The Law of Supply

Quantity supplied rises as price rises and falls as price falls, other things constant.

Continued
Law of Supply: the higher the price, the

larger the quantity supplied.

P P QS QS

Quantity Supplied is the amount of good

a supplier is willing and able to supply at a certain price.

Supply Schedule
Price Per Slice of Pizza (Rs) 50 100 150 200 250 300 Slices Supplied Per Day 100 150 200 250 300 350

Price

Supply

P2 P1 P3

An increase in price will cause an EXPANSION in Supply.

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

Q3 Q1 Q2

The supply curve is the graphic representation of the law of supply.

Quantity

Supply function
Qx
s

= f (P x, F1, F2Fm, T,

Pr, Fe)

Supply
Price
Price of inputs Prices of related products Number of producers Future price expectation Taxes and subsidies

Why Supply curve moves upward???

The quantity supplied is the amount sellers are

willing and able to offer for sale at a single price

Supply curves normally slope upward as
Rising prices act as an incentive for producers to

expand output potential for higher profits

Increased output may lead to higher costs of

production

Shift in Supply Curve

Vs
Movement along Supply Curve

 A change in supply is not the same as a change in quantity supplied.

In this example, a higher price causes higher quantity supplied, and a move along the demand curve.

In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entire supply curve, from SA to SB.

 When supply shifts to the right, supply increases. This causes quantity supplied to be greater than it was prior to the shift, for each and every price level.

To summarize: Change in price of a good or service leads to Change in quantity supplied (Movement along the curve).

Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve).

Price

S1 S2

P1

Q1

Q2

Quantity

S3 Price S1 S2

P1

Q3

Q1

Q2

Quantity

Factors that Shift Supply

Resource Prices

Prices of Related Goods and Services

Supply

Technology And Productivity

Number Of Producers

Expectations Of Producers

Price of Inputs (Resource Prices) When costs go up, profits go down, so that the incentive to supply also goes down.

Technology
Advances in technology reduce the number of inputs needed to produce a given supply of goods. Costs go down, profits go

Expectations
If suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later.

Number of Suppliers
As more people decide to supply a good the market supply increases (Rightward Shift).

Price of Related Goods or Services Eg: if price of wheat rises sharply, it becomes more profitable and thus the farmers would produce less of other crops like rice, pulses etc and increase the production of wheat.

Taxes and Subsidies

When taxes go up, costs go up, and profits go down, leading suppliers to reduce output. When government subsidies go up, costs go

S0 Price (per unit) B A Change in quantity supplied (a movement along the curve)

$15

1,250 1,500 Quantity supplied (per unit of time)

Individual and Market Supply Curves

The market supply curve is derived by horizontally adding the individual supply curves of each supplier.

(1) Quantities Supplied A B C D E F G H I Price (per DVD) Rs. 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

(2)

(3)

(4) Charlie's Supply 0 0 0 0 0 0 0 2 2

(5) Market Supply 0 1 3 5 7 9 11 14 15

Ann's Barry's Supply Supply 0 1 2 3 4 5 6 7 8 0 0 1 2 3 4 5 5 5

Market Supply
As with market demand, market

supply is the horizontal summation of individual firms supply curves.

Market Equilibrium
The operation of the market depends

on the interaction between buyers and sellers.

An equilibrium is the condition that

exists when quantity supplied and quantity demanded are equal.

At equilibrium, there is no tendency for

Market Equilibrium
Only in equilibrium, quantity supplied is equal to quantity demanded. At any price level other than P0, the wishes of buyers and

Market Disequilibrium

Excess demand, or

shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price.

When quantity

demanded exceeds quantity supplied, price tends to rise until equilibrium is

Market Disequilibrium
Excess supply, or

surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.

When quantity supplied

exceeds quantity demanded, price tends to fall until equilibrium is restored.

