secondary Four H •

onours Economics 2021

THEORY OF SUPPLY

Definiti'on
I.

11. The Law of Supply

111. Supply Schedule

IV. Supply Curve

v. Individual ~ nd Market Supply

VI.

VII.
Differences between Change in Quantity Supplied and Chao.ge in Supely

Non-~rice Determinants of Supply

. -
1. Pnces of Factors of Production
2. State of Technology
3. Prices of Other Goods
4. Government Policy ·
5. Expected Future Prices
6. Number of Sellers

At the end of the lesson, students should be able to

• Explain that supply reflects opportunity costs and recognise the direct relationship between
price and quantity supplied.
• Discuss the factors affecting supply and the implications of the ceteris paribus condition.
• Differentiate between shifts and movements along the supply curve.

·-·-·-·-·-·-·-·-·-·-·-·-·-·-·-·-·-·-·-
~/have been up against tough competition all my life. I wouldn't know how to get along without it.~
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I·-·-·-·-·-·- ·-·-·-·-·-·-·-·-·-·-·-·-·~

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 I
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I
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I. DEFINITION to offer for sale a
II
, I
I
~ -and @j[..._ltYJ0 fW9-'1-;;pt i.e. it is expressed
refers to the Su ly is a floW co '
I particular good per penod of t,m_e. PP
as so many units per period of t,me. _~ that ~

I Th. ~of a good refer~ d of time.

are Jandl._t)f!to offer for sale at~ ~ -
prite ,r prile J.,
II. THE ~l:AW-OF SUPPL YI Gi~ ,t) Qt~ t
. su lied and price of a good, we
To study the relationship betw~en quant!ty ali~ther factors constant.
vary only the price of the good itself, holding
. "bus the l!!(l~r the price1of a
The law of suppl}' states that ceter~s panth ' ood.
good, the ~ r the q11_antity suRpl1ei:II of e g
. . stant (ceteris paribus), when the
This means that other things remai~ing con d will also rise. Conversely,
price of a good rises, quantity supplied of th ~ goo lied will also fall, ceteris
when the price of the good falls, the q_uanti~y si~p een price and quantity
paribus. This implies a ,eositive relationship w . of t
supplied of the good. There are two reasons for this: eg . ,t pnGe t'V'OIS /
v• tG« ol'- .,,~s 1:. '" a,,wiq dur

0
F'rxed ';;lie 1. 't1!!! Oli'OIMJNISff1NG'l!IW.JlilLl!iBl:!l700li "l lDII,
00 cm The positive relationship between price of a good and its quantity supplied can
ooo 'tt!J!4 be explained by the law of diminishing marginal returns.
0000
~ s production increases, some factors of production like_capital and land
cannot be increased in the short run. So output can be increased only by
employing more variable factors such as labour. As more Clffable'factocf are
added to theset&OO:ta'cto'.B, the contribution to total output by each additional
worker will eventually fall. This is known as the law of diminishing marginal
returns.
Diminishing marginal returns means increasingly more workers have to be
employed to obtain each additional unit of output. Hence, the cost of producing
each additional unit of output will rise. Therefore, a higher price must be offered
in order to induce the producer to increase the quantity supplied of the good.
---------'""-- ) . p(ices.1' > pro-ti-\' 1" / proc\l..\(e >
2. _.. \
T~e h1g~er the pnce of the good, the more profitable it becomes to produce.
Firms will thus be encouraged to produce more of it by switching from
producing less profitable goods.

1. Some FoPs cM1V1ot be cvicwi~

ifl srort ruVl ~ -lo,n~
-!-
1' vari/;lbll fo.cto r$
~- \Oll:,OUf to 1' prochJe,itOVl 1eve1

i
cxl.d1ti\11) "to output eocvi o'iC(dit;oV10i)
v1.1orKe, eve~iu.~\\~ ~\\S
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10 :prc,d.\AC,e eac,tii ocld.i-tiovi()I u~i+ outM
> ~I
O.V'u l,\JOr~ers ,)ti,:~ to ~e evnplo~eolJ . -::_:,
,,.oo.J
 SUPPLY SCHEDULE

e w of supply can be illustrat .

fh e18 A supply schedule lists ed using either a
cu~~ period of time, ceteris P~ ~bhe quantities suppsl~pdplyf
18 o schedule or a supply
ove n us. a good at each price,

fable 1: Supply Schedule pri~e t , Qt~ s1.tpplf~ 1'

price of waffles ($) Quantity of waffl
i.--- 1 es supplied per week
2

--- 2
i.----
5
3
8
4
11
-
T
- 5

. of a goo d , cetens . paribus

..
able 1 illustrates the positive rel t· .
a ionsh1p
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between the quantity supplied and

the pnce F
increases from $2 to $3, quantity s~ ~r examp~e, when the price of a waffle
per week. Conversely, when the pri ppf ed also increases from 5 to 8 waffles
ce th e good decreases, quantity supplied
O

ee-
of the good dec;:reases too.

