Paete Science and Business College, Inc.

J. P. Rizal Street, Paete, Laguna

Applied Economics
12 Third Quarter (Module 5)
Instructor: Mark Dave C. Florano

PSBC Learning Materials

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Address: J. P. Rizal Street, Paete, Laguna 4016; Telephone Number: (049) 557-0184; Fax Number (049) 557-0184
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J. P. Rizal Street, Paete, Laguna

Applied Economics
Module 5
Demand, Supply, and Price (Part 3)

Market Supply
There are all kinds of useful things to produce and sell but they are not
always produced and sold. Why not? What determines the choices of those who
supply goods and services? ‘The price they can charge for their product and the
costs they would incur in producing and selling their product govern the choices
made by those who supply goods and services. Things are not produced and sold
unless it is profitable and technologically feasible to do so.
Supply refers to the relationship between the price of a good or service and
the quantity or number of units a// sellers in a market would choose to sell during
a given time period. A given quantity of a good or service sellers would choose to
buy at a particular price is called quantity supplied. Just as we did when we
studied demand, we will emphasize that, in economics, the term supply refers to
the entire relationship between price and quantity supplied while the term
quantity supplied refers to a given quantity chosen by sellers at a particular price.
Price and quantity supplied are normally assumed to be positively related:
that is, when the price of a good rises (falls), the quantity supplied goes up (goes
down), ceteris paribus. This positive relationship between price and quantity
supplied is called the law of supply. The law of supply tells us what would happen
to the quantity of a good that sellers would choose to sell if only the price of that

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Address: J. P. Rizal Street, Paete, Laguna 4016; Telephone Number: (049) 557-0184; Fax Number (049) 557-0184
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good changed and all the other factors affecting supply for that good remained
unchanged.
Why are price and quantity supplied regularly observed to be positively
related? It is because as the quantity produced of any good increases, the marginal
cost— the cost of producing each additional unit of the good—would eventually
increase. Generally, it is not worth producing an additional unit of hamburger if
the price received for that additional unit does not at least cover the additional
cost of producing it. When the price of hamburger rises, producers are able to
cover a higher marginal cost. So as the price of hamburger rises, producers are
generally willing to produce more hamburgers. A higher price increases the
quantity supplied. A lower price decreases the quantity supplied.
The observed positive relationship between price and quantity supplied can
be shown using a table or a graph.
Supply Schedule
The market supply for hamburgers can be represented by a schedule of the
various quantities of hamburgers sellers would choose to sell at various market
prices. The table below contains a hypothetical schedule of the supply for
hamburgers in a local market during a typical week. The column on the left shows
various prices. The column on the right shows the number of units sellers would
choose to sell at those prices. Note that as the price rises, the quantity supplied
goes up.
Price Quantity Supplied
0 0
10 10,00
20 20,000
30 30,000
40 40,000
50 50,000
60 60,000
70 70,000
80 80,000
90 90,000
100 100,000

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Address: J. P. Rizal Street, Paete, Laguna 4016; Telephone Number: (049) 557-0184; Fax Number (049) 557-0184
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Supply Curve
The market supply for hamburgers can also be represented by a curve. The
market supply curve for hamburgers is a graphical representation of a supply
schedule for hamburgers.

In the figure above, price is scaled on the graph’s vertical axis and quantity on
the horizontal axis. Each point on the curve shows the quantity of the hamburgers
that sellers would choose to sell at a specific price. In the figure, each price-
quantity combination in the previews table represented by a point. For example,
point C represents the pair P40 and 40,000 units, while point D represents the pair
P60 and 60,000 units. When we connect all of these points representing price-
quantity combinations with a line, we obtain the market supply curve, labeled S in
the figure.
The market supply curve slopes upward. An upward-sloping supply curve
reflects the observed positive relationship between price and quantity supplied: a
higher price increases the quantity supplied and vice versa.
Shift of the Supply Curve
A few example will illustrate how a change in factors affecting supply other
than the price may be translated into an increase or decrease in supply.

