Supply Analysis:

Supply: It refers to the various quantities the seller will be

willing to offer for sell at different prices of the product.
Factors affecting supply:
1.Price of the commodity
2.Price of related commodities
3.State of technology
4.Factor availability and their prices
5.Time
6. Natural conditions
7. Transport conditions
8. Government policies etc.
 Market Equilibrium:
• The weekly demand and supply schedule for a brand of soft drink at various
prices (between 30p and 1.10p) is shown below:

QUANTITY
PRICE (£) QUANTITY SUPPLIED
DEMANDED

1.10 0 1000
1.00 100 900
90 200 800
80 300 700
70 400 600
60 500 500
50 600 400
40 700 300
30 800 200
Changes in equilibrium-suppose the demand has
increased –then at 60 -shortage or surplus?
QD1 QUANTITY
PRICE (£) QD
SUPPLIED
1.10 0 200 1000
1.00 100 300 900
90 200 400 800
80 300 500 700
70 400 600 600
60 500 700 500
50 600 800 400
40 700 900 300

30 800 1000 200

Demand shifts to the right
Demand shifts to the left
Supply shifts to the right
Supply shifts to the left
 Market equilibrium with taxes and
subsidies
• 1. Price control mechanism
• 2. Minimum support price
• 3.Taxes
• 4. Subsidies
Government intervention in free market
mechanism
• Price control and Rationing:
• Under price control the maximum price of a good is
fixed above which the seller cannot charge from the
consumers.
• Price control is imposed or Price ceiling is set below
the equilibrium price.
• when the government intervenes to fix the
maximum price for a commodity, price losses its
important function of a rationing device.
• P.C. with rationing will give rise to ‘Black Marketing’.
 MINIMUM SUPPORT PRICE (MSP):

• It is a form of market intervention by the GOI to insure

agricultural producers against any sharp fall in farm prices.
It is administered price mechanism.
• Announced at the beginning of the sowing season for
certain crops on the basis of the recommendations of
the Commission for Agricultural Costs and Prices
(CACP).
• Objectives:
• To protect the producer(farmers)-against excessive
fall in price during bumper production years.
• To support the farmers from distress sales.
• To procure food grains for public distribution.
 Food Corporation of India(FCI)

1.It was set up on 14 January 1965.

2.It had its first District Office at Thanjavur
- rice bowl of Tamil Nadu - and
headquarters at Delhi under the Food
Corporations Act 1964.
Purpose: To implement the objectives of
the National Food Policy of India
 Objectives of NFP of India:
1. Effective price support operations for
safeguarding the interests of the farmers
2. Distribution of foodgrains throughout the
country for Public Distribution System
3. Maintaining satisfactory level of operational and
buffer stocks of foodgrains to ensure National Food
Security.
4. Regulate market price to provide foodgrains to
consumers at a reliable price.
INCIDENCE OF INDIRECT TAXES:

• It means who bear the money burden of

taxes.
• When supply is more elastic than demand, the tax
burden falls on the buyers. If demand is more
elastic than supply, producers will bear the cost of
the tax.
 Subsidies:
• Difference from the cost of production or
procurement given by the government so as
to encourage the production and consumption
of certain goods and services.
Q3. Illustrate the following situation with demand and supply curves:

In 2010, the total United States demand for crude

oil was 13.6 millions barrels per day. Of that
amount only 7.7Mbpd(million barrels per
day)were supplied by US producers while the rest
was being imported. The price of oil on world
market that year averaged to about $18 which is
given to be below the equilibrium price.
Now suppose the government levies a tax of 33⅓% on imported oil.

•Due to this price increases, which is given to be still

below equilibrium , the quantity demanded drops to
12.2mbpd while the domestic production increases
to 9 mbpd. Find the total tax (or tariff) revenue
generated by the government?
Q 4.Suppose a market consists of 3 consumers A, B and C
whose individual demand functions are given below:-

• A: P=35 – 0.5QA
• B: P= 50 – 0.25 QB
• C: P = 40 – 2.00 QC
(i)Find the equilibrium price and quantity:
(ii)If the market supply function for the
commodity is given as Qs = 40 + 3.5P,
determine the equilibrium price and quantity.
DEMAND AND SUPPLY
NUMERICALS
WITH TAXES AND SUBSIDY
Before the price change

Demand function is Qd =f(p)

Supply function is Qs=f(p)
Then after tax the new supply function is QS’=f(p-t)
and
the supply function after subsidy => Qs’ = f(p+s)
where ‘t’ is the tax per unit and ‘s’ the subsidy per
unit.
Q1. The demand and supply equations of a
commodity are given as Xd =½ (5-P) and Xs =2P-3.

(i)Find the equilibrium price and quantity?

(ii)Find the new price and quantity if a tax of Rs. 6/5
per unit is imposed on the commodity?
(iii)Find the total tax revenue generated by the
government?
(iv)Find the price actually realised by the seller?
 Solution 1.
i. P=11/5 q=7/5
ii. P’=79/25 q’=23/25
iii. Total tax revenue =138/125
iv. Price realised by the seller: 49/25
Q2.The demand function =3q +4P =24 and the supply
function is P=¼q+3 respectively.

(i) Find the equilibrium price and quantity?

(ii)Find the new price and quantity if a tax of Rs. 1/3
per unit is imposed on the commodity?
(iii) Find the total tax revenue generated by the
government?
(iv) Find the price actually realised by the seller?
 Solution 2
i. P=15/4 q=3
ii. P’=4 q’=8/3
iii. Total tax revenue = 8/9
iv. Price realised by the seller = 11/3
Q3. The demand function is P=5-2X and the supply function
is P=½(X+5) respectively.
(i)Find the equilibrium price and quantity?
(ii)Find the new price and quantity if a subsidy of Rs.
5/2 per unit is granted on the commodity?
(iii)Find the total amount of subsidy granted by the
government?
 Solution 3
i. P=3 X=1
ii. P’=1 X’ =2
iii. Total amount of subsidy granted =5
Q4. The demand function is 4q +9P =48 and the supply
function is P=(1/9) q +2 .
(i)Find the equilibrium price and quantity before tax.
(ii)What additive tax per unit should be imposed to
raise the price by Rs.8/5 per unit.
 Solution 4
• i. P=8/3 q=6
• P’=64/15
• So qd’ = 12/5
• ii. t=Rs. 2 per unit
Q5. If the demand function is X=10 – 2P and the
supply function is X = 4P.

(i)What amount of tax per unit should be imposed

which will double the price?
(ii)What amount of subsidy per unit is required to
reduce the price to half its present value?
 Solution 5
• i. P=5/3 q=20/3
• New price after tax =>P’ = 10/3
• t=Rs. 5/2 per unit

• ii. P=5/3 q=20/4

• New price after subsidy =5/6
• s= Rs. 5/4 per unit
Video link for understanding GST regime:

• Link:
• https://www.youtube.com/watch?
v=JK8CzkQh1FY
• https://www.youtube.com/watch?v=UJGEjmpf
6Go
• https://www.youtube.com/watch?v=Zss-
P1qv_dM