Supply Module 6

8/6/2019 Supply Module 6

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� 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 ² 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 factorsof 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 suppliedvaries directly ² in the same direction ² 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

Quantity

Supply

P1

Q1

P2

Q2Q3

P3

An increase inprice will cause

anEXPANSION

in Supply.

A fall in price willcause aCONTRACTION

in Supply.



� The ´quantity suppliedµ 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 ² 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

Quantity

S1

P1

Q1Q2

S2



Price

Quantity

S1

P1

Q1Q2

S2

S3

Q3



� 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 relativ e response

of one var iabl e to changes in anot her var iabl e.

� 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 toprice

� Unitary Elastic

When the quantity supplied moves in lock-stepwith 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 beUnitaryElastic.



� When Supply is Elastic, price has a large

impact on the supply for a good.

� Elastic Supply often reflects a longer periodof time as Supply is often difficult to change

in the short term as many production factorsmust be considered.

� Put simply, if a Producer can collect a largeprice 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 shortperiod of time as Supply is often difficult to

change quickly as many production factorsmust be considered.

� Essentials, such as food, are generallyInelastic.



� When Supply isUnitary Elastic, price and

quantity demanded move in lock step.

� This indicates that the percentage change inthe price of the good will equal the

percentage change in the demand for thegood.

� This is a special case scenario.

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Supply Module 6