 In economics, supply during a given period of time

means the quantities of goods which are offered for

sale at particular prices.

 Thus, supply of a commodity may be defined as the

amount of that commodity which the sellers (or
producers) are able and willing to offer for sale at a
particular price during a certain period of time.
 Individuals control the factors of production – inputs,
or resources, necessary to produce goods.

 Individuals supply factors of production to

intermediaries or firms
 The analysis of the supply of produced

goods has two parts:

 An analysis of the supply of the factors of

production to households and firms.
 An analysis of why firms transform those factors
of production into usable goods and services.
 The cost factors of production
 The state of technology
 Factors outside the economic sphere
 Tax and subsidy
 In a supply function, the determinants of supply can
be summarised as under:
 Sx= f(Px, Pf,Py,O,T,t,s)
 Where Sx= the supply of commodity
 Px= price of X
 Pf=set prices of the factor inputs employed for
producing X
 O=factors outside the economic sphere
 T= technology, t=tax, s=subsidy
 There is a direct relationship between price and
quantity supplied.
 Quantity supplied rises as price rises, other things
constant.
 Quantity supplied falls as price falls, other things
constant.
 Supply is the quantity of a good or service that a
producer is willing and able to supply onto the market
at a given price in a given time period

 The basic law of supply is that as the market price of a

commodity rises, so producers expand their supply
onto the market

 A supply curve shows a relationship between price

and quantity a firm is willing and able to sell
 The supply curve is the graphic representation of
the law of supply.
 The supply curve slopes upward to the

right.
 The slope tells us that the quantity supplied varies
directly – in the same direction – with the price.
 Assumptions underlying the law of supply

 Cost of production is unchanged

 No changes in technique of production
 Fixed scale of production
 Government policies are unchanged
 No change in transport costs
 No speculation
 The prices of other goods are held constant
Price Supply

An increase in
price will cause
P2 an
EXPANSION
P1 in Supply.

P3

A fall in price
will cause a
CONTRACTIO
N in Supply.

Q3 Q1 Q2 Quantity
 The “quantity supplied” is the amount sellers are willing and able
to offer for sale at a single price
 The change in the price of the good itself causes a movement
ALONG the supply curve
 Supply curves normally slope upward. Why?
 Rising prices act as an incentive for producers to expand output
– potential for higher profits
 Increased output may lead to higher costs of production
 But not all economists accept this convention (A2 theory)
 Increased output might lead to lower costs per unit (known as
economies of scale)
Price

S1
S2

P1

Q1 Q2 Quantity
Price S3
S1
S2

P1

Q3 Q1 Q2 Quantity
 Changes in production costs
 Wages,raw materials and components, energy, rents, interest
rates
 Government taxes and subsidies
 Changes in technology
 Climatic conditions (important for agricultural supply)
 Changes in the number of producers in the market
 Changes in the objectives of suppliers in the market
 Changes in the prices of substitutes in production
 The profitability of alternative products (substitutes) or those with
joint supply (crude oil = petrol and paraffin and diesel)
 Expectation of future price changes
What is it and how is it measured?
 Elasticity is defined as “The relative response
of one variable to changes in another variable”.

 For our purposes, the two variables are:

 The quantity supplied
 Price
 Elastic:
 When the quantity supplied is very sensitive to
price
 Inelastic:
 When the quantity supplied is not very sensitive to
price
 Unitary Elastic
 When the quantity supplied moves in lock-step
with price change
 1. Calculate the percentage change in Price
 ((Initial Price – New Price) / Initial Price) * 100 = percentage (%)
change of price
 2. Calculate the percentage change in Quantity Supplied
 ((Initial Quantity – New Quantity) / Initial Quantity) * 100 = %
change of supply
 3. Calculate the Elasticity
 % change of Quantity / % change of Price = Elasticity
 If the result of the Elasticity calculation is
greater than 1, the relationship is said to be
Elastic.
 If the result of the Elasticity calculation is less
than 1, the relationship is said to be Inelastic.
 If the result of the Elasticity calculation is
exactly 1, the relationship is said to be Unitary
Elastic.
 When Supply is Elastic, price has a large
impact on the supply for a good.
 Elastic Supply often reflects a longer period
of time as Supply is often difficult to change
in the short term as many production factors
must be considered.
 Put simply, if a Producer can collect a large
price for an item, they will supply more of it –
as soon as they can.
 When Supply is Inelastic, price does not have
a large impact on the supply for a good.
 Inelastic Supply generally reflects a short
period of time as Supply is often difficult to
change quickly as many production factors
must be considered.
 Essentials, such as food, are generally
Inelastic.
 When Supply is Unitary Elastic, price and
quantity demanded move in lock step.
 This indicates that the percentage change in
the price of the good will equal the
percentage change in the demand for the
good.
 This is a special case scenario.