Supply Analysis

Lecture IV
Agenda
● Introduction to supply
● Determinants of supply
● Supply schedule
● Supply curve
● Elasticity of supply
What is Supply?
Supply

The desire The ability

to provide to provide
something it
Supply

● Supply for a product refers to the quantity of it that

producers are willing and able to provide to the market
at various prices and over a specified period.
● It is always related to price and time.
● Understanding supply is critical for businesses as it
influences pricing decisions, resource allocation and
production planning.
Individual Supply and Market Supply

• Quantity of a good a single producer

Individual is willing and able to provide at a
Supply given price

• Total quantity of a good all producers in

a market are willing and able to provide
Market Supply at a given price
Determinants of Supply?
Determinants of Supply

Own Price
(+)
Substitute & Production
Complementary costs (-)
Goods
Determinants
of Supply Resource
Availability
Number of (+)
suppliers
Government
Regulations
Supply Schedule

● A table that shows the quantity of a good that producers

are willing to sell at different price levels, all else being
equal.
● Components of a Supply Schedule:
1. Price (P): List of various price levels.
2. Quantity Supplied (Q): Corresponding quantity
producers are willing to sell at each price.
Individual Supply Schedule - Ice Cream (Rs.)
Market Supply Schedule - Ice Cream (Rs.)
Supply Equation
● A mathematical representation of the relationship between
the price of a good and the quantity supplied by producers in
a market.
● General Form of the Supply Equation:
Qs = a + bP
1. Qs: Quantity supplied
2. P: Price of the Good
3. a: Intercept (Quantity supplied when the price is zero)
4. b: Slope (Rate of change in quantity supplied with a change in
price)
Supply Equation - Example

● Supply equation for tea (A):

Q = 1 + 2*P
● Interpretation:
1. Intercept (a = 1): Represents the maximum quantity
supplied when the price is free.
2. Slope (b = 2): Indicates that for every 1 Rs. increase in
price, quantity supplied of tea increases by 2 units.
Supply Curve

● A graphical representation of the relationship between the

price of a good and the quantity supplied by producers in a
market, holding other factors constant.
● Key Features:
1. Y-axis: Price of the Good
2. X-axis: Quantity Supplied
3. Upward Sloping: As price increases, quantity supplied
increases
Individual Supply Curve
Market Supply Curve

● A graphical representation that shows the relationship

between the price of a good and the quantity of that
good that all the producers are willing and able to sell
in a given market, holding all other factors constant.
Market Supply Curve
Price Elasticity of Supply
Price Elasticity of Supply
Measures how sensitive the quantity supplied of a product is
to changes in its price
Price Elasticity of Supply Graphically

● PES > 1, price

elastic
● PES = 1, unit
elastic
● PES < 1, price
inelastic
● PES = 0, perfectly
inelastic
● PES = infinite,
perfectly elastic
Price Elasticity of Supply - Examples

Example

Perfectly Perfectly
Elastic Inelastic Elastic Inelastic Unit Elastic

Burgers/ Prescription Bottled

- Art Work Fast Food Water
medications
Ratio Method - PES
● Formula:
PES = (+) (% Change in Quantity Supplied) / (% Change in Price)

● If the price of a television model increases by 10%, and the quantity

supplied rises by 30%:
PES = (% Change in QS) / (% Change in Price)
=(30% / 10%)
= 3,
Indicating elastic supply
Questions
1. Suppose a small bakery produces 1,000 loaves of bread per day. When
the price of bread increases from $2 to $2.50 per loaf, the bakery
increases its daily production to 1,200 loaves. Calculate the price
elasticity of supply for the bakery's bread.
2. A toy manufacturer produces 10,000 toy cars per month. When the price
of toy cars increases from $10 to $12 per car, the manufacturer increases
its monthly production to 12,500 cars. Calculate the PES for the toy
manufacturer's toy cars.
Thank you