Theory of Supply

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12/08/21 Dawn Jose , Faculty SJCET School Of Manage
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 Law of Supply
►“Ceteris paribus, the quantity of
commodity produced and offered for
sale will increase as the price of the
commodity rises and decreases as the
price falls” Prof. Lipsey
► Assumes a direct relationship between
price and quantity supplied.
► Quantity Supplied: The amount offered for
sale in the market at a particular price at a
given time ,other factors remaining
unchanged
12/08/21 Dawn Jose , Faculty SJCET School Of Manage
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• The principle that suppliers will normally
offer more for sale at higher prices and less
at lower prices.

► Why do producers produce more output

when prices rise?
 They seek higher profits
 They can cover higher marginal costs of
production

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► Supply Schedule The supply schedule is a
table that shows the relationship between
the price of the good and the quantity
supplied.
► Supply Schedule of Felix

QTY OF CONES
SUPPLIED

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 Supply Curve
► The supply curve is the graph of the
relationship between the price of a good and
the quantity supplied.
QTY OF CONES
SUPPLIED

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 Market Supply VS Individual Supply

► Market supply refers to the sum of all

individual supplies for all sellers of a
particular good or service.
► Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.

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 Determinants of Supply
► Productivity (Improvements in machines and
production processes of a good or service)
► Inputs ( Change in the price of inputs required to
produce the good or service.)
► Government Actions (Subsidies, Taxes and
Regulations)
► Technology (Improvements in machines and
production processes of a good or service)
► Expectations (outlook of future prices and profits)
► Size of Industry (Number of firms in the industry)
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Change in Supply Vs Shift in Supply
Change in Quantity Supplied
► Movement along the supply curve.
► Caused by a change in price.

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 Shift in the supply Curve
►A shift in the supply curve, either to the left or
right.
► Caused by a change in a determinant other than
price.

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 What can cause a change in supply to
the right? (Increase in supply)
► Lower cost of inputs such as cheaper labor
or cheaper packaging
► More productive/better trained labor.
► New technology like more fuel efficient
delivery vehicles, better/faster machines
► Lower taxes/government subsidies (subsidy
is a government payment to an individual or
business to encourage or protect a certain
economic activity.)
12/08/21 Dawn Jose , Faculty SJCET School Of Manage
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 What can cause a change in supply to
the left? (Decrease in supply)
► More expensive labor
► Higher taxes
► Less efficient workers
► Broken technology
► Withdrawal of subsidies

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 SUPPLY AND DEMAND
TOGETHER
► Equilibrium refers to a situation in which
the price has reached the level where
quantity supplied equals quantity
demanded.
► Equilibrium Price
The price that balances quantity supplied
and quantity demanded.
► On a graph, it is the price at which the
supply and demand curves intersect.
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 Equilibrium Quantity
► Thequantity supplied and the quantity
demanded at the equilibrium price.
► On a graph it is the quantity at which the
supply and demand curves intersect.

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12/08/21 Dawn Jose , Faculty SJCET School Of Manage
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12/08/21 Dawn Jose , Faculty SJCET School Of Manage
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 Market Equilibrium and
Disequilibrium

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 Supply Elasticity
► Supply elasticity is caused by the ability
of a producer to change output.
► If producers can increase output
quickly, supply is elastic.
► If producers can not increase output
quickly, supply is inelastic.

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 Supply Elasticity
Type of Elasticity Change in Quantity
Supplied Due to a
Change in Price
Elastic IF PE > 1
Unit Elastic IF PE = 1
Inelastic IF PE <1

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