 to Q1 even if the price of wheat remains unchanged
because farmers will switch from wheat to barley production. This results in a
leftward shift in the supply curve of wheat.

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2) Cost of Production

Besides that, the price of other related goods who affecting the factor of supply are
cost of production. This factor causes a decrease in the price of input and it will
reduce production of cost. As for result, profit will increase. When the profit is
increase it provides the incentive to producers to produce more. For an example, when
the labour of cost decreases, the cost of production will reduce. Because the income
earned by labour resources is called wages and it is the largest source of income for
most people. Therefore, supply of goods increases will shift to the rightward in the
supply curve.

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3) Technology

Furthermore, the factors that also affecting supply is technology. If there is an

improvement or advancement in technological then it will increase in supply. For
example, when there is a machinery is used in the production process, it may affect
the production output to increases. For the result, goods can be produced in a shorter
time period causing a greater quantity to be produced at any given price. Therefore,
supply of goods decreases resulting in a leftward shift in the supply curve.

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4) The number of producers

When the number of producers increases, the supply will be increased more easily.
This is because there are more suppliers in the market. A large number of producers
would result in a large supply of goods in the market and the supply curve will shift to
the right. In another way, a decline in the number of producers would reduce the
supply of goods and the supply curve will shift to the left. Moreover, when
fewer barriers to entry of an industry, it will be more easier for companies to enter the
industry and contribute to the supply of the goods and services of the industry.
Therefore, an increase in the number of producers makes the supply more elastic.

RM

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REFERENCES

· Lecture Notes
· https://www.economicshelp.org/blog/glossary/costs-of-production/
· https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-
2-factors-of-production
· https://marketbusinessnews.com/financial-glossary/joint-supply-definition-
meaning/
· http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=substitute-in-
production
· https://www.pinterest.com/pin/552746554245021684/
· https://en.wikipedia.org/wiki/Supply_(economics)#Factors_affecting_supply
· https://www.khanacademy.org/economics-finance-domain/microeconomics/
supply-demand-equilibrium/supply-curve-tutorial/a/what-factors-change-supply
· http://stud.sisekaitse.ee/saar/Demand&supply/factors_affecting_supply.html
· https://www.investopedia.com/ask/answers/040315/what-factors-influence-
change-supply-elasticity.asp

GROUP PHOTO

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FROM LEFT TO RIGHT: Ngu Yu Qing, Yap Jia Ying, Tham Yi Wen, Lim Wen
Xuan, Lai Wai Kei

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