Outline of the Lecture 6

• What is Supply?
• Law of Supply
• Individual Supply vs Market Supply
• Factors of Supply
• Determinants of Market Supply
• Supply schedule & Supply curve
• Market Equilibrium
Supply
Difference between Stock & Supply
 Supply analysis
(Supplier /Producer point of view)
• Unlike a demand curve, a supply curve has a positive
slope, reflecting the law of supply. The law of supply
states that quantity supplied is positively related to
price; i.e., firms offer larger amounts at higher prices
and smaller amounts at lower prices. In this case,
price is the reward for production so that higher
market prices bring forth larger quantities. Higher
prices provide firms with extra funds to purchase
more resources or inputs to increase production.
Higher prices also act as a signal to producers that
consumers value their goods highly and desire more
of them.
• Producer or manufacturer of the goods always
thinks to supply more goods at high price for the
consumer to get more income. Like demand,
supply is not a given quantity—that is called
quantity supplied. It is a relationship between
price and quantity. As the price of a good rises,
producers are generally wants to sell in larger
quantity. The reverse is equally true: as price
decreases, so the supplier don’t like to sell or
supply in large quantity. Like demand, supply
can also be described in a table or a graph.
Law of Supply
 Law of Supply
• The relationship between price and quantity
supplied is usually a positive relationship. A
rise in price is associated with a rise in
quantity supplied.
 Supply Function
The supply function is the mathematical expression of the relationship between supply
and those factors that affect the willingness and ability of a supplier to offer goods for
sale:

Sx = f (px, pf, O……..T…t….S)

SX = Supply of goods
PX = Price
PF = Factor input employed (used) for production.
Raw material
Human resources
Machinery
O = Factors outside economic sphere.
T = Technology.
t = Taxes.
S = Subsidies

There is a functional (direct) relationship between price and supply.

 Factors determine Supply
a) Price of a commodity
b) Prices of related commodity
c) Techniques of production
d) The policy of taxation & subsidies
e) Transport and communication facilities
f) Natural factors
g) Expectations about future prices
Supply Schedule
• As the price of good increases, suppliers will
attempt to maximize profits by increasing the
quantity of the product sold.
• Supply Curve
 The Model of Supply and Demand
(equilibrium)
• Equilibrium is defined to the price-quantity
pair where the quantity demanded is equal to
the quantity supplied, represented by the
intersection of the demand and supply curves.

• In words, equilibrium exists if the amount

sellers are willing to sell is equal to the
amount buyers are willing to buy.
• The market price of a good is determined by
both the supply and demand for it. In 1890,
English economist Alfred Marshall published
his work, Principles of Economics, which was
one of the earlier writings on how both supply
and demand interacted to determine price.
Today, the supply-demand model is one of the
fundamental concepts of economics. The price
level of a good essentially is determined by
the point at which quantity supplied equals
quantity demanded.
To illustrate, consider the following case in which the
supply and demand curves are plotted on the same
graph:
• On the graph, the equilibrium price and quantity are
indicated by the intersection of the supply and
demand curves.
 Market equilibrium price

• Market Equilibrium price

Think about this
Excess demand (shortage)
Think about this
Excess supply (surplus)
 Possible exam Q
• What is Economics? What are the main
branches of Economics? Discuss.
• What is Demand? Discuss four major
exceptions of Demand.
• Explain Law of Demand with the help of a
graph.
• What is Production? Discuss the four factors of
production.
• Explain the supply function.
 
 Q
• Give definition of Supply. What are the basic
differences of Stock and Supply?
• Discuss five factors that shifts Supply curve.
• What is the meaning of market equilibrium
price? Explain with appropriate graphs.