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Technology- If a technological improvement allows producers to

produce more hamburgers with the same or fewer inputs, the cost of
producing any given number of hamburgers will fall. Producers will be
able to offer more hamburgers at any given price.
Prices of inputs used in production- A fall in the minimum ‘wage or
the price of beef would make it less costly to produce and sell
hamburgers and would thus increase the supply of hamburgers.
Prices of alternative goods produced- Suppose
producers can easily switch from hot dog production to hamburger
production. In this case, hot dogs and hamburgers are substitutes in
production—they can be produced by using almost the same
resources. If the price of hot dogs falls, hot dog producers receive less
for each hot dog and they switch production from hot dogs to hamburger. The
supply of hamburgers increases.
Expectations of future prices- If hamburger sellers expect that
hamburger prices will rise next week, they may decide to sell fewer
hamburgers now and sell more afterward. If they expect the price
of hamburgers to fall next week, they may sell more hamburgers
now and sell fewer afterward.
Weather conditions- Favorable weather increases the productivity of
all firms— including fast-food restaurants. Unfavorable weather and
natural disasters disrupt the production of firms in the affected areas.
If many hamburger sellers are located in an area affected by a
typhoon or earthquake, the supply curve for hamburgers in the local
market will shift leftward.
Number of sellers- As new hamburger producers enter the fast-food
industry, the supply of hamburgers increases. As hamburger
producers leave the fast-food industry, the supply of hamburgers
decreases.
Taxes, subsidies, and regulations- If the government would increase
the tax imposed on the producers of hamburgers, this increases the
cost of producing hamburgers and shift the supply curve for

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hamburgers to the left. If the government decreases the tax imposed on the
producers of hamburgers, this would decrease the cost of producing hamburgers
and shift the supply curve for hamburgers to the right.
Subsidies are payments made by the government to firms to encourage
production of certain good. A subsidy reduces the cost of production and increases
the supply.
Government regulates business activities because of environmental and
safety concerns. Some requirements—such as passing a health and sanitation
inspection or use of certain equipment with pollution-control devices—can
increase the cost of production and thereby decrease the supply.
Market Shortage
Supposed that the price of a unit hamburger is P40, as in figure below. At this
price the quantity demanded is P60,000, which is greater than the quantity
supplied, 40,000. There is a market shortage or excess demand—a situation in
which the quantity demanded is greater than quantity supplied. Graphically, a
shortage occurs at any price below the intersection of the demand and supply
curves.

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When there is a shortage, too few hamburgers are offered for sale and some
consumers who want to buy are not able to buy hamburgers. In this situation,
competition among buyers will drive the price up. Buyers who want hamburgers
but are unable to get them at a price of P40 will offer to pay higher price, forcing
other buyer to follow the suit. Sellers, noticing the lines of buyers who are willing
to pay a higher price, raise the price of hamburgers.
Market Surplus
Suppose that the price of a unit of hamburgers is P60, as in figure below. At
this price, buyers want to purchase P40,000 hamburgers—less than P60,000
hamburgers producers are willing to offer. The result is a market surplus or excess
supply—a situation in which the quantity supplied is greater than the quantity
demanded. Graphically, a surplus occurs at any price above the intersection of the
demand and supply curves.

When there is a surplus, too many hamburgers are offered for sale and some
producers who want to sell hamburgers are not able to do so. In this situation,
competition among sellers will drive the price down. Producers who want to sell
hamburgers but are unable to sell them at a price of P60 will offer to sell at a lower
price, forcing other producers to match the price cut.

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Address: J. P. Rizal Street, Paete, Laguna 4016; Telephone Number: (049) 557-0184; Fax Number (049) 557-0184
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The fall in price will reduce the surplus because a falling price increases
quantity demanded and decreases quantity supplied. When the price reaches #50,
there is no longer a surplus. The forces driving the price down stop operating
because sellers no longer have a reason to offer a lower price—they will be able to
sell all the hamburgers they want to sell at the going price.
Market Equilibrium
In the 2 figures on the previous page above, competition among buyers and
sellers drives the price toward the equilibrium price, P50, the price at which the
quantity demanded equals the quantity supplied (50,000).
A market equilibrium is a situation in which two sides of the market balance
each other. Equilibrium in a market happens when the price balances the amount
that consumers plan to buy and the amount that producers plan to sell. The price
at which the quantity demanded equals the quantity supplied is called the
equilibrium price. The quantity bought and sold at the equilibrium price is called
the equilibrium quantity.
A market moves toward its equilibrium because a shortage emerges when
the market price is below the equilibrium price and a surplus emerges when the
market price is above the equilibrium price. When there is a shortage, competition
among buyers drives the price up toward the equilibrium price. When there is a
surplus, competition among sellers drives the price down toward the equilibrium
price.

END OF DISCUSSION

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Address: J. P. Rizal Street, Paete, Laguna 4016; Telephone Number: (049) 557-0184; Fax Number (049) 557-0184
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