Elasticity of Supply

Price elasticity of supplymeasures the

relationship between change in quantity supplied and a change in price. In other words, it measures the amount supply changes when price changes.
If it is said to be INELASTIC, there will be a

small change in supply due to a large price change. Supply does not change much when the price changes.
If it is said to be ELASTIC, there will be a

large change in supply due to a small price change. Supply changes a lot when price

Formula for calculating Price Elasticity of Supply

Es = % Change in Qs % Change in Price

ES > 1 ES = 1 ES < 1 Es = 0 Es = infinity

elastic supply unit-elastic supply inelastic supply perfectly inelastic supply perfectly elastic supply

Definitions
Infinitely Elastic Supply: When the amount

supplied at the ruling price is infinite, we say the supply is infinitely elastic.
Elastic Supply: When the percentage change

in the amount of a good supplied is greater than the percentage change in price it then the supply is said to be elastic supply.
Unitary Elasticity: When the percentage

change in the quantity supplied is exactly equal to percentage change in price the supply is said to have elasticity equal to unity.

Continued
Inelastic Supply: When the percentage

change in the quantity supplied is less than the percentage change in the price the supply is said to be inelastic.
Perfectly Inelastic Supply: In perfectly

inelastic-supply, the quantity supplied does not change even if there is a change in price. The elasticity of supply in other words is zero.

Unitary Elastic Supply

Calculations to do
1. The price of a product falls from 60p to

40p causing supply to contract from 120 to 100. 2. The price of a product falls from Rs45 to Rs40. As a result supply falls from 6000 to 5000. 3. The price of a product rises from Rs50 to Rs60 causing supply to extend from 100 to 200. 4. A products price rises from Rs12 to Rs13 but supply remains unchanged at

The price of a product falls from 60p to 40p causing supply to contract from 120 to 100. PeS= 16%/ 33%= 0.48 The price of a product falls from $45 to $40. As a result supply falls from 6000 to 5000. PeS= 16% / 11 % = 1.45 The price of a product rises from 50 to 60 causing supply to extend from 100 to 200. PeS= 100% / 20 % = 5 A products price rises from 12 to 13 but supply remains unchanged at 2000. PeS= 0% / 8.3% = 0 Supply extends from 900 to 1200 because of a rise in price from 10 to 11. PeS= 33.3% / 10% = 3.3

Answers

Examples of Inelastic
Petrol (gas) The amount of petrol supplied would not change much when the price of petrol changes, therefore it is inelastic. Tickets (to a concert/sports match) Tickets are printed in a fixed amount (there are only so many seats available), so no matter how much the price changes, the amount supplied should

Elastic Products
Clothes If the price of certain clothes drop, then the production (and therefore supply) of those clothes will drop too. Clothes would be elastic. Electronic goods (games, cameras, etc.) If the price of a certain electronic, say, a games console were to drop, then production of the games console would drop too.

Whenever a transaction occurs in the marketplace, both consumers and producers benefit. But how much do they benefit?

Consumer Surplus The difference between the price that a consumer is prepared to pay and the actual price paid is known as

Willingness to Pay: the maximum price at Pay

which he/she would pay for a good.

Individual Consumer Surplus: the net Surplus

gain in the purchase of a good. It is the difference between the actual price and a persons willingness to pay.

Total Consumer Surplus: the sum of all

the consumer surpluses of all the buyers of a good.

Price (Rs)

Market Price = Rs5

20 consumers willing to pay Rs5

15 Consumers WILLING to pay Rs9 9

These 15 consumers get 15 x Rs4 of consumer surplus

Total utility = value represented by blue and gold area

Blue area is amount paid to acquire good. Gold area = total consumer surplus

15

20

Quantity Demanded

EXAMPLE

Buyer

Willingness to pay

Price paid

Individual Consumer Surplus

David Maggie Henry Jamie Anna

Rs62 55 38 18 11

Rs28 28 28 -------

Rs34 27 10 0 0

Suppose I am willing to pay $4 for 10 widgets. However, the price is $1.50.

6 5 4 3 2 1 0

D $2.5 0
4 5 6 15 16

This results in CONSUMER $4.00 SURPLUS, - 1.50 which is the difference $2.50 between D and x 10 P
Price

1 2 3 12 13 14

10

$25.0 110Q

So, Consumer Surplus is the TOTAL BENEFIT consumers receive from having a market in the good. $4.00 - 1.50 $2.50 x 10

6 5 4 3 2 1 0

D P $2.5 0
4 5 6 15 16 7 8 9

$25.0 0 Price
10 11

1 2 3 12 13 14

The area between the demand ($4.00) and the price ($1.50) is the CONSUMER SURPLUS.

6 5 4 3 2 1 0 1 2 12 13 3 4 5 6 14 15 16 7 8 9 10 11