The Law of Supply

Grade 11 ABM
 The Law of Supply
 In the previous discussion about demand, it is the perspective of
individual consumers. Wherein when price increases quantity demand
decreases and if price decreases quantity demand increase. In contrast
law of supply, ceteris paribus an increase in price causes an increase in
quantity supplied.
 It is now the perspective of businesses and entrepreneurs in producing
goods, allocating their scarce resources.
 As business the goal is profit maximization. Producers may not increase
their quantity supply. But it is a law not a rule that firms may produce
more or supply more of their product while the price is high.
 Strike while the iron is hot!
What is Profit Maximization?
 The term use in economics and business in
full utilization of their scarce resource in
producing a product.
 Utilizing the cost of the product and price it
strategically to earn profit.
 Remember when establishing a business, the
goal is to earn
Supply Curve
if the demand curve is downward slope, in supply it is a
upward slope

Y-Values
180

160

140

120

100

80

60

40

20

0
0.5 1 1.5 2 2.5 3 3.5
Determinants or Shifters of the supply

 Price of resources
 Number of Producers
 Technology
 Taxes and Subsidies
 Expectations
 Shift is the movement of the supply curve from
left to right and right to left.
 Price of resources or Input Price
It includes land, labor, capital and entrepreneurship. The cost of inputs in
producing goods have an effect in quantity supplies. Higher cost may lead to
firm to cut down the supply because a firm wants to achieve profit maximum
returns.

Prices of other goods may also affect the quantity supply, for example a business
produce papers and ball pens. When the price of input of ball pens increases and
compared the cost in producing paper is lower, the firm would choose to
produce more paper rather than pens because there is a potential of maximizing
their profit by selling more papers.
 Technology
Firms tend to keep abreast of the latest innovations in order to
keep competitive in the market. Technology aides the producers to
much more faster and efficient production. Minimizing delays and
rejects. Less cost and more outputs.

For example a burger stand produces 10 hamburgers per 10 minutes

of grilling, to increase their production the stand would upgrade their
griller that produce 20 hamburgers per 10 minutes. This will increase
their production of supply, increase sales and profit.
 Taxes and Subsidies
Government Policies
 Tax is imposed by the government. Firms and businesses pay for it at their
income. Having higher taxes may force the firms to increase their prices or
decrease their production.
 Value Added Tax
Known VAT or 12% VAT in the Philippines. It is commonly paid by the
end consumers, but firms may decrease their production or reduce portion of
the goods to maintain their sales

Excise Tax – oppose to VAT, this kind of tax is more higher. Here in our
country producers of Liquors and cigarettes have this tax.
 Subsidy
 Monetary assistance coming from the government to help producers of
goods to increase their production with lower cost coming from them.
 Example are the farmers here in our country, where the government
give monetary assistance in buying sprouts of the rice. The government
pays a portion of the cost especially for farmers affected by typhoons or
calamities. It will benefit the community from rice shortages.
 For public utility vehicles, they receive oil subsidy so that the drivers
may not easily increase fares.
Import Quota is the limit imposed of the government in importing goods.
Many of the produces imports raw materials because of their low cost
even they are locally available. The government protects local producers
of raw materials for their maximization of income.
It may result also in reducing their production because of the cost.
 Expectations or Producer Expectations
Producers who anticipate a surge in factor prices tend to increase
production.

Example are canned goods. If there is a increase in cost of tin cans that are
used in canning. Manufacturers will increase the production having a lower
cost and later increase their price because there is an increase in tin cans cost.
Market Equilibrium
 Market is a meeting place for buyers and sellers, where the
buyer can purchase goods from a seller for a price that is
agreeable to both. Market is not limited to physical
locations (examples are wet market,super market, grocery
store). It can be also virtual like the stock exchange.
Through technology, online platform is also a market.
(examples are amazon, Lazada, shopee, play store, and
lots of more)
 Market Price
for an exchange of good to happen, the buyer and
the seller must agree on the price.

The point where consumer and supplier expectations

meet is known as the market equilibrium. At this
point quantity demanded is equal to quantity
supplied. It determines equilibrium price.
Market Disequilibrium
 Market Shortage happens when there is an excess in demand. In a
graphical representation the shaded part under the equilibrium point
is shortage.
It means quantity demanded exceeds quantity supply. To eliminate
the shortage suppliers tend to increase production to meet the quantity
demand. This will increase prices. Why would they increase prices?
Because of there will be an increase of input cost which is labor.
Production time will increase and it may increase wages expense.

And law of demand will apply by an increase in price, demand

decreases. For there will be lesser consumers to buy the product for a
higher price.
 Market Surplus
Represented in the graph as shaded area above the equilibrium
point.

Quantity supplied exceeds quantity demanded. To eliminate the surplus

firms and businesses decrease their price.

The law of demand will apply, wherein decrease in price increases quantity
demand.

There will be an increase of consumers willing to buy the goods for lower
price