1v.
The law of supply can also be represented 1
· .
howing the relationship betwee th ~ a grap~. A supply curve 1s a curve
~eteris paribus. n e quantity supplied of a good and its price,

Price
ss

0 Quantity
Fig. 1: Supply Curve

From the supply curve, we can see that when the~ of a goodfi'el'..eaS-~,
ceteris paribus, the ~ supplied G ea'M, and vice versa . Thus, the
supply curve is ram left to right.

V. INDIVIDUAL AND MARKET SUPPLY

shows the .-Wlffli'..~lWthatC i,rggM
is to lfflJl for sale , over a period of time. In the
market, there are many producers or sellers of a good . Thus, there is also a
market supply schedule. · TheGtJl1Blifl"'elMmJ is an ~offfi@
the i!rdUf!i-Bor a good.

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 . ffl in the market, Do and Nut
l
Assume that there are only two suppliers of wa es th
We can get the market supply schedule by summing up e q~a~. ~s
t'tl
1

of the good by each producer at the various prices as shown in IQ

I' ·

e ow.
ied ;~PP
Price
Price Price

?f
SS1

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I', ............................. 1............................................ , ................................................................................................................................ 1
I !
II I lQ.,+C>l.
i

1Q. I ! \. 0 35 Quantity
0 15 Quantity
20 Quantity O Market Supply
Producer Do Producer Nut

Fig. 2: Derivation of the Market Supply Curve for Waffles

The market supply curve is obtained by horizontal summation of the individual

supply curves. It shows the relationship between the price of a good and the
total quantity supplied by all the producers or sellers in the market, ceteris
paribus.

VI. DIFFERENCES BETWEEN CHANGE IN QUANTITY SUPPLIED

AND CHANGE IN SUPPLY
A~ - qiJii'ilii¢.iiigp.Jljf/}efers to the change in the amount that
producers are willing and able to offer for sale due to a change in the ,V:i~
fffllfido1:l..itsiffl other factors remaining constant.
I
/ I
It ~s shown by a_~emen@:MI the same lffpip~co~ For example, in Fig.
3(1) when the price increases from 0P1 to 0P2, quantity supplied increases from
001 to 002. This is a movement from point A to B on the supply curve.

Price
ss

Quantity
0

Fig. 3(i): Change in Quantity Supplied

AQ-t~ S5 P'c,e c?f 0~

f::. ss VlOV)- \'(iGe diete(YY)1v'l0\VTTS.

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 On the o~her hand, a efers to the response of supply to
changes in any of the other factors affecting supply, other than its own price.
In other words, a change in supply occurs when there is a change in any of the
of supply. It is represented graphically by a shift of
the whole supply curve. -

An incre_ase in _su_pply means that more of the good is supplied at each and
every price. This 1s represented by a rightward • . . . . . . from
SS to SS, as shown in Fig. 3(ii).

Price 'i ss I SY>ifi ri<3~t } Sc.~ e>.S

DD
}SS : stiift l~i
ss,

Q Quantity

Fig 3(ii): Change in Supply

Conversely, a fall in supply means th~t_l_

ess of the good is supplied at each and
every price. This is represented bfa~ard shift of the supply curve from SS
to SS2 as shown in Fig. 3(ii).

Think-Pair-Share
Distinguish between an increase in quantity supplied and an increase in
supply.

VII. NON-PRICE DETERMINANTS OF SUPPLY

1. PRICES OF FACTORS OF PRODUCTION

The amount of a good that producers are willing to supply depends very much
on the costs of production. The costs of production will rise if there is a rise in
the prices of factors of production such as wages, rent and interest or a rise in
the prices of raw materials used in the production of a good.

Keeping the price of the good constant, higher average cost means lower profit
per unit of output. Hence, the producer will reduce his supply of the good. This
will shift the supply curve to the left, from SS to SS, as shown in Fig . 4.

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