Supply and Determinants

Meaning of Supply
• Supply refers to quantity of a product offered for sale at a given price
at a given point of time.
• It must not be confused with stock of produced goods with the
producer.
• Thus supply can be defined as the schedule of the quantities of a good
that the firms are able and willing to offer for sale at various prices.
• How much the firm will produce depend on resources and technology
available to it.
• Whereas how much it will supply depend on the profit they expect to
make on producing and selling the commodity.
• Profit on one hand depends on price of the commodity and on other
hand cost of the commodity.
 Supply function
• The quantity of commodity that a firm will be able and
willing to sell in the market depends on several factors.
These factors are:
Qsx= S(Px, F1, F2,………, Fm)
• The price of the commodity
• The price of the inputs used for production.
• The state of technology
• The number of firms producing and selling the commodity
• The prices of related goods produced
• Future expectations regarding prices
 Law of Supply
• Supply of a commodity is functionally related to its price. The law of
supply relates to this functional relationship between price of
commodity and its quantity supplied.
• Unlike price and quantity demanded, price and quantity supplied moves
in same direction and thus quantity supplied of a commodity and its
price varies directly.
• Means higher the price, higher the quantity supplied.
• The supply schedule and upward slopping supply curve reflect the law
of supply.
• Acc to law of supply “when the price of a commodity rises, the quantity
supplied of it in the market increases, and when the price of a
commodity falls, its quantity suppplied decreases other factors remain
constant”.
Price per Quintal (Rs) Quantity Supplied (In Quintals)
500 100
510 150
520 200
530 225
540 250
550 275

560
Price per Quintal

550 550
540 540
530 530
520 520
510 510
500 500
490
480
470
100 150 200 225 250 275
Quantity Supplied
 Why Supply curve slopes upward?
• The law of supply shows positive relationship between price and
quantity supplied. The firms are driven by profit.
• The higher the price, given the cost per unit, makes it profitable for a
firm to produce and supply more at higher prices.
• Other reason is, the change in prices also depends on the possibilities
of substitution of on product for others. With higher prices of wheat,
a farm would withdraw resources from other crops and devote more
in wheat production. In this way a farmer may expand his profit.
• To produce more products, a firm devote more resources. Employing
more resources cause diminishing returns to occur.
• Due to diminishing returns, AC & MC cost of the production
increases. Thus at higher additional cost of producing more units of
output, it is profitable to produce more units of output only at a
higher prices so as to cover the rise in additional cost per unit.
 Movement along supply curve vs shift in
Supply curve
Movement along Supply Curve Shift in Supply Curve
When price of the commodity fall or rise, When quantity supplied changes due to
cause change in supply and result in change in other factors than price of the
movement along the supply curve. commodity in question, result in shift in
supply curve.

Increase in quantity supplied due to increase Increase in quantity supplied due to

in price given that other things remain favorable change in any of the other factors
constant is called Expansion of supply and than the price is called Increase in supply
point on supply curve moves rightward. and supply curve moves rightward to a new
supply curve.

Decrease in quantity supplied due to Decrease in quantity supplied due to

decrease in price given that other things unfavorable change in any of the other
remain constant is called Contraction of factors than the price is called decrease in
supply and point on supply curve moves supply and supply curve moves leftward to a
leftward. new supply curve.
Expansion and Contraction of Supply Increase and Decrease in Supply

is on C
P2
pan Decrease
Ex Increase
tion A C
Po c A B
tra Po
n
Co
B
P1

S0 S1
S0 S2

Q1 Q0 Q2 Q1 Q0 Q2
 Factors Determining Supply
• 1. Cost of Production:
• A. Production Technology: improvement in production technology leads to
increase in productivity and decrease in unit cost of production and thus firm
would supply more at given price. And supply curve would shift rightward.
• B. Price of Inputs: increase in price of factor inputs, unit cost will increase and
thus production would fall at given price. Thus supply curve would shift left.
• 2. Price of related products: increase in price of related goods, supply of
goods in question would decrease.
• 3. no. of producers or firms: with increase in no. of producers the supply in
the market would increase and cause rightward shift in supply curve. If in
short run, firms and industry are making large profits, the new firm will enter
the industry and production and supply will increase. On the other hand, due
to losses in the short run if some firms leave the industry in the long run, the
supply of its product will decline.
• 4. Future Price Expectations: if price would increase in future, the producer
will reduce the current supply .
• 5. Taxes and Subsidies.
 Market Supply Curve
• It refers to the aggregate supply of a product
made by all the firms taken together at a given
market price.
• It can obtained by horizontal summation of
the supply curve of individual firms.
•
Total Market
Price Qty SS by A Qty SS by B Qty SS by C SS
10 100 150 200 450
20 200 300 400 900
30 300 400 500 1200
 Elasticity of Supply
• Elasticity of supply defines as the responsiveness to
a change in one of its determinants while all other
determinants unchanged.
• Like price elasticity of demand, price elasticity of
supply is measured as a ratio of the proportionate
change in supply to a proportionate change in price.
 Arc Price Elasticity of Supply
• Here changes in quantity price are expressed
as proportions of the avg values of the price
and quantity rather than of their initial values.
 Point Price elasticity of Supply

• If the linear supply curve intersect or passes through the origin it is Unitary elastic.
• The price elasticity of supply at a point on it is less than unitary if the linear supply
curve intersects the quantity axis (x-axis).
• Price elasticity of supply for a linear supply curve at a point on it is more than
unitary if the supply curve intersects the price axis (y-axis).
Degrees of Price Elasticity of Supply
 Competitive Market Equilibrium
• Market equilibrium determines the point at which the quantity demanded
equals the quantity supplied.
• In other words it determines the price at which the quantity demanded is
equal to quantity supplied.
• The price at which the quantity demanded equals quantity supplied is
called equilibrium price.
• The quantity of goods which is purchased and sold at this equilibrium
price is called equilibrium quantity.
• Only at this price wishes of both the buyers and sellers are satisfied. If
prices were more or less than equilibrium price, the buyers and sellers
wishes would be inconsistent.
• Then either buyer would demand more than supplied by supplier or the
supplier would supply more than demanded by the buyers.
• When there is excess supply or excess demand the forces of demand and
supply would automatically work to correct the excess supply or excess
demand and thereby restore market equilibrium.
 Changes in Market Equilibrium
• Impact of Increase/ Decrease in demand on
market equilibrium
• Impact of changes in supply on market
equilibrium
Changes in market equilibrium when there is
changes in both demand and market supply
Effect of increase in both demand and supply
 Practical Problem
• Ex. The quantity supplied is given as a price function
below. Find the quantity supplied at price Rs 20,000. Also
find price elasticity of supply if price reaches to Rs25,000.
• Qs= 15,000+ 0.4P

• Ex. The quantity supplied is given as a price function

below. Find the quantity supplied at price Rs 16,000. also
find price elasticity of supply if 25% increase in price
caused quantity supplied to increase by 4,000 units.
• Qs= 26000 +0.5P
• Ex. The quantity demanded and quantity supplied are
given as price function below. Find the equilibrium
price and equilibrium quantity demanded.
• Qd= 16-2P Qs= 2+5P

• Ex. The quantity demanded and quantity supplied are

given as price function below. Find the equilibrium
price and equilibrium quantity demanded.
• Qd= 200+0.8P Qs= 260-0.4P
• Ex. The quantity demanded and quantity
supplied are given as price function below.
Find the equilibrium price and equilibrium
quantity demanded.
• Qd= 320+1.6P Qs= 240- 2.4P

• At Rs25 Price, there will be excess demand or

Excess supply and how much?