LAW OF SUPPLYLAW OF SUPPLY

- P.Bharathi- P.Bharathi

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SUPPLY DEFINEDSUPPLY DEFINED

Rs12345

P QS

Good A

520355060

Supply schedule is a table Supply schedule is a table that shows the amount of goods that shows the amount of goods the producers are willing to the producers are willing to supply a different price supply a different price levels levels

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LAW OF SUPPLYLAW OF SUPPLY

As Price Rises…

…Quantity Supplied Rises

As Price Falls…

…Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

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5

P

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

Supply Supply

ScheduleSchedule

SUPPLY CURVESUPPLY CURVE

55

P

Qo

Rs5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

6

35

P

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVESupply Supply

ScheduleSchedule

7

P

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

8

P

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

9

SP

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

10

SP

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVESupply Supply

ScheduleSchedule

11

.

QSQS22

DirectDirect

Reasons for direct relationshipReasons for direct relationship1. There is increasing opportunity cost if you don’t produce.2. Current producers produce more3. New producers are attracted to the market.

““S” refers to the “whole supply curve” and refers to whatS” refers to the “whole supply curve” and refers to what producers will supply at “different prices”producers will supply at “different prices”““QS” refers to a “point on the curve” and refers to whatQS” refers to a “point on the curve” and refers to what

producers will supply at a “particular price”producers will supply at a “particular price”

SS

QSQS11

PP22

PP11

Price increasesincreases; QS increasesincreasesPrice decreasesdecreases; QS decreasesdecreases

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SP

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

Rs.54321

60503520 5

P QS

PricePrice

QuantityQuantity

SUPPLY CURVESUPPLY CURVESupply Supply

ScheduleSchedule

13

SP

Qo

Rs.5

4

3

2

1

10 20 30 40 50 60 70 80

PricePrice

QuantityQuantity

Rs.54321

60503520 5

P QS

8070604530

S’Increase

in

Supply

Increase

in Quantity

Supplied

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

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Changes in Supply and in Quantity Changes in Supply and in Quantity SuppliedSupplied

QuantityQuantity

PricePrice

SS22

SS11Entire supply curve shifts Entire supply curve shifts rightward when:rightward when:• price of inputprice of input ↓↓• price of alternateprice of alternate good good ↓↓• number of firms ↑number of firms ↑• expected price ↑expected price ↑• technology advancestechnology advances• favorable weatherfavorable weather

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SSPP

QQoo

Rs.5Rs.5

44

33

22

11

10 20 30 40 50 60 70 8010 20 30 40 50 60 70 80

Rs.5Rs.544332211

6060505035352020 55

PPQQSS

PricePrice

QuantityQuantity

S’S’

454530302020 00 ----

DecreaseDecrease

inin

SupplySupply

DecreaseDecrease

in Quantityin Quantity

SuppliedSupplied

SUPPLY CURVESUPPLY CURVE

Supply Supply

ScheduleSchedule

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Changes in Supply and in Quantity SuppliedChanges in Supply and in Quantity Supplied

QuantityQuantity

PricePrice

SS11

SS22Entire supply curve Entire supply curve shifts leftward when:shifts leftward when:• price of inputprice of input ↑↑• price of alternateprice of alternate goodgood ↑↑• number of firms ↓number of firms ↓• expected price expected price ↓↓• unfavorable weatherunfavorable weather

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Factors that Shift the Supply CurveFactors that Shift the Supply Curve

Input pricesInput prices

• A fall (rise) in the price of an input causes an A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the increase (decrease) in supply, shifting the supply curve to the right (left)supply curve to the right (left)

Price of Related GoodsPrice of Related Goods

• When the price of an alternate good rises When the price of an alternate good rises (falls), the supply curve for the good in (falls), the supply curve for the good in question shifts leftward (rightward)question shifts leftward (rightward)

TechnologyTechnology

• Cost-saving technological advances increase Cost-saving technological advances increase the supply of a good, shifting the supply the supply of a good, shifting the supply curve to the rightcurve to the right

