Supply Analysis

Supply

• Quantity supplied is the amount of a good that sellers are willing and able to sell.

• Law of supply– The law of supply states that, other things

being equal, the quantity supplied of a good rises when the price of the good rises.

The supply schedule

• Supply scheduleThe supply schedule is a table that shows the relationship between the price of a good and the quantity supplied.

• Supply curveThe supply curve is a graph of the relationship

between the price of a good and the quantity supplied.

Supply Schedule

Price of an ice-cream Quantity of ice-creams supplied

Rs 0.00 05 110 215 320 425 530 6

Market supply versus individual supply

• Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Movements along the supply curve

• Change in quantity supplied– Movement along the supply curve is caused

by a change in anything that alters the quantity supplied at each price.

Shifts in the supply curve

• Change in supply– A shift in the supply curve, either to the left or

right. – Caused by a change in a determinant other than

price.

A change in the good’s price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve.

Shifts in the supply curve

Caused by:•Technology

– New inventions result in more Q at low cost; thus, more supply for the same price

•Input prices– If prices of inputs such as raw materials, labour and capital

decline, more Q will be supplied at the same price– If they increase, firms will reduce the supply.

•No of sellers (firms) in the market– Supply refers to all firms and so more the firms, larger will be

the Q

Shifts in the supply curve

Caused by:•Expectations of future prices

– Firms will supply less now, if they expect the prices to rise and vice versa

•Government taxes, subsidies and regulations– If govt imposes more taxes on firms to pay for government

services, firms’ costs will go up and reduce the supply– If govt provides subsidies to firms, firms’ costs will go down

and firms will supply more– Regulations can change firms cost and affect supply

Determinants of Supply

• Price of the goods:• Technology• Input prices• No of sellers (firms) in the market• Expectations of future prices• Government taxes, subsidies and regulations

Questions

Price (Rs. / ltr) Supply (Lakh/Ltr)

9 910 1011 1112 1213 1314 14

Find out :

• What is the weekly supply function for milk?

• What is the price below which no milk will be supplied?

The elasticity of supply

• Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.

• Ep of Supply = % change in quantity supplied % change in price

• If E > 1 then this reflects that the quantity supplied moves proportionately more than its price, supply is said to be Elastic

Find out ….

• What is the price elasticity of supply for an increase in the price?

Computing the price elasticity of supply (arc elasticity method)

Just in case, you are given the supply schedule for milk only for two prices (say, Rs. 11 and Rs. 12), what will be the price elasticity of supply?

Determinants of elasticity of supply

• Ability of sellers to change the amount of the good they produce.

• Time period. – Supply is more elastic in the long run.

Supply and demand together

Equilibrium refers to a situation in which supply and demand have been brought into balance.

Equilibrium price

The price that balances quantity supplied and quantity demanded.

Equilibrium quantityThe quantity supplied and the quantity

demanded at the equilibrium price.

Demand schedule

Price of an ice-cream

Quantity of ice-creams demanded

Quantity of ice-creams

suppliedRs 0.00 12 0

5.00 10 110.00 8 215.00 6 320.00 4 425.00 2 530.00 0 6

• Show the equilibrium based on demand and supply schedule

Disequilibrium

• Surplus– When market price > equilibrium price, then quantity supplied >

quantity demanded. • There is excess supply or a surplus.

Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

• Shortage– When market price < equilibrium price, then quantity demanded

> the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many

buyers chasing too few goods, thereby moving toward equilibrium.

Equilibrium

• Law of supply and demand– The claim that the price of any good adjusts

to bring the supply and demand for that good into balance.

Three steps to analysing changes in equilibrium

• Decide whether the event shifts the supply or demand curve (or both).

• Decide whether the curve(s) shift(s) to the left or to the right.

• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

Controls on prices

• Price Controls are usually enacted when policymakers believe the market price is unfair to buyers or sellers.

• Price ceiling A legal maximum on the price at which agood can be sold.

• Price floorA legal minimum on the price at which a good can be sold.

A market with a price ceiling

Copyright©2003 Southwestern/Thomson Learning

Rent Control

Quantity ofrentable homes

0

Rent

Demand

Supply

2000 PriceceilingShortage

75Quantitysupplied

125Quantity

demanded

Equilibriumprice

Rs 3000

A market with a price floor

Copyright©2003 Southwestern/Thomson Learning

Quantity oflabour

Wage

0

labourSupplylabour surplus

(unemployment)

labourdemand

Minimumwage

Quantitydemanded

Quantitysupplied

A labour market with a binding minimum wage

Questions

Price (Rs. / ltr) Demand (Lakh/Ltr)

Supply (Lakh/Ltr)

9 18 910 16 1011 14 1112 12 1213 10 1314 8 14

Find out ….

• If the market price is Rs. 15, what would be surplus/deficit of milk?

Question

A farm product has the following demand and supply functions

Demand : Qd = 13500 – 500PSupply : Qs = 3000 + 200P

1.What is the equilibrium price?2.If the government imposes a specific sales tax

of Rs. 10 per unit, what will be the new equilibrium price?