Microeconomics

Dr. Syeda Farzana Manzoor

BSBBA4 Program
Department of Management Sciences
THEORY OF SUPPLY
Supply is the willingness of sellers to offer a
given quantity of a good or service for a given
price.
Law of Supply
Keeping other factors unchanged, As Price
increases quantity supplied by the supplier in
market also increases or vice versa
The Supply Function depends on the price at
which the good can be sold as well as the cost
of production for an additional unit of the good.
The greater the difference between those two
values, the greater is the willingness of
producers to supply the good.
An individual seller’s supply function:
Q x = f (Px, W, K, T )
where Qs is the quantity supplied of some good
X, Px is the price per unit of good X, and W is
the wage rate of labor in currency unit ($ /
Rs.) per hour, K is capital and T is Technology
Qs= f (P )
Qs = c + dP
Qs = − 175 +25 P
Question:
if the price of gasoline were $3 per gallon, how much
gallons per week supplier will supply in market?
 SUPPLY CURVE
The graph of the supply function is called supply curve
1. It shows simultaneously the highest quantity
willingly supplied at each price and
2. The lowest price willingly accepted for each
quantity.
 CHANGES IN SUPPLY
A change in the price of a good itself will result in
a movement along the supply curve and a
change in quantity supplied.
MOVEMENTS ALONG THE SUPPLY CURVE
A change in any variable or factor other than own-
price will cause a shift in the supply curve
 MARKET EQUILIBRIUM
An important concept in the market model is
market equilibrium, defined as the condition in
which the quantity willingly offered for sale by
sellers at a given price is just equal to the
quantity willingly demanded by buyers at that
same price.
Equilibrium occurs at that quantity at which the
highest price a buyer is willing to pay is just
equal to the lowest price a seller is willing to
accept for that same quantity.
The demand curve shows an infinite number
of combinations of prices and quantities
that satisfy the demand function. Similarly,
The supply curve shows an infinite number
of combinations of prices and quantities
that satisfy the supply function.
Equilibrium occurs at the unique combination
of price and quantity that simultaneously
satisfies both the market demand function
and the market supply function.
Graphically, it is the intersection of the
demand and supply curves as shown
simply Qd=Qs
This Equation is called the Equilibrium Condition,
 CONSUMER SURPLUS ( CS )
Consumer surplus is the benefit or good feeling
of getting a good deal.
It is the difference between willingness to pay
for a good and the price that consumer
actually pay for it.
Consumer surplus can be positive or negative.
It will be positive if
Market price < Price the customer is willing to pay.
it will be negative if
Market price > Price the customer's willing to pay.
PRODUCER SURPLUS ( PS )
The producer surplus is the difference
between the market price and the
lowest price a producer is willing to
accept to produce a good.
if the market value of an item is $50 but
customers pay $100, the company may
have the additional funds to produce
more of that item and earn a profit.
CS VS PS