THEORY OF SUPPLY

DEFINITION & CONCEPT

Definition of Supply : The different quantities of a

good or service sellers are willing and able to
produce and offer to sell at different prices in a
given period of time.

Individual supply : The relationship between the

price of a good and the quantity supplied by a
single seller.

Market supply: The sum of all the quantities

supplied by all sellers in the market for a particular
good or service at a given price and period of time
 DEFINITION & CONCEPT
Supply Schedule Supply Curve

Supply schedule is a list or table of A curve showing the different

different amounts of the good that quantities supplied for a good at
producers are both willing and able to different prices in a given period of
offer for sale at various prices during a time, ceteris paribus.
particular period of time.

Source: The Supply Curve (Normala Ismail, 2008,p. 111)

Source: Relationship between Price and the Quantity of Good X supplied (Normala
Ismail ,2008, p.110)
 DEFINITION & CONCEPT
Market Supply Schedule Market Supply Curve

A table showing the quantity supplied for
a good by all sellers in the market.
It is derived by adding the quantities
supplied each price.
A market supply curve shows the price-
quantity relationship of good for all sellers.
It is derived by adding up horizontally the
individual supply curves.

Source: Deriving a Market Supply Schedule and a Market Supply Curve

(Roger 2011, pg. 67) Source: Deriving a Market Supply Schedule and a Market Supply Curve
(Roger 2011, pg. 67)
 LAW OF SUPPLY

The quantity supplied of a good rises when the price of the good
rises, and when the price falls, quantity supply will fall, ceteris
paribus.

The quantity supplied of a good is positively related to its price.

 A CHANGE IN QUANTITY SUPPLIED Versus
A CHANGE IN SUPPLY
Changes in quantity supplied Changes in Supply

 due to changes in the price of the  due to changes in other factors but
product; other factors are constant price remains constant.

 a movement between points along  the supply curve shifts so that

a stationary supply curve, ceteris different quantities correspond to
paribus. each of the possible prices.
 A CHANGE IN QUANTITY SUPPLIED Versus
A CHANGE IN SUPPLY
Changes in quantity supplied Changes in Supply

Source: Pragati Ghosh (2016)

Source: Pragati Ghosh (2016)

An upward movement (from point A to point B) along the

supply curve SS is due to a rise in price of a good and A rightward shift of the supply curve from SS to S1S1 is
quantity supplied increase. It is called expansion of supply. an increase in supply.

A downward movement (from point A to point C) along the A leftward shift of the supply curve d from SS to S0S0
supply curve SS is due to a fall in price of a good and is a decrease in supply.
quantity supplied also decrease. It is called contraction of
supply.
 DETERMINANTS OF SUPPLY
1) Number of sellers

2) Resource prices

3) Prices of related goods in production.

4) Technology

5) Price Expectations

6) Government policies
 DETERMINANTS OF SUPPLY

1. Number of sellers
More number of suppliers will increase supply and the supply
curve shifts to the right. While fewer suppliers cause supply to
decrease leading to leftward shift in the supply curve for a good.

2. Resource prices
When resource prices increase, production costs rise, causing
supply to decrease and the supply curve for a good shift
leftward. On the other hand, falling resource prices increase
supply, hence the supply curve shift rightward.
 DETERMINANTS OF SUPPLY
3. Prices of related good (in production).

Goods in Competitive supply

 Goods which can be substituted in supply with one another.
 Higher prices of other goods a firm can produce cause supply
to decrease. While lower prices of alternative goods cause
supply to increase.

Goods in Joint Supply

 The supply of one good is directly related to the supply of
another good.
 Higher prices of a good a firm produce cause supply of
another good to increase. While lower prices of a good cause
supply to decrease.
 DETERMINANTS OF SUPPLY

4. Technology

Improvements in technology (techniques of production) enable

firms to produce units of output with fewer resources and
therefore supply of a good increase, and vice versa.

5. Price expectations

Expecting higher future prices decreases current supply because

producers may hold back some of the current product from
market. Therefore the current supply curve will shift leftward.
While expecting lower future prices increases current supply.
 DETERMINANTS OF SUPPLY

6. Government policies

 Taxation
Some taxes increase per-unit costs. Increase in sales tax imposes an
additional production cost and decrease supply. Therefore, the supply
curve of a good shift leftward.

 Subsidies
With subsidies, cost of production will be cheaper and encourage
producer to increase supply. So, the supply curve of a good shift to the
right.
 EXCEPTIONAL (ABNORMAL) SUPPLY
(Backward-Slopping Supply Curve)
 Exceptional supply occurs when it is not conform to the law of
supply.
 It shows an inverse relationship between price and quantity
supplied. The price of product increases and the quantity
supplied decreases.
 The supply curve slopes downward from left to right.
 Example : Supply of labour.
 The backward-bending labour supply curve occurs when an even
higher wage actually entices people to work less and consume
more leisure or unpaid time.
 EXCEPTIONAL (ABNORMAL) SUPPLY
(Backward- bending Supply Curve)
 As the wage rate rise from W0 to W1 the worker
decides to work long hours from OL0 to OL1.
However, if the wage rate increased above W1 ,
the number of hours offered to work for pay
would fall . If the wage rate increased from W1
to W3, the number of hours offered to work for
pay would fall from 0L1 to 0L3. This is
represented by a backward-sloping supply curve
as under.

 The backward bending supply curve indicating

that initially the supply of labour is directly
Source: Sanket Suman (2016)
related to wage, but after a particular limit of
wage level, the supply of labour becomes
inversely related to wage. Workers normally
prefer leisure after reaching certain amount of
wage level.
 REFERENCES
1. Hashim Ali (1998). Comprehensive Economics Guide. Singapore. Oxford University Press Pte. Ltd.

2. Irvin B. Tucker (2008). Economics for Today’s World (5th Ed.). International Student Edition. Thomson
South-Western.

3. Normala Ismail (2008). Micro Economics (ECO162). Institut Perkembangan Pendidikan, Universiti
Teknologi MARA, UiTM. Shah Alam

4. Rodney H. Mabry & Holley H. Ulbrich (1989). Introduction to Economic Principles. International Edition.
Singapore. McGraw-Hill.

5. Roger A. Arnold (2011). Principles of Economics, (10th Ed). South-Western . Cengage Learning International
Edition.

6. Pragati Ghosh (2016). Difference between “change in quantity supplied” and “change in supply”.
Retrieved from http://www.shareyouressays.com/115719/difference-between-change-in-quantity-
supplied-and-change-in-supply

7. Sanket Suman. (2016). Top 6 Theories of Wages (With Diagram).

Retrieved from http://www.economicsdiscussion.net/theories-of-wages/top-6-theories-of-wages-
with-diagram/12634