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Factors that Shift the Supply CurveFactors that Shift the Supply Curve

Number of Firms Number of Firms

•An increase (decrease) in the An increase (decrease) in the number of sellers—with no other number of sellers—with no other changes—shifts the supply curve to changes—shifts the supply curve to the right (left)the right (left)

Expected PriceExpected Price

•An expectation of a future price An expectation of a future price increase (decrease) shifts the increase (decrease) shifts the current supply curve to the left current supply curve to the left (right)(right)

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Factors that Shift the Supply CurveFactors that Shift the Supply Curve

Changes in weather Changes in weather • Favorable weatherFavorable weather

• Increases crop yieldsIncreases crop yields• Causes a rightward shift of the supply curve for Causes a rightward shift of the supply curve for

that cropthat crop

• Unfavorable weather Unfavorable weather • Destroys cropsDestroys crops• Shrinks yieldsShrinks yields• Shifts the supply curve leftwardShifts the supply curve leftward

Other unfavorable natural events may Other unfavorable natural events may effect all firms in an areaeffect all firms in an area• Causing a leftward shift in the supply curveCausing a leftward shift in the supply curve

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Shift in the Supply CurveShift in the Supply Curve

A change in any variable other than price A change in any variable other than price that influences quantity supplied that influences quantity supplied produces a produces a shift in the supply curveshift in the supply curve or a or a change in supply.change in supply.

Factors that shift the supply curve Factors that shift the supply curve include:include:• Change in input costsChange in input costs

• Increase in technologyIncrease in technology

• Change in size of the industryChange in size of the industry

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DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLY

Resource PricesResource Prices TechnologyTechnology Taxes & SubsidiesTaxes & Subsidies Prices of Other GoodsPrices of Other Goods Price ExpectationsPrice Expectations Number of SellersNumber of Sellers

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Es

Percentage Change inQuantity Supplied

Percentage Change in Price

ELASTICITY OF SUPPLYELASTICITY OF SUPPLY

Elasticity of supply measures the relationship Elasticity of supply measures the relationship between change in quantity supplied and a change between change in quantity supplied and a change in price.in price.

Formula:Formula:

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ELASTICITY OF SUPPLYELASTICITY OF SUPPLY

(1) When supply is elastic, producers can (1) When supply is elastic, producers can increase production without a rise in cost or a increase production without a rise in cost or a time delaytime delay

(2) When supply is inelastic, firms find it hard to (2) When supply is inelastic, firms find it hard to change their production levels in a given time change their production levels in a given time period.period.

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Determinants of Supply ElasticityDeterminants of Supply Elasticity

Factor substitution possibilitiesFactor substitution possibilities• Factor substitutability with a change in demandFactor substitutability with a change in demand

• Factor substitution at low costFactor substitution at low cost• When factors are highly specialized, When factors are highly specialized,

substitution may be harder and thus supply substitution may be harder and thus supply will be inelasticwill be inelastic

Availability of excess production capacity Availability of excess production capacity • When there is spare capacity, businesses can When there is spare capacity, businesses can

expand output easily to meet rising demand expand output easily to meet rising demand without upward pressure on costswithout upward pressure on costs

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Stocks (inventories) available to meet demandStocks (inventories) available to meet demand

• A low level of stocks makes supply inelastic in A low level of stocks makes supply inelastic in the short termthe short term

• When stocks can be released onto the market, When stocks can be released onto the market, supply is elasticsupply is elastic

The time frame allowedThe time frame allowed

• Momentary period (fixed supply)Momentary period (fixed supply)

• Short run (inelastic supply)Short run (inelastic supply)

• Long run (elastic supply)Long run (elastic supply) Artificial limits on supplyArtificial limits on supply

• E.g. the impact of patents that limit which firms E.g. the impact of patents that limit which firms can supply a productcan supply a product

Determinants of Supply ElasticityDeterminants of Supply Elasticity

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