Supply and

cost

How
How Markets
Markets
Work?
Work?

MODULE:-6

BY :- INDRAPAL
SINGH

ATRIA INST. OF TECH.

 In this chapter you will…


Learn
Learn about
about the
the supply,
supply, law
law of
of
supply.
supply.

Change
Change in
in supply
supply and
and Elasticity
Elasticity of
of
supply
supply

Expansion
Expansion of
of path………..
path………..

2
 SUPPLY

•• Supply
Supply refers
refers to
to the
the amount
amount
(quantity)
(quantity) of
of aa goods
goods that
that
sellers
sellers are
are willing
willing and
and able
able to
to
sale
sale at
at alternative
alternative prices
prices for
for aa
given
given period.
period.

3
 Determinants of Supply

•• What
What factors
factors determine
determine how
how much
much
quantity
quantity you
you are
are willing
willing to
to offer
offer
or
or produce?
produce?

Product’s
Product’s Own
Own Price
Price
Input
Input prices
prices
Technology
Technology
Expectations
Expectations
Number
Number of
of sellers
sellers

4
 Low of supply

Law
Law of
of Supply
Supply
–– The
The law
law of
of supply
supply states
states that,
that,
other
other things
things equal,
equal, the
the
quantity
quantity supplied
supplied of
of aa goods
goods
rises
rises when
when the
the price
price of
of the
the
goods
goods rises.
rises.

5
The Supply Schedule and the
Supply Curve
 The
The supply
supply schedule
schedule is
is aa table
table
that
that shows
shows the
the relationship
relationship
between
between the
the price
price of
of the
the goods
goods
and
and the
the quantity
quantity supplied.
supplied.
 The
The supply
supply curve
curve is
is aa graph
graph ofof
the
the relationship
relationship between
between the
the
price
price of
of aa goods
goods and
and the
the quantity
quantity
supplied.
supplied.

6
 Supply Schedule

Price of Quantity of
Product (Rs) Supplied
0.00 0
0.50 0
1.00 1
1.50 2
2.00 3
2.50 4
3.00 5

7
 Supply Curve
Price of
product

Rs3.00

2.50

2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 8 10 12 Quantity of
product

8
 Market Supply Schedule

•• Market
Market supply
supply is
is the
the sum
sum of
of all
all
individual
individual supplies
supplies at
at each
each possible
possible
price.
price.

9
 Market supply as the Sum of
Individual Supplies
Price of product
A B Market
(Rs)

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

10
Change in supply
•• Increase
Increase in
in supply
supply occur
occur due
due to
to two
two
changes
changes onon the
the part
part of
of producers.
producers.
a)
a) More
Moresupply
supplyat
atsame
sameprice.
price.
b)
b) Same
Samesupply
supplyat
atlow
lowprice.
price.

•• Decrease
Decrease in
in supply
supply has
has two
two
aspect.
aspect.
a)
a) Producer
Producersupply
supplyless
lessqunt.
qunt.at
atless
lessprice.
price.
b)
b) Same
Samequantity
quantityis
issupplied
suppliedat
ataahigher
higherprice.
price.

11
 Figure :- Increase in supply

Price S1
S2

Increase
P2 in supply

P1

0 Q1 Q2 Quantity

12
 Figure :- Increase in supply

Price
S2
Decrease
in supply

P2
S1

P1

0 Q1 Q2 Quantity

13
 SUPPLY AND DEMAND TOGETHER

•• Equilibrium
Equilibrium refers
refers to
to aa situation
situation in
in
which
which the
the price
price has
has reached
reached the
the level
level
where
where quantity
quantity supplied
supplied equals
equals quantity
quantity
demanded.
demanded.

14
 Equilibrium
•• Equilibrium
Equilibrium Price
Price
–– The
The price
price that
that balances
balances quantity
quantity
supplied
supplied and
and quantity
quantity demanded.
demanded.
–– On
On aa graph,
graph, it
it is
is the
the price
price at
at which
which
the
the supply
supply and
and demand
demand curves
curves
intersect.
intersect.
•• Equilibrium
Equilibrium Quantity
Quantity
–– The
The quantity
quantity supplied
supplied and
and the
the
quantity
quantity demanded
demanded atat the
the equilibrium
equilibrium
price.
price.
–– On
On aa graph
graph it
it is
is the
the quantity
quantity at
at
which
which the
the supply
supply and
and demand
demand curves
curves
intersect.
intersect.
15
 Equilibrium

Demand Schedule Supply Schedule

At Rs2.00, the quantity

demanded is equal to the
quantity supplied!
16
 Figure 4-8: The Equilibrium of
Supply and Demand
Price of
Ice-Cream
Cone

Supply

Equilibrium Equilibri
$2.00 price um

Demand

Equilibrium
quantity

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Cream Cones

17
 Equilibrium
•• Surplus
Surplus
–– When
When price
price >> equilibrium
equilibrium price,
price, then
then
quantity
quantity supplied
supplied >> quantity
quantity demanded.
demanded.

