SUPPLY

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 SUPPLY

• Quantity supplied is the amount of a good that

sellers are willing and able to sell in the
market.
• Supply is a full description of how the quantity
supplied of a commodity responds to changes
in its price.

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 Supply schedule and Supply curve
Price of
Ice-Cream
Cones Supply curve
$3.00
Price of Quantity of 2.50 1. An increase
Ice-cream cone Cones supplied in price . . .
$0.00 0 cones 2.00
0.50 0 1.50
1.00 1 2. . . . increases quantity
1.50 2 1.00 of cones supplied.
2.00 3
2.50 4 0.50
3.00 5
0 1 2 3 4 5 6 7 8 9 10 11 12

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Quantity of Ice-Cream Cones
Market supply and individual supplies

Price of ice-cream cone A B Market

$0.00 0 + 0 = 0
0.50 0 0 0
1.00 1 0 1
1.50 2 2 4
2.00 3 4 7
2.50 4 6 10
3.00 5 8 13

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 Market supply and individual
supplies
A’s B’s Market
supply + supply = supply
Price of Price of Price of
Ice Ice Ice
Cream Cream Cream
Cones SA Cones Cones
$3.00 $3.00 $3.00 SMarket
SB
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

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0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Quantity of Ice-Cream Cones
Ice-Cream Cones
 Law of Supply

• The law of supply states that, the quantity

supplied of a good rises when the price of the
good rises, as long as all other factors that
affect suppliers’ decisions are unchanged or
considering other factors to be constant.

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Shifts in the Supply Curve: What causes them?
Price of
Ice-Cream Supply curve, S 3
Supply
Cone
curve, S1
Supply
Decrease curve, S 2
in supply

Increase
in supply

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0 Quantity of
Ice-Cream Cones
 Supply Shift
Supply Schedule
Price ($) Quantity Supplied
Before After
0.00 0 0
0.50 0 1
1.00 1 2
1.50 2 3
2.00 3 4
2.50 4 5
3.00 5 6

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Anything that reduces
production costs, shifts
supply to the right.
 Determinants of Supply
• Price of the Commodity
• Cost of Production
• Profitability in alternative good
• Profitability in Joint good
• Future expected Price
• Natural Calamities
• Man made Calamities

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• Number of Suppliers
 Shifts in the Supply Curve

• Due to changes in
– Input prices
– Technology
– Number of sellers (short run)
• The market supply will shift right if
– Raw materials or labor becomes cheaper
– The technology becomes more efficient

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– Number of sellers increases
Interaction of demand and supply/Equilibrium
Point

• We have seen what demand and supply are

• We have seen why demand and supply may
shift
• Now it is time to say something about how
buyers and sellers collectively determine the
market outcome
• To do this, we assume equilibrium

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SUPPLY AND DEMAND
TOGETHER
Demand Schedule Supply Schedule

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At $2.00, the quantity demanded is
equal to the quantity supplied!
Equilibrium of supply and demand
Price of
Ice-Cream
Cones Supply
$3.00

2.50 Equilibrium
price Equilibrium
2.00

1.50
1.00
Equilibrium Demand
0.50 quantity

0 1 2 3 4 5 6 7 8 9 10 11 12

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Quantity of Ice-Cream Cones
 Markets Not in Equilibrium

(a) Excess Supply

Price of
Ice-Cream Supply
Cone Surplus
$2.50

2.00

Demand

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0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
 Markets Not in Equilibrium

(b) Excess Demand

Price of
Ice-Cream Supply
Cone

$2.00

1.50
Shortage

Demand

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0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
SUPPLY AND DEMAND 15
How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .

Supply

$2.50 New equilibrium

2.00
2. . . . resulting
Initial
in a higher
equilibrium
price . . .
D

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D

0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. . . . resulting
in a higher
price of ice
cream . . . Demand

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0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
A Shift in Both Supply and Demand

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