COBECON

Module 4.1: Understanding Supply and Its Determinants

Adapted from Case, Fair, and Oster (2017)

The Law of Supply
 Quantity Supplied

 Quantity supplied is the amount of a particular product

that firms would be willing and able to offer at a
particular price during a given time period.

When looking at quantity supplied, the focus is on what

happens given a change in price alone
 Quantity Supplied

 A Supply schedule shows how much of a product firms

will sell at alternative prices.

 The Supply curve is a graph illustrating how much of a

product a firm will sell at different prices.
Price and Quantity Supplied
Let’s try it with Rice!

Imagine you are a farmer, how many

kilograms of rice are you willing to
produce in a week at a given price?

When you look at quantity supplied, all

other factors are held constant.
Supply Schedule
A Farmer’s Supply Schedule

PRICE QTY. SUPPLIED

25 10

35 20

45 30

55 40

65 50

75 60

85 60
Supply
 The Law of Supply
 
 An increase in the market price, ceteris paribus, will
lead to an increase in quantity supplied.

 There is a positive relationship between the quantity

supplied and the price. This is the law of supply.
Price ()  Quantity Supplied (
 Supply
 Important!
 Note that when price reaches a certain level, quantity
supplied no longer increases.

 This is because often, an individual firm’s ability to

respond to an increase in price is constrained by its
existing scale of operations, or capacity in the short run.
 Supply
 In the longer run, suppliers may acquire more land
or technology may change, allowing for more
production.
Other Determinants of Supply
 Other Determinants of Supply
 There are other factors that may affect supply:

 Cost of Production
 Prices of Related Products
Cost of Production
For firms to earn a profit, their revenues must
exceed costs.

Therefore, suppliers look at their costs to

determine how much they will supply.
 Cost of Production

Technological change
 Enormous impact on lowering cost of production
over time.
 Output is likely to increase.
Cost of Production
Prices of factors of production
 Prices of Related Products
 Firms often react to changes in the prices of related
products.

 Some Examples:
 (1) Suppose you plant coffee in your farm but the price of
corn increases. What will happen to your supply of
coffee?
 (2) Suppose the price of beef increases. What will happen
to your supply of leather?
Thank you!