•• Shortage
Shortage
–– When
When price
price << equilibrium
equilibrium price,
price, then
then
quantity
quantity demanded
demanded >> the
the quantity
quantity supplied.
supplied.

18
 Excess Supply
Price of
product

Surplus
Supply
2.50

2.00

Demand

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of
product
Quantity Quantity
Demanded Supplied

19
 Figure 4-9 b): Excess Demand
Price of
product

Supply

2.00

1.50

Shortage
Demand

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of
product
Quantity Quantity
Supplied Demanded

20
 ELASTICITY OF SUPPLY

•• “Elasticity
“Elasticity of
of supply
supply defined
defined as
as
the
the percentage
percentage change
change in
in quantity
quantity
divided
divided by
by percentage
percentage change
change in
in
price”
price” ……..
…….. Prof
Prof Bilas
Bilas

21
 DEGREE OF ELASTICITY OF SUPPLY

•• Perfectly
Perfectly Elasticity
Elasticity Supply.
Supply.
•• Perfectly
Perfectly Inelasticity
Inelasticity Supply.
Supply.
•• Unitary
Unitary Elasticity.
Elasticity.
•• Relatively
Relatively Elasticity.
Elasticity.
•• Relatively
Relatively Inelasticity.
Inelasticity.

22
 PREFECT ELASTICITY

•• In
In this
this supply
supply increase
increase or
or
decrease
decrease automatically
automatically without
without
change
change in
in the
the price.
price.

23
 Figure
Price

Supply
perfectly Inelastic

Rs250

Rs100

0 1 2 3 4 5 6 7 8 Quantity

24
 PREFECTLY INELASTICITY

•• In
In this
this case
case price
price of
of commodity
commodity
is
is rise
rise or
or fall
fall but
but no
no change
change in
in
supply.
supply.

25
 Figure
Price

Perfectly Inelastic
Rs1
00

0 1 2 3 4 5 6 7 8 Quantity

26
 UNITARY ELASTICITY

•• In
In this
this case
case supply
supply and
and price
price
both
both are
are change
change in
in equally
equally
proportional.
proportional.

27
 Figure
Supply
Price

Unitary Elastic
Rs2
50

Rs1
00

2. …
resulting in
a higher
price …

0 1 2 3 4 5 6 7 10 11 Quantity

3. … and a less quantity

change

28
 RELATIVELY ELASTICITY

•• If
If the
the supply
supply of
of aa commodity
commodity
changes
changes by
by higher
higher %% then
then the
the
price.
price.

29
 Figure
y
Suppl
Price

Relatively Elastic
Rs2
50

Rs
100
2. …
resulting in
a higher
price …

0 1 2 3 4 5 6 7 10 11 Quantity

3. … and a less quantity

change

30
 RELATIVELY INELASTIC

•• In
In this
this case
case percentage
percentage change
change in
in
supply
supply is
is less
less then
then percentage
percentage
change
change in
in price.
price.

31
 Figure
Price

Supply
Relatively Inelastic

Rs250

Rs100

2. …
resulting in
a less price
…

0 1 2 3 4 5 6 7 10 11 Quantity

3. … and a higher quantity

change

32
 EXPANSION PATH

•• The
The level
level of
of optimal
optimal factor
factor proportions
proportions
may
may change
change when
when output
output oror factor-price
factor-price
ratio
ratio changes.
changes.

33
Figure
Y

K L
3

K EXPANSION ON PATH
2

K
1

0 LI L L x
2 3

34
Conclusion…

•• Supply
Supply and
and Demand
Demand together
together
determine
determine the
the prices
prices of
of the
the
economy’s
economy’s different
different goods
goods and
and
services.
services. .. ..
•• Prices
Prices in
in turn
turn are
are the
the signals
signals
that
that guide
guide the
the allocation
allocation of
of
resources.
resources.

35
THANK YOU

36