LAW OF SUPPLY LAW OF SUPPLY

-- P.Bharathi P.Bharathi
2
SUPPLY DEFINED SUPPLY DEFINED
Rs1
2
3
4
5
P Q
S
Good A
5
20
35
50
60
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
3
LAW OF SUPPLY LAW OF SUPPLY
As Price Rises
Quantity Supplied Rises
As Price Falls
Quantity Supplied Falls
A direct relationship exists between
price and quantity supplied
4
5
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
Supply Supply
Schedule Schedule
SUPPLY CURVE SUPPLY CURVE
55
P
Q
o
Rs5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
6
35
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
7
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
8
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
9
S
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
10
S
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
11
.
QS QS22
Direct Direct
Reasons for direct relationship Reasons for direct relationship
1. There is increasing opportunity cost if you dont produce.
2. Current producers produce more
3. New producers are attracted to the market.
S refers to the whole supply curve and refers to what S 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 what QS 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
QS QS11
PP22
PP11
Price increases increases; QS increases increases
Price decreases decreases; QS decreases decreases
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S
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
Price Price
Quantity Quantity
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
13
S
P
Q
o
Rs.5
4
3
2
1
10 20 30 40 50 60 70 80
Price Price
Quantity Quantity
Rs.5
4
3
2
1
60
50
35
20
5
P Q
S
80
70
60
45
30
S Increase
in
Supply
Increase
in Quantity
Supplied
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
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Changes in Supply and in Quantity Supplied Changes in Supply and in Quantity Supplied
Quantity Quantity
Price Price
SS
22
SS
11
Entire supply curve shifts Entire supply curve shifts
rightward when: rightward when:
price of input price of input
price of alternate price of alternate good good
number of firms number of firms
expected price expected price
technology advances technology advances
favorable weather favorable weather
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SS
PP
QQ
oo
Rs.5 Rs.5
44
33
22
11
10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 80
Rs.5 Rs.5
44
33
22
11
60 60
50 50
35 35
20 20
55
PP QQ
SS
Price Price
Quantity Quantity
S S
45 45
30 30
20 20
00
-- --
Decrease Decrease
in in
Supply Supply
Decrease Decrease
in Quantity in Quantity
Supplied Supplied
SUPPLY CURVE SUPPLY CURVE
Supply Supply
Schedule Schedule
16
Changes in Supply and in Quantity Supplied Changes in Supply and in Quantity Supplied
Quantity Quantity
Price Price
SS
11
SS
22
Entire supply curve shifts Entire supply curve shifts
leftward when: leftward when:
price of input price of input
price of alternate price of alternate good good
number of firms number of firms
expected price expected price
unfavorable weather unfavorable weather
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Factors that Shift the Supply Curve Factors that Shift the Supply Curve
Input prices Input 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 Goods Price 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)
Technology Technology
Cost Cost--saving technological advances increase saving technological advances increase
the supply of a good, shifting the supply curve the supply of a good, shifting the supply curve
to the right to the right
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Factors that Shift the Supply Curve Factors that Shift the Supply Curve
Number of Firms Number of Firms
An increase (decrease) in the An increase (decrease) in the
number of sellers number of sellerswith no other with no other
changes changesshifts the supply curve to shifts the supply curve to
the right (left) the right (left)
Expected Price Expected 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 Curve Factors that Shift the Supply Curve
Changes in weather Changes in weather
Favorable weather Favorable weather
Increases crop yields Increases crop yields
Causes a rightward shift of the supply curve for Causes a rightward shift of the supply curve for
that crop that crop
Unfavorable weather Unfavorable weather
Destroys crops Destroys crops
Shrinks yields Shrinks yields
Shifts the supply curve leftward Shifts the supply curve leftward
Other unfavorable natural events may effect Other unfavorable natural events may effect
all firms in an area all firms in an area
Causing a leftward shift in the supply curve Causing a leftward shift in the supply curve
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Shift in the Supply Curve Shift 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 curve shift 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 costs Change in input costs
Increase in technology Increase in technology
Change in size of the industry Change in size of the industry
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DETERMINANTS OF SUPPLY DETERMINANTS OF SUPPLY
Resource Prices Resource Prices
Technology Technology
Taxes & Subsidies Taxes & Subsidies
Prices of Other Goods Prices of Other Goods
Price Expectations Price Expectations
Number of Sellers Number of Sellers
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E
s
=
Percentage Change in
Quantity Supplied
Percentage Change in Price
ELASTICITY OF SUPPLY ELASTICITY 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 SUPPLY ELASTICITY OF SUPPLY
((11) When supply is elastic, producers can ) 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 delay time delay
((22) When supply is inelastic, firms find it hard to ) 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 Elasticity Determinants of Supply Elasticity
Factor substitution possibilities Factor substitution possibilities
Factor substitutability with a change in demand Factor substitutability with a change in demand
Factor substitution at low cost Factor 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 inelastic will 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 costs without upward pressure on costs
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Stocks (inventories) available to meet demand Stocks (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 term the short term
When stocks can be released onto the market, When stocks can be released onto the market,
supply is elastic supply is elastic
The time frame allowed The 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 supply Artificial 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 product can supply a product
Determinants of Supply Elasticity Determinants of Supply Elasticity
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